Idiot Switching in a P/E10=14 Bear Market

We are in a long lasting (secular) Bear Market. P/E10=13.

I examined a series of single threshold allocations shifts between 100% and 0%. I refer to this as Idiot Switching. It has merit at times of high valuations.

I evaluated the results on the Investment Strategy Tester at Year 10. I started with an initial balance of $100000 and withdrew $5500 each year (plus inflation). I assumed 2% TIPS. I selected a P/E10=14 Bear Market.

I found that the Unlucky results (lower 20% of outcomes) were inferior to staying entirely with TIPS.

I looked at a variety of fixed allocations. I found that a fixed 10% stocks was best at Year 10 [when using the lower 20% probability threshold].

I found that the standard 100%-80%-50%-20% allocation shifts at P/E10 thresholds of 6-8-18 beats the 10% fixed allocation at Year 10. Interestingly, however, it was inferior at the lower 20% threshold at Year 5.

The standard allocation shifts come very close to delivering a 5.5% 30-year Safe Withdrawal Rate in a Bear Market. They easily deliver a 5.5% 30-year Safe Withdrawal Rate in a Normal Market.


This suggests that it can make sense to wait for more favorable valuations. The Year 5 unlucky outcomes suggest using a 10% fixed allocation. Against this, we must consider the possibility that the market has hit bottom already.

My personal preference is to ease into stocks over the next 4 to 7 years. Short term decisions are difficult at best. The long term is much more predictable.

Have fun.

John Walter Russell
March 21, 2009