Friday, January 21, 2011

Valuation-Informed Indexing - Preliminary Results

Update: I made a new and improved version for the contents of this post here.

This original post was merely a very rough initial draft of the analysis.
In the update, I based the analysis around a 50/50 asset allocation. Here it was centered on 60/40. The result here was that a valuation-based asset allocation strategy provides more wealth for 102 of the 110 rolling 30-year periods, while buy-and-hold did better in 8 of the periods. 
If you are interested in the subject of valuations, I have published several research articles, all of which should be fairly understandable without a deep mathematics background:

Pfau, Wade D. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle."  Journal of Financial Planning. Vol. 24, No. 5 (May 2011), 42-50.  [blog summary]   [story about the article from The Economist

 Clicking on the article title will bring you to a page from which you can download a .pdf draft version of the paper.
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  1. I wouldn't think using rolling periods is proper here.

  2. Lumpr: the results are based on the total stock returns, which includes dividends.

    About rolling periods: I understand there is some debate about this. I think rolling periods is definitely an improvement over existing studies which seem instead to track how an investment made in 1871 would be doing today.

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