How Long Should You Wait?

I used the Scenario Surfer to get an idea of how long we should wait to buy stocks heavily.

Scenario Surfer Runs

I set up the Scenario Surfer for P/E10=14 in a Bear Market. I determined the first time that P/E10 fell below 11 and below 10.

Run 1
P/E10 Below 11: Year 2
P/E10 Below 10: Year 3

Run 2
P/E10 Below 11: Year 11
P/E10 Below 10: Year 12

Run 3
P/E10 Below 11: Year 7
P/E10 Below 10: Year 7

Run 4
P/E10 Below 11: Year 1
P/E10 Below 10: Year 2

Run 5
P/E10 Below 11: Year 10
P/E10 Below 10: Year 10

Run 6
P/E10 Below 11: Year 6
P/E10 Below 10: Year 6

Run 7
P/E10 Below 11: Year 1
P/E10 Below 10: Year 5

Run 8
P/E10 Below 11: Year 6
P/E10 Below 10: Year 11

Run 9
P/E10 Below 11: Year 6
P/E10 Below 10: Year 19

Run 10
P/E10 Below 11: Year 5
P/E10 Below 10: Year 5

Run 11
P/E10 Below 11: Year 3
P/E10 Below 10: Year 3

Run 12
P/E10 Below 11: Year 6
P/E10 Below 10: Year 6

Run 13
P/E10 Below 11: Year 5
P/E10 Below 10: Year 5

Run 14
P/E10 Below 11: Year 12
P/E10 Below 10: Year 12

Run 15
P/E10 Below 11: Year 6
P/E10 Below 10: Year 6

Run 16
P/E10 Below 11: Year 2
P/E10 Below 10: Year 10

Run 17
P/E10 Below 11: Year 5
P/E10 Below 10: Year 5

Run 18
P/E10 Below 11: Year 1
P/E10 Below 10: Year 1

Run 19
P/E10 Below 11: Year 5
P/E10 Below 10: Year 5

Run 20
P/E10 Below 11: Year 3
P/E10 Below 10: Year 3

Data Summary

P/E10 fell below 11 at Years: 1 (three times), 2 (twice), 3 (twice), 5 (four times), 6 (five times), 7 (once), 10 (once), 11 (once), 12 (once).

P/E10 fell below 10 at Years: 1 (once), 2 (once), 3 (three times), 5 (five times), 6 (three times), 7 (once), 10 (twice), 11 (once), 12 (twice), 19 (once).

P/E10 fell below 11 at Year 5 or earlier: 11 times out of 20.
P/E10 fell below 11 at Year 10 or earlier: 18 times out of 20.
P/E10 fell below 11 at Year 15 or earlier: 20 times out of 20.
P/E10 fell below 11 at Year 20 or earlier: 20 times out of 20.

P/E10 fell below 10 at Year 5 or earlier: 10 times out of 20.
P/E10 fell below 10 at Year 10 or earlier: 16 times out of 20.
P/E10 fell below 10 at Year 15 or earlier: 19 times out of 20.
P/E10 fell below 10 at Year 20 or earlier: 20 times out of 20.

Conclusions

This explains why I recommend increasing stock allocations gradually. There is likely to be an outstanding buying opportunity within the next few years. But there is also the possibility that prices will rise if you wait too long.

These data will help you understand your odds.

Have fun.

John Walter Russell
December 2, 2008