There was an excellent article in the back pages of today’s Wall Street Journal titled “Yes, You Can Time the Market.”
It detailed a method of determining when market fundamentals are too frothy, and how to re-adjust one’s stock holdings versus bond holdings. The author focuses on the Shiller P/E ratio for the S&P 500, which currently stands at a rather high 26.31.
For comparison’s sake, right before “Black Tuesday” in 1929, the ratio stood at 30, while during the tech bubble it reached 44 in late 1999. (It also reached lows in the mid-single digits just after World War I, after the 1929 crash, and in 1981 after a nearly a decade of stagflation, oil shocks, and the Soviet invasion of Afghanistan — all excellent times to invest in the stock markets.)
I won’t give away the bottom line, but the author discusses how $100,000 invested in 1926 grew to $141 million in 2013, while using a method focused on the Shiller P/E ranges, that same $100,000 grew to $238 million. All beginning with a 60-40 split between stocks and bonds (a “moderate portfolio,” as discussed in TSP Investing Strategies).
There is one other strategy investors can use in employing the method discussed in “Yes, You Can Time The Market” – strategy 3 in TSP Investing Strategies. I’ve been using this with strategy 4 in order to slowly build up my bond allocation (I’ve chosen the G Fund, for reasons I’ve discussed previously) because I’ve been paying close attention to the Shiller P/E ratio for the last couple of years now. I may have missed out in some recent growth in the stock funds, but it’s the long term I’m focused on, as discussed in the article.
While the article focuses on the Shiller P/E, a book with the same title by Ben Stein and Phil DeMuth offers a series of other metrics investors can use to “time the market” – or for buy-and-hold investors, metrics to use as a guide in gradually shifting allocations as market conditions dictate, in preparation for investing opportunities as they appear. It’s a good book, I highly recommend it.