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Six years ago I went to Vegas with a bunch of family and friends to celebrate my 50th birthday. Since one of my nieces was going to East Carolina University at the time, I jokingly proposed that we all get t-shirts emblazoned with the words, “ECU Blackjack Team.”
It’s a good thing we didn’t. No need to embarrass my niece and her school. We sucked at blackjack—especially me. I don’t know what it is. It’s a simple game, providing you can count to 21. But for the life of me, when I’m actually playing, I lose my ability to count. I always have to ask the dealer what my count is. Pretty sad.
Anyway, I bring up my pathetic blackjack skills because I see a parallel between counting cards and the Shiller PE Ratio. And this parallel is especially important, given that Mrs. Groovy and I are in the critical first 5 years of our retirement. Let me explain.
Counting Cards and the Shiller PE Ratio
Counting cards, like the game of blackjack, is pretty straight forward. You assign a +1 to the low-value cards in the shoe (2-6), a zero to the medium-value cards (7-9), and a -1 to the high-value cards (10, Jack, Queen, King, and Ace). Then, as the cards are played, you mentally sum them in your head. If you reach a point where the sum has a high negative value, this means there’s an abundance of low-value cards left in the shoe, and this situation favors the dealer. If you reach a point where the sum has a high positive value, this means there’s an abundance of high-value cards left in the shoe, and this situation favors the player.
Now a question. If you’re counting cards, and the count favors the dealer, should you bet big? Or should you bet the minimum? If you said “bet the minimum,” go straight to the head of the class. If the reverse were true, and the count favors you, your betting strategy should flip. You should be betting more than the minimum on each hand.
In the investment world, the Shiller PE Ratio is the equivalent of counting cards. For those who may not know, the Shiller PE Ratio is the price-earnings ratio of the S&P 500 based on the S&P 500’s average inflation-adjusted earnings from the previous 10 years.
Wow. That’s a lot of gobbledygook, I know. But here’s the important number to keep in mind. The historic median of the Shiller PE Ratio is 16.14. If the current Shiller PE Ratio is much higher than that, the Wall Street “shoe” is rich in low-value cards, so to speak. The investment landscape favors the dealer (i.e., returns in the immediate future have a good chance of being negative), and the player, the retail investor, should minimize his or her bet on stocks and be more defensive (i.e., increase the bonds and cash portions of his or her portfolio).
To see the card-counting quality of the Shiller PE Ratio, consider the year 1999. In December of that year, the Shiller PE Ratio climbed to 44.20. That’s almost three times the historic median—not many high-value cards were left in the shoe. And sure enough, over the next three years, the dealer won big. The S&P 500 had a -38% return.
In contrast to 1999, let’s take a look at 1932. That year, the Shiller PE Ratio sunk to 5.57 in June—almost two-thirds below its historic median. The shoe was chock full of high-value cards. And any investor who realized this and upped his or her bet on stocks was rewarded handsomely. Over the next three years, the S&P 500 was up 117%.
Bad Moon Rising
I hear hurricanes a-blowing
I know the end is coming soon
I fear rivers over flowing
I hear the voice of rage and ruin
Don’t go ’round tonight
It’s bound to take your life
There’s a bad moon on the rise
I’m not going to sugar coat things. I’m nervous about the stock market.
First, Mrs. Groovy and I have only been retired for a year, and the notion of sequence risk looms large. Investopedia describes sequence risk as follows:
Sequence risk, also called sequence-of-returns risk, is the risk of receiving lower or negative returns early in a period when withdrawals are made from an individual’s underlying investments. The order of the sequence of investment returns is a primary concern for retirees who are living off the income and capital of their investments.
Put in layperson terms, if you’re a newbie retiree with a portfolio heavily weighted toward stocks, and the stock market crashes—à la 2008—your portfolio will be seriously compromised and you just might need to un-retire yourself. Ouch. This is bad.
The second thing that makes me nervous about the stock market is this: the current Shiller PE Ratio is 31.38. That’s almost twice the historic median. And although the Wall Street shoe may not be chock full of low-value cards, it has enough of them to make any thoughtful investor wary. The advantage is clearly with the dealer.
So there you have it. I’m nervous because sequence risk and the Shiller PE Ratio are unmistakably crying out: tread lightly on stocks. If Mrs. Groovy and I were in our 30s, we wouldn’t give a rat’s ass about either. We’d be dollar-cost-averaging machines. But we’re in our mid-50s. There are no more paychecks to fortify our Roths and 401(k)s. And most importantly, we love this retirement thing. Waking up each day knowing we don’t have to work is nothing short of glorious. The last thing we want to do at this point is screw things up and find ourselves back in cubicle hell.
Game Plan
When I was younger, I wasn’t very adept at heeding warning signals. No more. Sequence risk and the Shiller PE Ratio say tread lightly on stocks, I’m treading lightly on stocks.
Our portfolio allocation is currently 35% stocks and 65% bonds/cash. And our stock exposure will remain in the 35% range as long as we’re less than five years removed from the day we retired and the Shiller PE Ratio is north of 20.
Will minimizing our bet on stocks sacrifice our portfolio’s returns? In the short run, yes. The S&P 500 is up almost 15% so far this year. Our two Roth accounts, however, which mirror our overall 35/65 allocation the closest, are only up a little over 9% each. And our underperformance may continue for several years.
But the Wall Street dealer has a knack for humbling giddy players (see the years 1929-31, 1937, 1973-74, 2000-02, and 2008). And at this stage of the game—one year into retirement—we can’t afford to be humbled.
Besides, a 9% return ain’t that bad. Moreover, sequence risk will eventually subside, and the Shiller PE Ratio will eventually favor the player. And when that day comes, we’ll have plenty of chips left to be more aggressive with our stock bets (hello 60/40 allocation).
Final Thoughts
Okay, groovy freedomists, that’s all I got. What say you? Are we being too wimpy with our stock allocation? Or are we playing it right, given that we’re new to retirement and the Shiller PE Ratio is rather high? Let me know what you think when you get a chance. Peace.
I am currently just as fearful of bonds, assuming you are using an index fund. Many in the FI community are in funds such as VBTLX. It has an average duration of 6 years. That means that for every 1% interest rise, your bond fund will loose around 6%. I’m concerned about this because it seems like the main reason the stock market has gone so high for so long is that the Fed has kept interest rates at such historic lows. But they are now beginning the tightening. It’s possible that this will blow up interest rates and correct the stock market at the same time. I have a lot in cash right now and I know I’m “loosing” but I’m not comfortable with this crazy situation which will certainly end badly at some point.
Oh, man, you nailed, Susan. The investor’s dilemma. What do you do when the two primary asset classes, equities and bonds, are overvalued? Right now my asset allocation is 35% equities, 52% bonds, and 13% cash. I’ll stick with that allocation for 2018. If we do have a major correction, like we did in 2008-2009, I think bonds will hold up well (a 1-2% gain). Why? Because even though interest rates are starting to rise, many investors will run to the safety of bonds when things get ugly in equities. Well, that’s my game plan, anyway. We’ll see what happens. But I can understand how one would want to favor cash in the current environment. Those still standing after the next big correction will have a wonderful opportunity to “buy low.” Thanks for stopping by, Susan. Love the way your mind works.
i’ve been wrestling with this thought myself. maybe these assets are not overvalued, but paper money is undervalued. thus we may want to consider other productive assets as a hedge against this. I now have rental real estate and I’m open to buy more. I am also close to buying a rather boring business that can generate cash without a lot of day-to-day work.
Makes sense, Steve. I’m very intrigued by real estate. After we’re done building our home, I may build and tiny house and rent it out via AirBnB. I’ll market as a way of discovering if tiny-home living is for you. And love your idea about a buying a boring business that generates good cash flow and doesn’t require a lot of work. Perhaps you can write a post about it? I’d love to hear the details.
Great analogy and a nice read. By the way, I’m 56, wife is 57 next month, and she plans to retire next year to work with me on our part time Amazon business and to travel!
Nothing that I’ve read about the Shiller PE Ratio considers other asset classes. Our investment plan is designed after the ‘ultimate buy and hold portfolio’ created by Paul Merriman. In the last 10 yrs we have had annual returns of about 7.2% net of fees. (https://www.marketwatch.com/story/the-ultimate-buy-and-hold-strategy-2017-05-04)
We’ve been at a 70/30 allocation throughout that period in our main accounts and I also have a ‘gambling’ fund with an additional 10% of our total portfolio in it that I use for buying individual stocks. It’s returned about 9.3% annually over that same period.
Back to asset allocations. Having a well diversified portfolio of uncorrelated asset classes reduces the overall risk to your portfolio significantly. Yes, it also reduces your overall returns. But, I don’t need a 10% return, or even an 8% return in order to have enough to provide for our retirement. What I do need is lower volatility and lower risk. Over the past 10 years or so, we’ve been 50% US and 50% overseas. We also have a 50 / 50 split between large cap and small cap stocks, both in the US and overseas funds. We also lean toward funds with a value tilt. And we have a REIT index fund. In addition, we have recently added some new asset classes, just 5% of our total portfolio value each, that include a Reinsurance index fund (SRRIX) and a peer to peer lending index fund (LENDX). Both are only available through advisors, but, they add 2 additional asset classes that again are uncorrelated to the others but add some stability and ‘hopefully’ decent returns over the long term. For example, in 2014 reinsurance fund returned 11%, and in 2015, that fund returned 7.9% which was our best performing asset class that year. This year, thus far, our best asset class has been emerging markets which are up 28% while reinsurance is down 10% due to some recent natural disasters. Our total portfolio returns YTD have been about 11%.
I will admit that reading all the recent FI posts about the Shiller ratio has caused me to think about our asset class allocations, especially in light of our upcoming retirement. And, I have moved to a 60/40 allocation mainly because of our upcoming retirement. (still have my ‘gambling’ money though)
Our plan is to pull 3% or so from our retirement funds and use our business to supplement our income during retirements first 5-7 years. It’s impossible to predict future returns or our future business income. But having a well diversified portfolio of asset classes, seems to me, can offer you decent returns over time and reduce risk and volatility significantly.
Hey, Mike. Sorry for the late reply. I’ve been a lazy poop lately. Anyway, I’m very impressed by your investment strategy and allocation. And I love your gambling fund. We currently have one stock in our gambling fund, a lithium concern, and it’s doing very well. And because it’s doing so well (up over $80k YTD), our portfolio of 35% stocks and 65% bonds/cash has kept pace with the S&P 500 so far this year. Like you, Mrs. Groovy prefers to be a little more stock-centric than I. But my trepidation toward stocks is only temporary. Once we get past the first few critical years of retirement, I want to get back to a 50/50 or 60/40 split. Thanks for stopping by, my friend. Great freakin’ comment. You really gave me a lot to think about. Cheers.
Thanks. I’m new to your blog, but really enjoy it – tons of great info and certainly gives me a lot to think about – weekly! There aren’t many FIRE bloggers who are a bit ‘older’, so I appreciate your perspective. Someday maybe I’ll take a stab at blogging 😉
This ‘forecasting’ portfolio return stuff can drive you nuts, especially once your income and future ‘job free’ lifestyle depends on those returns!
Thank you, Mike. I really appreciate your kind words. And I really do hope you enter the blogging fray. You got a keen mind and our freakish community of money nerds would love to have you join our cult.
Interesting post with the black jack reference. My vote would be to have your long term asset allocation set and don’t worry about it. I think long term you will have better results and not stress yourself out by jumping back and forth.
Maybe set up a percentage of the overall portfolio where you can market time . For the majority of your portfolio though my vote is stick with an asset allocation that you can stomach when the market corrects. If that is where you are then so be it!
Thanks, DM. There’s a lot to chew on. And your advice is very sound. Mrs. Groovy would feel more comfortable with a 50/50 or 60/40 allocation. I’m the wimp in the family when it comes to investing.
Nothing wrong with that it is your hard earned money and I don’t necessarily think there is a “right” answer. Let us know what you do in future posts!
Thanks, my friend. Will do.
Great analogy, Mr. Groovy. Although I’m more of a craps man myself. 🙂
Sounds like you have a strategy that works for you in regards to SORR, and I think that’s probably the most important thing when it comes to managing your retirement.
I think you are right on with the conservative approach. My wife and I are in your age bracket. We survived the dot com bust and great recession, but the scars remain. It’s good time to vet your portfolio of any weak holding and keep a conservative asset allocation in my opinion. Tom
It’s a shame that bank interest rates and cd rates are so low to make the temptation to remain in stocks much lower. But my grandparents lost big in 2009 because they were too thick in stocks and were half retired at the time.
I don’t think you are too risky. I’m 31. While I’m a huge fan of dollar cost averaging, I am starting to rotate a few of my high stocks so I can buy low whenever I think the cards are in my favor.
Yes, I stink at blackjack too but I do have a small “gambling fund” with the stock market. It keeps life fun.
Hey, Josh. I’m right there with you. I remember back in 2007 when you could still get a 6-month CD for 4%. I’m sure those days are going to return. It might not be until after 2020, though. And I love your “gambling fund.” We’re big proponents of that too. In fact, because of our gambling fund, our overall portfolio has returned close to 14% so far this year. Absent our two individual stocks, our very defensive portfolio would only have return around 7% so far this year. I’ll be doing a post about it soon. Thanks for stopping by, my friend. Great comment as always.
I think you are making the right move. I’m going all guns blazing into the stock market because I’m still young and I’ve got the ability to ride out a crash should it happen. Any drop just gives me an ability to buy more and buy it cheaper.
But when you are retired, and I can’t imagine unretiring, you definitely want to be more wary of any potential drops and how much of your portfolio is invested. Anyway 9% is a pretty sweet deal.
“Any drop just gives me an ability to buy more and buy it cheaper.”
Nailed it, my friend. Were I your age, I do the exact same thing. Make no mistake. The next correction/crash is going to hurt. But those who have youth and emotion control on their side are going to make out like bandits. Thanks for stopping by, Terence. Awesome comment.
I’ve been cringing lately when I hear about anyone changing their investment allocation based on any indicator or market sentiment. This is what I’d recommend: Once you set your allocation, keep it. Period. 35/65? 75/25? Whatever you can be comfortable with through a market cycle. But unless your needs change, or your overall personal risk tolerance changes, don’t change the allocation. The problem with the changes you make is statistically they’ll be the wrong move, despite being so comfortable/scared/thrilled when you do so.
Regarding the Cape/Shiller index, it’s skewed. Look at the actual numbers involved that make up that 10 year average. In 2009 the market PE was about 70. 70! And not because things were so good, but because they were so bad they severely skewed the numbers. At that time the stock prices had plummeted, but not as much as the actual profits.
For what it’s worth, I’m around 95% stocks with zero intention of changing until my needs change. It was like that at the market bottom ten years ago, and it’s like that now. I sincerely believe you and I just can’t predict (no matter how badly we think we can!) what’s going to happen over the next 5 months or 5 years. I know it’s tempting. But resist! Check out page 7 of this report. It’s the #1 tool I use to remind myself to not second guess staying the course: http://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf
Hey, Ron. Very sound argument for maintaining a particular asset allocation through the market cycle. I really have no counter argument. Intuitively, I know you’re right. But my lizard brain keeps going back to the blackjack analogy. If the remaining cards in the shoe favor the dealer, why bet above the minimum? I eventually want to get to a 50/50 or 60/40 allocation. And so does Mrs. G. But given our recent leap into retirement, and given the Shiller index and the extent of this bull run, we’re content to wait. Besides, for reasons I’ll go into on a future post, our portfolio has returned almost 14% so far this year. And despite our 35/65 allocation, that’s not too far behind S&P 500. So right now, we got the best of both worlds. Low equity exposure plus excellent returns. Thanks for stopping by, my friend. You got a keen mind, and I really appreciate your sharing it. Cheers.
I love the fact that you equate the Shiller CAPE to card counting. You’re on to something here. We should definitely expect lower average returns going forward. The markets can continue to chug higher for a long time or may crash tomorrow. Your allocation makes sense for your objective.
Thank you, Matt. Because of you and the other commenters, I feel much better. I’m not hoping for another crash, but when it inevitably occurs, I think I have a good shot of riding it out. Cheers.
Sounds like you’ve got a good plan. Shiller or no, the market can’t go up forever. And 9% is perfectly respectable.
Thanks, Gary. I think I got all the bases covered. And the comments so far reinforce that position. Or am I just being sucked in by group think? Aaarrrggghhh! I’m thinking too much today.
Great post! I think you hit the nail on the head. If you’re in accumulation phase it doesn’t matter. If you’re retired or sitting on a nice nest egg, rotate into safety. But there is no sense in fretting.
Look at the periods you mentioned – short, sweet and painful. But then look at the world, some nice progress being made. Someone has to make all the robots to replace us humans. And while that’s happening the gloabl economy will expand.
And there it is, that’s all that matters, an expanding economy, if you don’t think the economy will expand then don’t invest. But yiur, mine and everyone’s hope in investing is that the economy will keep growing.
“If you’re in accumulation phase it doesn’t matter. If you’re retired or sitting on a nice nest egg, rotate into safety.”
Couldn’t have said it better myself, my friend. And as far as an expanding global economy goes, I totally agree. Mankind’s never ending quest for knowledge and stuff assures that there will always commerce and an expanding global economy. Thanks for stopping by, HM. Your comment made me a little more hopeful.
Soooo helpful. This mirrors what my husband says. If the market chugs along for the next 4 years, we just might qualify for lean FIRE by then. Problem is we’ll need a market crash to come first so we can avoid being in a compromised situation during our first few years of retirement.
You did a better job explaining than my hubby though 🙂 it didn’t sound like gobbledygook for once.
Nothing wrong with 9%!!
Haha! Thank you for your kind words. But don’t get Jared upset. I’m sure he’s a wonderful explainer.
I have a problem with the Schiller model and I think it’s fatally flawed. Nowhere in that model does he take into account prevailing interest rates or historic rates. Back in 1999 for example rates were about double where they are now. That presented a far higher “drag” on stocks in terms of their valuation. Schiller looks at P/E ratios as if that’s some isolated thing and an inverted P/E or earnings yield is a great proxy for comparison to bonds. Will rates go up? Of course they will! But when!? What if it’s a decade or more? If that’s the case, then stocks are going to prove to be wicked cheap at today’s levels. Most of the “smart money” is moving to cash – there’s a ton of hedge funds doing just that. And they’re badly under-performing the market because of it. And I blame a lot of it on flawed Schiller
Agreed, Go4. I neglected to consider interest rates in my analysis. As long as interest rates remain low, the 16.14 Shiller median may not be the right number for my card-counting analogy. Damn, this personal finance stuff is hard! Thanks for giving me something to chew on, Go4. I really appreciate it.
What a great analogy to visualize the Shiller PE Ratio! The wife and I are joining the FI club next year, so this topic is certainly on our minds.
I think your stock allocation sounds about right. We’re slightly more equity-heavy with an 80/20 stock bond split, but we’re also in our 30s, and while we don’t WANT go back to work in the future, it wouldn’t be the end of the world if we had to. We’re also keeping an extra bit of cash on the side we can invest when the inevitable correction takes place.
Nice, Joel. I like your attitude and strategy. By FIRE-ing in your 30s, you have a distinct possibility of being retired for 70 years. That’s awesome. And if I was in your position, my portfolio would be more equity-heavy as well. Thanks for stopping by, my friend.
You made counting cards sound so easy. I’ve half-heartedly tried but the result was I got frustrated and it didn’t help my situation. So I stick to basic Blackjack strategy and craps.
But enough about that. First, kudos on your use of “gobbledygook”. It’s used far to seldom these days.
Second, this is helpful for our planning. We are 6 months from pulling the plug (HOLY $#€%!) and are allocated at about 52% stocks, remainder bonds and about 3% cash. Our tax situation this year is such that converting more stock into bonds or cash might not be a great option, so we will look towards early next year. We’d like to be closer to 40/60 or even 35/65.
We are hoping things remain stable for a few more months so we can reallocate our taxable accounts and minimize the tax hit
Thanks for another thought provoking post, and the black jack tips!
LOL! I certainly made card counting sound easy, didn’t I? Not my intention, of course. I just wanted to get the basics of card counting out of the way so I could make my analogy. And you are so right about “gobbledygook.” In the 80s, gobbledygook was used a lot more frequently. And so was “repudiate” and “vituperation.” But I never see those words used anymore. Why do words go in and out of favor? Anyway, I really appreciate what you had to share, especially about being six months away from FIRE. I’m so happy for you and Mrs. G. You guys are going to crush it. Thanks for stopping by, my friend.
If you believe the accounting changes and business unfriendly regulations of the last administration hurt profitability, then the E component of the P/E ratio when averaged over the last five years may be unduly small. This smaller denominator may have skewed the Schiller PE Ratio temporarily. If the Schiller P/E ratio remains high after a few years of a more business-friendly regulatory environment, a reversion to mean will be almost certain. However, if Schiller eases back to average levels after the last few years’ earnings are no longer considered, happy days should continue.
It is impossible to time the market. Thus balancing equities with a non-correlated productive asset is imperative. However, I do not trust bonds when debt is so highly skewed by government borrowing and rate setting by the Federal Reserve. Trouble is the best alternative I’ve found (after Real Estate) is ICOs. But they have significant regulatory and technical risk.
It boggles the mind to consider balancing the risk of one asset class with another, riskier asset class. Nevertheless, that may be what is called for at this time. I should consult my son-in-law on the topic.
In the meantime, I intend to leave my very heavy equities portfolio untouched in the unhappy event of a market meltdown. I’ll eat catfood and pick up pop cans on the side of the road first.
“I’ll eat catfood and pick up pop cans on the side of the road first.”
You got moxie, my friend. And a very analytic mind. Excellent point about the regulatory environment pre-Trump. Since regulations are taxes by another name, less regulations should mean more E. The future may not be so bad. I got my fingers crossed.
well, I DID get a math degree in my ill-spent youth.
quite frankly, it isn’t moxie so much as a steely determination to not lose my head when all around me are losing theirs. i just went through my budget for this month and what with some side-hustles i’ve got some cash available for experimenting with Bitcoin & Ethereum. My first job out of grad school was cryptologic mathematician, so they’re fun to play with.
Oh, man, I’d love to get your take on Bitcoin and Ethereum. Have you written a post about it yet?
I touched upon cryptocurrencies a bit in this post a little while ago. However, the central thrust of the post was that you need to turn multiple keys to make desired life changes.
https://www.catfoodretirement.com/post/two-keys/
Since I spent the day playing with Bitcoin and Ethereum today, I should revisit the topic. In particular, the topic of ICOs.
I did mention using ICOs as a means of balancing a portfolio with a productive asset that’s uncorrelated with equities in this post:
https://www.catfoodretirement.com/post/high-wire-act/
Thank you, sir. You’re the best.
Great analysis of what’s going on. I’m of the same mindset, but I’m like the 30-year old version of you that you described: I don’t give a rats ass 🙂 Haha well that’s not entirely true…I DO, but it doesn’t really worry me at this point. I still have some time on my side.
Thanks, Dave. It’s going to suck when the next correction comes. But those who are young, like yourself, will be in the best position to weather it. Thanks for stopping by, my friend.
I think even folks my age (62) won’t be hurt by the next melt-down/crash, provided we refuse to panic. Dividend income won’t change after a market panic. If you look at VTSAX ytd dividend yield it has gone from about 2% to 1.85% of late. It will go lower as the market climbs. In the unhappy event of a panic, the dividend rate will dramatically climb b/c the dollar-value of those dividends won’t change. Moreover, your dollar will go further in the deflation that generally follows a crash–you should find some bargains then. If you plan on a 1.85% SWR you need never sell any VTSAX shares. This reduces equities’ volatility risk to zero.
Awesome, Steve. Our SWR is currently 2.5. With each comment you make, I get more hopeful.
Remember that actual dividend $ payouts typically -do- drop during large market drops, just not as much as the market value itself. But yes, after a drop the dividend % is usually higher because of it.
Thanks for the clarification.
Nope. You’re not. There’s a lot of warning signs that stock valuations may be too high, and we’re hedging right now too (although not to the same extent you guys are, but then we have rental properties to help diversify our risks.)
1) PE ratios
2) Length of bull market is second highest at 103 months
3) Lack of investment by many companies to support PE growth
One thing I’m tempted to do is take all of my stock investment dividends off auto-reinvest. That will start pulling more cash into our accounts. Then if the market starts falling, I can turn the auto-reinvest back on and will have some extra cash to invest.
The part of me that knows market timing rarely works is arguing against that strategy, though.
I like your thinking, Emily, especially about taking dividends off auto-reinvest. We did that with our investments in our brokerage accounts. Better to be safe than sorry. And I hear ya about timing the market. But maybe we’re not timing the market. Not reinvesting the dividends may be a form minimizing our bets. Perhaps that’s a rationalization, but it sounds good.
Lol I never win trying to count cards.
I believe it’s good to be cautious given your your early retirement situation. Never risk what you can’t afford to lose.
Check out these two heavy weights. Siegel vs Schiller.
https://www.cnbc.com/2017/04/29/robert-shiller-vs-jeremy-siegel-on-stock-valuations.html
Haha! I can’t count to 21 when I playing. So counting cards was out of the question. And I totally agree with you about being cautious. To everything, turn, turn, turn. There’s a time to be cautious, and a time to be risky. Now’s the time to be cautious–at least for me anyway. Thanks for stopping by, my friend. And thanks for the link. I look forward to the debate. Cheers.
Mr. Groovy – That is some good, clean head-thinking!
I’ve been incredible lucky up to this point – I FIREd in 2012 into one of the longest bull markets ever. My Sequence of Returns has been beyond my craziest dreams! But this dream could soon become a nightmare.
I’m with you on Shiller PE – it’s now in nosebleed territory. Like you, I make adjustments to my US stock allocation based on US Shiller PE by swapping out stock index funds for bond index funds.
I make no adjustment to my international stock allocation because Shiller PE is based on US stock prices.
Here is my current allocation:
US Stock: 12.50%
International Stock: 22.50%
US REIT: 10.00%
Bond: 55.00%
I rent which is why I have a significant allocation in US REIT.
That’s great, Mr. FF. FIRE-ing in 2012 certainly turned out to be fortunate. My quick back of the napkin calculation shows the S&P 500 has had a 127% return since then. Nice. And I love your allocation. Looks like you’re positioned very well for the next downturn. Thanks for stopping by, my friend. I appreciate it.
I’m with you. The risk is high at this point. I’m willing to take lower returns for a few years and be more conservative than usual. 9% is really good for 35/65.
Hey, Joe. Great point. Better to underperform and live to fight another day. I’m thrilled with 9%. But overall, it’s actually higher. I’ll explain it in a future post. It’s all because of the one individual stock we have that’s on fire. But that’s pure luck. The market could turn just as quickly on this stock. Thanks for stopping by, my friend.