21 Feb 2010
A value based asset allocation strategy - A minor update
This is just a minor update to my previous post about allocating assets to stocks depending on the current value of CAPE compared to its long term average. In the graph using Shiller data I plotted a straight line at 16.35, the current long term average of CAPE. However, it would perhaps have been better to show the CAPE average as it would have looked at the time, therefore removing the benefit of hindsight and showing what information investors would have had at the time. And here it is, with the long term CAPE average shown in black:
Although the average plot now wiggles to some extent, it doesn't take long for it to settle in close to 15, from where it never really deviates very far. In fact, continuing my obsession with averages, the average of the long term averages of CAPE is 15.4. Putting this into the allocation function gives the results below, which is little different from the previous version since the function is fairly insensitive:
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