Jump to content
House Price Crash Forum

Recommended Posts

My investment strategy is a mechanical one requiring no trading ability or skill. Since I implemented it in 2009 I have beaten a sensible benchmark over the long term. That said the benchmark has had some small wins in the short term causing me to question myself on occasion but I've stuck with it.

The strategy is a pretty standard buy, hold and rebalance a portfolio of varying assets one. Assets cover a variety of classes and risks from cash through equities. The main variation is that I choose to hold what I consider a higher level of "risky" assets than the common Age in Bonds Rule of Thumb but try and offset that additional risk with a mechanical valuation metric for the equities portion of my portfolio. This is based on Robert Shiller's Cyclically Adjusted PE (CAPE) ratio.

This requires me to run regular analysis on the FTSE 100, S&P 500 and ASX 200. I've just completed the FTSE 100 and given it's a "home index" for many I thought some HPC'ers may be interested in the results.

The mainstream media will show a chart like this:

131103-1.png

That tends to suggest we are again near record highs. I think that's sensationalist and so correct for inflation while plotting on a log scale to get this:

131103-2.png

Puts quite a different perspective on what's been going on over the last 20 years. Essentially prices have done nothing more than oscillate around a pretty flat trendline. If you were reinvesting dividends then great, if you were rebalancing within bands then great but if you were spending dividends and relying on capital growth for retirement (or some other worthwhile cause) then it's not looking so good.

It also suggests we could have quite a lot of upside left before the next down leg - of course history is not a predictor of the future and all that...

When it comes to valuation this is what both the PE and CAPE look like over the last 20 years:

131103-7.png

We're currently still a lot lower than we have been in the previous times of "irrational exuberance" but I'm still calling a small 13% over valuation. This means my mechanical strategy forces me to be slightly underweight UK Equities.

For any who are interested in more details including methodology, dividends, earnings and exactly what I'm doing then I have prepared a much more detailed post with more charts on my site here.

Share this post


Link to post
Share on other sites

It also suggests we could have quite a lot of upside left before the next down leg -

My interpretation of your data is that were on a 3rd peak where each has been lower than the last (once inflation adjusted) and therefore that there little scope for a significant increase and lots of downside risk.

Share this post


Link to post
Share on other sites

My interpretation of your data is that were on a 3rd peak where each has been lower than the last (once inflation adjusted) and therefore that there little scope for a significant increase and lots of downside risk.

Interesting observation. That would likely force me (reasonable downside will cause rebalancing bands to be hit) to start buying UK Equities again. Other than the RMG bribe I haven't bought any of them since December 2012 because of the rising market.

Share this post


Link to post
Share on other sites

Puts quite a different perspective on what's been going on over the last 20 years. Essentially prices have done nothing more than oscillate around a pretty flat trendline. If you were reinvesting dividends then great, if you were rebalancing within bands then great but if you were spending dividends and relying on capital growth for retirement (or some other worthwhile cause) then it's not looking so good.

It also suggests we could have quite a lot of upside left before the next down leg - of course history is not a predictor of the future and all that...

Interesting post (I'll read the full post on your site at some point - when my RSS picks it up (in its irritatingly truncated format!)).

I'm a divi-hound. They get reinvested at the moment but one day, I'll live off them. No bonds for me.

I've never understood those CAPE and PE10 measures - and why the down-trend?

Share this post


Link to post
Share on other sites

...

I'm a divi-hound. They get reinvested at the moment but one day, I'll live off them. No bonds for me.

I'm with you on the divi's. They really do matter. This post which looked at capital gain vs capital gain + divi's for the FTSE100, FTSE250, FTSE Small Cap and FTSE All Share really rammed that home for me. I'm reinvesting all divi's and have also started building a HYP to turbo boost the divi's. They'll form a large portion of my "income" during "early retirement".

I've never understood those CAPE and PE10 measures - and why the down-trend?

I think most people, except Gordon Brown, acknowledge the 7-10 year business cycle. Some call it boom and bust. The CAPE just attempts to correct for that business cycle by taking the real price and dividing it by the average of the real 10 year earnings.

Share this post


Link to post
Share on other sites

Share Maestro runs a mechanical system which is also mainly based on P/E ratios, but also factors in bond yields, inflation, volatility and dividend growth. Their current analysis is that US large caps are generally over priced but the FTSE is worth 7,747, about 15% above its current price.

Share this post


Link to post
Share on other sites

Share Maestro runs a mechanical system which is also mainly based on P/E ratios, but also factors in bond yields, inflation, volatility and dividend growth. Their current analysis is that US large caps are generally over priced but the FTSE is worth 7,747, about 15% above its current price.

Interesting. Do you replicate what they do personally and has it helped you build wealth? Incorporating bond yields (10 year gilts) is something I've considered undertaking in future work to potentially improve the strategy.

I agree on the US Market. I track the S&P 500 and today have that overvalued by 46% compared to the FTSE 100's 13%.

Share this post


Link to post
Share on other sites

Interesting. Do you replicate what they do personally and has it helped you build wealth? Incorporating bond yields (10 year gilts) is something I've considered undertaking in future work to potentially improve the strategy.

I agree on the US Market. I track the S&P 500 and today have that overvalued by 46% compared to the FTSE 100's 13%.

With interest rates so low and no were else to get a yield cant we expect to have a much higher stock market than history would dictate?

Share this post


Link to post
Share on other sites

With interest rates so low and no were else to get a yield cant we expect to have a much higher stock market than history would dictate?

We've had low interest rates before. My longest dataset covers the US so I'll use that to demonstrate. The US 10 Year is about 2.6% today. It was the same in 1955, 1951 and 1935.

Share this post


Link to post
Share on other sites

The US 10 Year is about 2.6% today. It was the same in 1955, 1951 and 1935.

The dollar was also convertible to gold back then, rather than just a number spewed out of a computer.

Share this post


Link to post
Share on other sites

quote name='wish I could afford one' timestamp='1383508320' post='909423449']

That tends to suggest we are again near record highs. I think that's sensationalist and so correct for inflation while plotting on a log scale to get this:

131103-2.png

What figures do you use for inflation adjustment? Will have a big impact on valuation.

I would like to see the HPC graph on the front page of this website plotted using shadow stats inflation figure. Also would be interesting to see the graph above adjusted by the shadow stat figures.

Share this post


Link to post
Share on other sites

For any who are interested in more details including methodology, dividends, earnings and exactly what I'm doing then I have prepared a much more detailed post with more charts on my site here.

Thanks for the analysis, I had been looking for an inflation-adjusted FTSE 100 graph.

Share this post


Link to post
Share on other sites

If the pound has been deliberately devalued by (say) 35% since 2007 then you'd expect the FTSE to have risen by about 50% since it is priced in pounds? Or am I being overly simple?

It's important to remember that FTSE 100 companies represent about 81% of the UK market and give international diversity with around 80% of all earnings coming from overseas. I discovered this while trying to take a step back and trying to come up with A Simple Low Expense, Low Tax Investment Portfolio for DIY Beginners.

Share this post


Link to post
Share on other sites

This is CPI. I chose CPI for consistency between countries as I also calculate this type of data for the Aus and US markets which make CPI data readily available.

I thought it was, my suggestion was it would be interesting to see it measures against Shadow stats or a measure that gives a more realistic measure of inflation.

alt-cpi-home2-mini.gif

With the current underestimation of inflation it has a big impact on improving GDP (great for Governments) but also masks the real performance of assets. There currently appears to be a 4% underestimation of inflation, this compounded over years has a huge impact.

Edited by Confounded

Share this post


Link to post
Share on other sites

My investment strategy is a mechanical one requiring no trading ability or skill. Since I implemented it in 2009 I have beaten a sensible benchmark over the long term.

A 2009 to now is anything but long term

B Seems to me share prices are going through multi month topping process leading to change from Bull to Bear into 2015.

Share this post


Link to post
Share on other sites

A 2009 to now is anything but long term

...

Thanks for picking me up on that. You are of course correct that 4 years or so is far from long term. Post written with maybe a little too much haste. A better phrase would have possibly been just 'Since I implemented it in 2009 I have beaten a sensible benchmark.'

Share this post


Link to post
Share on other sites

Thanks for picking me up on that. You are of course correct that 4 years or so is far from long term. Post written with maybe a little too much haste. A better phrase would have possibly been just 'Since I implemented it in 2009 I have beaten a sensible benchmark.'

As a matter of interest have you thought of where you are going to live when you retire?

I have heard of people moving to Thailand with half the cost of living. Have you had any similar plans?

Share this post


Link to post
Share on other sites

As a matter of interest have you thought of where you are going to live when you retire?

I have heard of people moving to Thailand with half the cost of living. Have you had any similar plans?

A few years to decide yet. I'd say 95% chance it will be Europe. I actually love the UK. There is no place better than the countryside here in the middle of summer. I just don't like what's being done to the UK but I'm also careful of grass is greener on the other side syndrome. Even in the current climate we are still a very very lucky country. One place I am seriously considering, which might be a bit left field, is Malta. This post covered my rationale in a little more detail.

Share this post


Link to post
Share on other sites

Interesting. Do you replicate what they do personally and has it helped you build wealth? Incorporating bond yields (10 year gilts) is something I've considered undertaking in future work to potentially improve the strategy.

I agree on the US Market. I track the S&P 500 and today have that overvalued by 46% compared to the FTSE 100's 13%.

I've subscribed to Share Maestro for about three years, and during that time I set up a modest account with City Index and traded the FTSE according to SM recommendations (with a strict 10% stop loss), three years isn't long but the returns have been about 22% per year over that period. I suppose what impressed me most was a few times I didn't follow their recommendations and always got caught out on those occasions.

They currently rate the FTSE a mild buy, I tend to agree, in particular I think high yelding large caps are still undervalued. I've been playing the stock market for over thirty years and there haven't been all that many times when you could put together a well diversified portfolio of large cap shares with strong balance sheets that yielded over 5%, something you can do at the moment.

Share this post


Link to post
Share on other sites

Currently only 3 stocks in the Ftse 100 with a forward P/E of under 10 , not much to choose from given my strict criteria.

I don't see any value there at all at the moment, hence me being about 80% cash until something turns up/changes.

D

Share this post


Link to post
Share on other sites

I've subscribed to Share Maestro for about three years, and during that time I set up a modest account with City Index and traded the FTSE according to SM recommendations (with a strict 10% stop loss), three years isn't long but the returns have been about 22% per year over that period. I suppose what impressed me most was a few times I didn't follow their recommendations and always got caught out on those occasions.

They currently rate the FTSE a mild buy, I tend to agree, in particular I think high yelding large caps are still undervalued. I've been playing the stock market for over thirty years and there haven't been all that many times when you could put together a well diversified portfolio of large cap shares with strong balance sheets that yielded over 5%, something you can do at the moment.

:o

Wow.

It's a few years since I actively traded, I did ok as I was making >10% when the FTSE was making c. 5% but 22% is astounding, well done you.

Share Maestro eh?

Share this post


Link to post
Share on other sites
It also suggests we could have quite a lot of upside left before the next down leg - of course history is not a predictor of the future and all that...

Indeed.

Suggests there may need to be an accompanying 3.5 yr 'bubble' too.

So dot.coms 97-2000; credit derivatives (housing mostly) 2004-07 and energy; what next?

Whatever it is if we're going to get another real 'bubble' of c. 3.5yrs duration it looks like it's about to kick off fairly soon.

Let us know if you spot it won't you........

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   224 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.