A High Stock Allocation for Today

I looked at Valuation Informed Indexing with a high stock allocation when P/E10 starts at 14 in a Bear Market. The Scenario Surfer tells us that this is a good idea.

Scenario Surfer

I examined a starting valuation of P/E10=14 (Bear Market). I started with a balance of $100000 and withdrew $5000 (plus inflation) annually. For stocks, I invested in the S&P500 index. I invested in 2% TIPS for my non-stock allocation.

Algorithm

I used Valuation Informed Indexing. In this case, I allocated 20% to stocks when P/E10=18 and above. I allocated 80% to stocks when P/E10=8 through 18. I allocated 100% to stocks when P/E10 fell below 8.

Data

I took these data using the Scenario Surfer with a P/E10=14 (Bear Market). I have included fixed allocation results for comparison.

Run 1. 415,211.
20% stocks: 5,889.
50% stocks: 87,630.
80% stocks: 207,723.

Run 2. 111,454.
20% stocks: bankrupt in Year 29.
50% stocks: 12,262.
80% stocks: 25,943.

Run 3. 26,201.
20% stocks: bankrupt in Year 28.
50% stocks: 3,291.
80% stocks: 11,140.

Run 4. 110,862.
20% stocks: bankrupt in Year 29.
50% stocks: 25,206.
80% stocks: 53,531.

Run 5. 61,825.
20% stocks: bankrupt in Year 29.
50% stocks: 2,417.
80% stocks: bankrupt in Year 30.

Run 6. 109,678.
20% stocks: bankrupt in Year 30.
50% stocks: 41,868.
80% stocks: 70,927.

Run 7. 66,888.
20% stocks: bankrupt in Year 29.
50% stocks: 28,101.
80% stocks: 66,888.

Run 8. 7,557.
20% stocks: bankrupt in Year 27.
50% stocks: bankrupt in Year 28.
80% stocks: bankrupt in Year 26.

Run 9. 168,239.
20% stocks: bankrupt in Year 29.
50% stocks: 36,288.
80% stocks: 88,485.

Run 10. 69,688.
20% stocks: bankrupt in Year 29.
50% stocks: 20,965.
80% stocks: 43,273.

Data Summary

These runs reflected a variety of possibilities. This includes a narrow trading range, bargain prices and the lack of bargain prices. Valuation Informed Indexing handled them all.

In every instance, Valuation Informed Indexing produced the highest final balance. In Run 7 it was matched by an 80% fixed stock allocation because P/E10 remained between 8 and 18 for the entire 30 years. In all instances, Valuation Informed Indexing produced a positive balance at Year 30.

The 80% fixed allocation went bankrupt by Year 30 in 2 out of 10 runs.

The 50% fixed allocation went bankrupt by Year 30 in 1 out of 10 runs.

The 20% fixed allocation went bankrupt by Year 30 in 9 out of 10 runs.

Conclusions

This Valuation Informed Indexing algorithm is suitable for today’s market. It allows you to withdraw 5% of your original balance (plus adjustments to match inflation) with a high level of safety. It is better than using a fixed allocation.

Have fun.

John Walter Russell
December 10, 2008