DYI:

U.S. Stocks

U.S. stocks remain at nose bleed valuation levels providing a future return for monies invested today or stocks held;  go to sleep like Rip Van Winkle waking 10 years from now your estimated average annual return is – [drum roll please] – 0.42%!  Yep 0.42% and that’s not a typo! 

This massive over valuation has been occurring for years.  The last time valuation reached investment quality was during the bottom of the Great Recession.  Since about 2014 valuation once again moved back into speculative arena leaving long term investors high and dry.

It is my opinion a time will come when stocks will revert not just to their mean – [Shiller PE at 17] – they will overshoot to the downside around Shiller PE of 10 and with the very real possibility of bottoming out around 5!

U.S. Long Term bonds

It is my judgement that the long term bond rally of a lifetime started on 9-30-1981 with 10 year T-Bonds peaking at 15.84% and ending on 8-4-2020 at a sub atomic low level of 0.52%!  Interest rates since then have skyrocketed to 4.37% (10yr T-bond) pushing up rates 740 percent! 

Rates over the coming years will continue to move upward but in a saw tooth manner.  Recessions will come pushing down rates however bottoming out at higher lows and reaching higher highs before the next recession.

Gold

Gold along with its cousin silver in my view remains in a silent bull market climbing slowly in a saw tooth manner frustrating the speculator but with complete understanding by an investor.  The Dow to Gold Ratio rest at 17 to 1 with stocks overvalued compared to gold by 70%!  Gold remains within DYI’s realm of investment at 49% of my model portfolio.

Cash

Short term bills and notes were for years at sub atomic low rates to the point this investment class was not just unloved but forgotten only recently “rediscovered” as rates have moved upward.  Rates at the shorter end will move upward over the years in a saw tooth manner as recessions come and go.

Till Next Time

DYI            

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 12/1/23

Active Allocation Bands (excluding cash) 0% to 50%

27% - Cash -Short Term Bond Index - VBIRX

49% -Gold- Global Capital Cycles Fund - VGPMX **

 24% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are domestic or international companies they believe will perform well during times of world wide stress or economic declines.  

 

Margin of Safety!

Central Concept of Investment for the purchase of Common Stocks.

"The danger to investors lies in concentrating their purchases in the upper levels of the market..."

Stocks compared to bonds:

Earnings Yield Coverage Ratio - [EYC Ratio]

Lump Sum any amount greater than yearly salary.

PE10  .........30.92
Bond Rate...5.43%

EYC Ratio = 1/PE10 x 100 x 1.1 / Bond Rate

1.75 plus: Safe for large lump sums & DCA

1.30 Plus: Safe for DCA

1.29 or less: Mid-Point - Hold stocks and purchase bonds.

1.00 or less: Sell stocks - Purchase Bonds

Current EYC Ratio: 0.66(rounded)

As of  12-1-23
Updated Monthly

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.

Lump Sum is any dollar amount greater than one year salary.

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss...If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham

%
Stocks & Bonds

Allocation Formula

12-1-23
Updated Monthly

% Allocation = 100 x (Current PE10 – Avg. PE10 / 4)  /  (Avg.PE10 x 2 – Avg. PE10 / 2)]

Formula's answer determines bond allocation.

Current PE10.....30.92

Avg. PE10...........17.07

% Stock Allocation     0% (rounded)
% Bond Allocation  100% (rounded) 

Logic behind this approach:

--As the stock market becomes more expensive, a conservative investor's stock allocation should go down. The rationale recognizes the reduced expected future returns for stocks, and the increasing risk. 

--The formula acknowledges the increased likelihood of the market falling from current levels based on historical valuation levels and regression to the mean, rather than from volatility. Many agree this is the key to value investing.  

Please note there is controversy regarding the divisor (Avg. PE10).  The average since 1881 as reported by Multpl.com is 16.70.  However, Larry Swedroe and others believe that using a revised Shiller P/E mean of 19.6 , the number since 1960 ( a 53-year period), reflects more modern accounting procedures.

DYI adheres to the long view where over time the legacy (prior 1959) values will be absorbed into the average.  Also it can be said with just as much vigor the last 25 years corporate America has been noted for accounting irregularities.  So....If you use the higher or lower number, or average them, you'll be within the guide posts of value.

Please note:  I changed the formula when the Shiller PE10 is trading at it's mean - stocks and bonds will be at 50% - 50% representing Ben Graham's Defensive investor starting point; only deviating from that norm as valuations rise or fall.        

  

DYI

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The Formula.

A value based allocation strategy

February 19, 2010 by John Kingham