Italy
Here is the link to a particularly useful article for ITA readers. As you read the article, pay particular attention to the fundamentals that provide clues as to whether or not the market is likely to generate lower than average, average, or above average returns over the next 10 to 20 years. Be sure to read the Price/Earnings ratio section and also the “Siegel long-term trend line” section.
ITA Wealth Management readers are very familiar with the definition of correlations, but R^2 or R Squared is likely to be less familiar. Check these links if you are unsure of the definitions. In our analysis we use either VFINX or VTSMX as the equity benchmark and SHY as the treasury or bond benchmark.
Where are we today?
- Price/Earnings ratio of several benchmarks. These P/E ratio values are historically about average. It would be to our advantage is the values were in the 13 to 15 range.
- VTI P/E ratio = 17
- VT P/E ratio = 16
- SPY P/E ratio = 18
- Link to long-term trend line predicts lower than average returns so long as the current curve lies above the trend line.
When running optimization or Quantext Portfolio Planner analysis, the final results are tied to our assumption of future returns for the S&P 500. Right now it makes sense to set that assumption somewhere between 6% and 7% depending on how pessimistic or optimistic you are as a 20-year investor.
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From the article:
“TTT confirmed our belief that there is nothing we know today that can help predict the short-term future—market timing still does not work.”
Whoever said that market timing is about predicting the short-term future?
Dick
Dick,
Defining what is meant by “market timing” is necessary. Particularly check the second definition using this link.
http://www.investopedia.com/terms/m/markettiming.asp
Market timing goes by many names and they describe varying degrees of the activity. We use the term “Risk Reduction” frequently on this blog. Our activity of staying away from ETFs that are under-performing SHY is a form of market timing. A rather mild form, but nevertheless, market timing. The TTT group concludes this does not work. We shall see as we continue to monitor portfolios going forward.
Lowell
Lowell:
I know what I think Market Timing is. My beef with the article is that they don’t define their usage, set up a straw man, and knock it down for their own purposes.
I don’t know much about this TTT group, but I suspect – based on their ‘conclusion” that they believe in Buy-and-Hold, and want to keep the $9 billion they supposedly manage as assets-under-management (and keep the fees thereby generated.)
Dick
Dick,
Here is my take on what the authors are stating in the article.
1. Market timing does not work.
2. Fundamental market analysis has merit, primarily in two areas. a) The lower the Price/Earnings ratio, the higher the probability we see better market growth. While they don’t deal in probabilities, the inverse correlation they show is based on some examples. b) If the annual return is higher than the trend line return, then expect lower returns. If the annual return is lower than the trend line return, then expect higher returns. This is a basic reversion-to-the-mean result.
There seems to be less correlation evidence when it comes to dividend yield. Bernstein addresses the dividend issue in a few of his books when he talks about a long-term trend indicator, The Gordon Equation. He was writing “Investor’s Manifesto” in 2009 when this equation projected better returns in the future. The equation turned out to be correct.
Lowell
Lowell:
I’m not arguing with you. I just think an article such as this is not helpful.
I can state: “The moon is made of blue cheese.”
Big deal. Without any proof, that statement is of no use to anyone.
They state; “Market timing doesn’t work.”
Big deal. Without any proof . . .
I’ll sign off from any more comments about this article.
Dick