Risk is one of the most elusive concepts in all of investing, partly because so many people define it in so many different ways. That’s okay though as a single definition probably isn’t sufficient anyway. One of the most useful definitions of risk is that it’s the probability of something bad happening, and if...
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Asset Allocation
In the short and medium term most share prices closely follow what the market does. This means it’s important to know which direction the market is likely to take in the years ahead. One of the best ways to do this is to understand the VALUE of the market and how it relates to its current price.
So if the FTSE 100 is at 5,000 or 7,000, does that mean it’s good value or not? Is the market likely to go up or down in the medium term?
The articles below will get you up to speed on a simple approach to valuing the market and how it can be used to help your investment process.
How the Stock Market Can Affect Your Savings Rate
Bogle on valuing the market
Morningstar had 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 investment. In the previous video called Markets About Fairly Valued Today, he covers much...
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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. If I...
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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...
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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...
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A value based 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...
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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...
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Backtesting of tactical asset allocation strategies
I’ve long been fiddling around with various mechanical methods of adjusting an almost passive index investing stragety to improve the risk/reward ratio. This is sometimes known as Tactical Asset Allocation (TAA). I thought I’d put up some charts of my efforts. The lines in the charts are for four portfolios: Cash, with the returns...
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Valuing Markets
I’m a big fan of CAPE (cyclically adjusted price earnings) and Tobin’s Q as tools for understanding expected future risk and returns from a stock market. After reading Wall Street Revalued: Imperfect Markets and Inept Central Bankers, I’m an even bigger fan. The logic is simple. Market valuations must be tied in some way...
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