A Trip Down Memory Lane

The year 2000 stocks were all the rage especially the dot.com companies listed on the NASDAQ. Everyone knew that by buying these stocks you were going to get rich or so they hoped.  As we all know hope turned into despair with high tech stocks dropping as much as 85%.  Would have a value player known better?  What would have our formula based investing told us?  Let's take a look!

STOCKS 

The average dividend yield for the year 2000 according to multpl.com was 1.22%.  What would our formula told us then.  PD stands for Price to Dividends it is the inverse of the interest rate.  ( 1 /1.22 ) x 100 = 82 (rounded).  Average PD is 23 today, I'm using that number as it will be very close to what it was in 2000.

100 -[ 100 x ( Curr. PD - Avg. PD / 2 ) ]

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(Avg. PD x 2 - Avg. PD / 2 )

Negative 104%

Stocks were so massively overvalued at that time our averaging formula had you at a negative 104% invested.  In other words, nothing in stocks.  Stocks would have to drop so precipitously to cut through the negative 104% just to get to 0% invested level.  Monies including dividends reinvested at that time til today would have returned on a nominal basis a scant 3.92%.

  

Bonds

There was hope back in those crazy days of 2000 as the average yield for 10 year Treasury debt was 6.66%(PI 15) as reported by multpl.com. Once again using our averaging formula.

100 - [100 x ( Curr. PI - Avg. PI / 2 ) ]

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(Avg. PI x 2 - Avg. PI/2)

The average yield since 1871 for 10 year Treasury bonds is 4.61% which will be very close to what it was in the year 2000.  The PI stands for Price to Interest calculated ( 1 / 4.61 ) x 100 = 22 (rounded). Working our formula with our grocery store scientific calculator we arrive at 36%.  DYI uses the 60% number as our governor keeping you invested in all four categories except during times (this example) of extreme under or over valuation.  Simply 36%(rounded) x .60 = 22%(rounded) invested in bonds.

Gold
In the late 1990's or the early 2000's if you had mentioned that you were interested in gold as an investment people would have look at you with a puzzled look on their faces.  Except value players or gold bugs (the few that were left) would have had a much different story to tell.


The average price for gold (year 2000) as reported by http://www.kitco.com was $279 per ounce and January the Dow was at it lofty price of 10,940 for a Dow/Gold Ratio at 39 to 1 (rounded).  Let me plug in the numbers using our average Dow/Gold Ratio of 16 and see what we get!

  [100 x ( Curr. DG - Avg. DG / 2 ) ]

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(Avg. DG x 2 - Avg. DG /2)

Gold at that time was on the give-away table as opposed to bubble land stocks.  At that time our formula would have you at 129%.  Of course we need to apply to our 60% governor or 129 x .60 = 77% invested.

Year 2000 Portfolio

 Active Allocation Bands (excluding cash) 0% to 60%

1% - Cash -Short Term Bond Index - VBIRX

77% -Gold- Precious Metals & Mining - VGPMX

 22% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

Interest rates dropped as the economy and stock market went into a tailspin pushing long term bond prices skyward and once stocks had bottomed out gold mining companies went on a multi year bull market.  All we simply have done is play the averages. Proportionally more undervalued or proportionally less overvalued.  Each of our four asset categories slowly moving up or down through the years as determined by the valuation formula.

DYI