Multiples, Forecasting, and Asset Allocation

Abstract

Multiples such as D/P, P/E, and CAPE are useful when forecasting long-term returns, and largely useless when forecasting short-term returns. Given this mixed forecasting ability, the issue addressed in this article is whether these multiples can be used to devise successful asset allocation strategies in the sense of outperforming a simple static portfolio. The bulk of the evidence discussed here suggests that investors would be better off sticking with a simple 60-40 stock-bond portfolio.

Keywords: Multiples; forecasting; asset allocation; CAPE; value investing

JEL Classification: G11