One quick question. Is the percentage allocation to equities a function of the current P/E10? Recent posts seem to say yes.
Yes.
Er, two. If so, would a retiree (doing the traditional allocation
based on P/E10) 'rebalance' to a new allocation if P/E10 changes
significantly enought? That is, if current P/E10 says to go 50/50,
but, a year or two down the road, your allocation is still 50/50, but
current P/E10 says to be 60/40, would you rebalance to that new
allocation?
Yes. I refer to this as "switching" (varying allocations according to P/E10). When used with an index fund, I refer to it as "Valuation Informed Indexing (VII or Lucky 7)." [Rob Bennett came up the phrase originally.]
I have found that training is superior to using a mechanically defined algorithm. [I had made some sophisticated calculators. I found that a human could rapidly learn to do even better.] The Scenario Surfer at my site allows you to train yourself rapidly.
Ah, three. If the P/E10 of the S&P500 says to be 50/50, while the
P/E10 of some other fund, perhaps a value fund, said to be 60/40, would
you allocate to 50/50 with the S&P500 index fund, but 60/40 to the
other fund?
Yes and No. I know that I ended up using the same switching algorithms with the "Gummy Slices" of Large and Small Capitalization, Growth and Value. I do not know whether I tried to optimize them separately.
With my Current Research related to Dividends, I did change the algorithm. It was simpler. It resulted in a higher stock allocation with a higher P/E10. (I remember that P/E10=17 was the key threshold for a high stock allocation--but not the highest--as opposed to 14 or 15.)
But remember, history does not repeat exactly. I have run sensitivity studies. They show that missing the exact optimum is OK. The optimal thresholds and allocations are quite broad.
Have fun.
John Walter Russell
