Valuations During Accumulation

Dollar cost averaging removes much of the influence of the initial valuation. The best course seems to be to invest entirely into stocks or TIPS in the early years. Invest entirely into stocks when valuations are reasonable (P/E10 below 20). Invest entirely into TIPS when valuations are unreasonably high (P/E10 above 20).

When the balance is high, especially within ten years of retirement, the best course is to vary allocations as if withdrawing funds during retirement. The rule of thumb is that you need to preserve capital when you have something to preserve.

The initial valuation does not mean much to someone who is just starting out. Rather, what matters is the valuation twenty years later, when he has accumulated a significant nest egg.

For those starting to save today, the outlook is bright. Two decades from now, valuations should be especially attractive. Stock returns and dividends should be high.

Have fun.

John Walter Russell
October 17, 2007