How to do asset allocation in 5 minutes

Asset allocation is incredibly important. Fans of the Efficient Market Hypothesis and Modern Portfolio Theory think that it’s responsible for most of the risks and rewards of your portfolio, and I’m inclined to agree.

But just because it’s important doesn’t mean it’s going to take ages to do or require a rocket scientist to help out.

You might think that five minutes to make your asset allocation decisions is not enough, but I’m going to cheat and give you five different ways to set your asset allocation in just one minute each.

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Bogle on valuing the market

Morningstar recently put out an interesting video from the master of Common Sense Investing, Jack Bogle.  The video was called Speculation Dwarfing Investment and in it, Bogle basically says that there is about 200 times more trading and speculation than there is an investment.

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The FTSE at 5000 – Good Value?

I’m sure you don’t need me to tell you what mood the market’s in.  Borderline panic is probably as good a description as any.  I may not like the panic, but as a value investor I do like the bargains it throws up and one such bargain may well be the FTSE 100 itself.

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Market Mayhem or Golden Opportunity?

The FTSE 100 closed last Friday at 5,129, about 13% down from when the carnage began in early August.  At that level, it has a PE10 of about 12 (PE10 is the 10-year average real price-to-earnings ratio) while the PE10 average is around 17.6. PE10 has been a pretty good indicator of future returns over the last century and it’s a favourite of mine for checking what sort of returns might be possible in the next few years.

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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:

A CAPE-based asset allocation strategy

I’ve mentioned my tactical asset allocation efforts in a couple of previous posts.  Both of those have been somewhat vague about how I actually decide on the stock/bond split, although not deliberately so. 

If Ben Graham can shout out the Net Net method to the world over 50 years ago and not have its effectiveness affected, then surely my tiny whispers on the web can do my approach no harm. 

In fact, it may to some miniscule degree make the markets more efficient.  Like the proverbial fly stopping an oncoming supertanker.  Perhaps I may even win a Nobel Prize, but I doubt it.

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Valuing the FTSE 100

As mentioned previously, my wife’s pension is invested using a ‘tactical asset allocation’ function dreamed up by my good self.  It basically uses the long-term average of the FTSE’s real CAPE (real as in adjusted by RPIX).  More specifically it uses the long-term average of what I call CAPE10, which is the average of the last 10 years CAPE values.

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