When Price Drops Occur (Valuation Informed Indexing)

I looked at investing $10000 for 30 years while maintaining varying stock allocations with valuations (Valuation Informed Indexing). There were no deposits. There were no withdrawals.

Varying allocations introduces a weak sensitivity as to when prices fall. The sooner, the better.

Scenario Surfer Runs

I invested entirely in stocks and 2% TIPS. I started with a $10000 balance. I selected P/E10=26 Bear Market. I made no deposits. I made no withdrawals. Here are the Year 30 balances. I include fixed allocations of 20%, 50% and 80% for a reference. P/E10 values are in “Current Years” in the “Portfolio Allocation” box.

Run 1.
P/E10 above 30 in Year 3.
P/E10 below 20 in Year 9.
P/E10 below 15 in Year 11.
P/E10 below 10 never.
20% rebalanced: 23,492.
50% rebalanced: 32,755.
80% rebalanced: 42,766.
Variable: 50,211.

Run 2.
P/E10 above 30 never.
P/E10 below 20 in Year 9.
P/E10 below 15 in Year 13.
P/E10 below 10 in Year 16.
20% rebalanced: 21,497.
50% rebalanced: 26,076.
80% rebalanced: 29,329.
Variable: 39,497.

Run 3.
P/E10 above 30 never.
P/E10 below 20 in Year 2.
P/E10 below 15 in Year 2.
P/E10 below 10 in Year 19.
20% rebalanced: 24,740.
50% rebalanced: 36,738.
80% rebalanced: 49,956.
Variable: 67,285.

Run 4.
P/E10 above 30 never.
P/E10 below 20 in Year 3.
P/E10 below 15 in Year 4.
P/E10 below 10 never.
20% rebalanced: 23,332.
50% rebalanced: 31,525.
80% rebalanced: 38,743.
Variable: 87,942.

Run 5.
P/E10 above 30 in Year 2.
P/E10 below 20 in Year 6.
P/E10 below 15 in Year 11.
P/E10 below 10 never.
20% rebalanced: 26,889.
50% rebalanced: 45,322.
80% rebalanced: 70,525.
Variable: 52,285.

Run 6.
P/E10 above 30 in Year 7.
P/E10 below 20 in Year 8.
P/E10 below 15 in Year 9.
P/E10 below 10 never.
20% rebalanced: 24,661.
50% rebalanced: 35,156.
80% rebalanced: 44,061.
Variable: 74,414.

Run 7.
P/E10 above 30 never.
P/E10 below 20 in Year 7.
P/E10 below 15 in Year 8.
P/E10 below 10 never.
20% rebalanced: 21,280.
50% rebalanced: 25,177.
80% rebalanced: 27,333.
Variable: 41,755.

Run 8.
P/E10 above 30 never.
P/E10 below 20 in Year 3.
P/E10 below 15 in Year 4.
P/E10 below 10 in Year 7.
20% rebalanced: 23,185.
50% rebalanced: 31,062.
80% rebalanced: 38,036.
Variable: 64,734.

Run 9.
P/E10 above 30 never.
P/E10 below 20 in Year 7.
P/E10 below 15 in Year 10.
P/E10 below 10 in Year 11.
20% rebalanced: 21,729.
50% rebalanced: 26,774.
80% rebalanced: 30,583.
Variable: 46,783.

Run 10.
P/E10 above 30 never.
P/E10 below 20 in Year 3.
P/E10 below 15 in Year 6.
P/E10 below 10 in Year 10.
20% rebalanced: 23,999.
50% rebalanced: 33,945.
80% rebalanced: 44,009.
Variable: 54,432.

TIPS only baseline:
Zero % stocks: 18,113.

Data Summary

Here are the balances ordered in terms of when P/E10 first falls below 20:

P/E10 below 20 in Year 2: balance 67,285.
P/E10 below 20 in Year 3: balances 87,942, 64,734, 54,432.
P/E10 below 20 in Year 6: balance 52,285.
P/E10 below 20 in Year 7: balances 41,755, 46,783.
P/E10 below 20 in Year 8: balance 74,414.
P/E10 below 20 in Year 9: balance 50,211, 39,497.

Here are the balances ordered in terms of when P/E10 first falls below 15:

P/E10 below 15 in Year 2: balance 67,285.
P/E10 below 15 in Year 4: balances 87,942, 64,734.
P/E10 below 15 in Year 6: balance 54,432.
P/E10 below 15 in Year 8: balance 41,755.
P/E10 below 15 in Year 9: balance 74,414.
P/E10 below 15 in Year 10: balance 46,783.
P/E10 below 15 in Year 11: balance 50,211, 52,285.
P/E10 below 15 in Year 13: balance 39,497.

Here are the balances ordered in terms of when P/E10 first falls below 10:

P/E10 below 10 in Year 7: balance 64,734.
P/E10 below 10 in Year 10: balance 54,432.
P/E10 below 10 in Year 11: balance 46,783.
P/E10 below 10 in Year 16: balance 39,497.
P/E10 below 10 in Year 19: balance 67,285.
P/E10 below 10 never: balances 50,211, 87,942, 52,285, 74,414, 41,755.

Here are the P/E10 thresholds versus the ordered Year 30 balances:
87,942 and years 3, 4 and never.
74,414 and years 8, 9 and never.
67,285 and years 2, 2 and 19.
64,734 and years 3, 4 and 7.
54,432 and years 3, 6 and 10.
52,285 and years 6, 11 and never.
50,211 and years 9, 11 and never.
46,783 and years 7, 10 and 11.
41,755 and years 7, 8 and never.
39,497 and years 9, 13 and 16.

Data Analysis

In all instances, owning stocks throughout the 30 year time frame was better than owning 2% TIPS alone.

In all instances, higher stock allocations were best among fixed allocations.

In 9 out of 10 instances, varying allocations was best. The exception still had a high final balance ($52,285).

The relationship when P/E10 falls below 20 and when P/E10 falls below 15 is weak. It favors early price drops. There is no clear cut relationship when P/E10 falls below 10.

Conclusions

With a single investment without deposits and without withdrawals, varying allocations introduces a weak sensitivity as to when price drops occur. The sooner P/E10 falls below 20 or 15, the better.

In contrast, fixed allocations have no such timing sensitivity when there are no deposits and no withdrawals.

Have fun.

John Walter Russell
May 17, 2008