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Interesting discussion. I just finished Bernstein’s Four Pillars of Investing however and he makes some great points about long term stock returns perhaps not having the advantage over bond returns that they’ve enjoyed over the past 30 years. Basically, the high current valuation of stocks means that the expected return over the next few decades is likely to be lower than in the past. He recommends no more than 75% equity positions, no matter what stage of accumulation we are in.
As an aside, foreign equities are currently not at such lofty prices, and thus according to Bernstein’s logic would have a higher expected return over the next few decades. I am personally planning to put the Vanguard admiral international stock index in to my taxable soon, as well as devoting a larger space to foreign equities in my deferred accounts….
While CAPE does point to lessened returns, unless of course earnings grow (which they should even if only a tax cut is passed, of course dollar has opposite effects), etc...I have no clue how one could propose bonds will do even better over the long term though as they are set up to do poorly. Bonds are really for volatility smoothing, aka diversification. In theory you should be able to do better with internantional funds, especially with the dollar being nice and high, but those markets are simply not our market.
CAPE has been a couple standard deviations above the "mean" for 3 decades now, so that may say something more structural than forecastable, though it does have a decent track record. But its just a general feel and never tells you within even several years whence the pain trade will occur.
Good theory article on article on the 60/40 going forward http://econompicdata.blogspot.com/2016/11/predicting-forward-6040-returns.html and quick thoughts on bonds in general.
Another interesting look at bond returns. http://theirrelevantinvestor.com/2016/12/07/dont-fear-the-reaper/
If you were going to attempt to time the market, at these valuations assuming nothing changes some sort of tactical asset/momentum trade wouldnt be out of the question as they do fairly well in this sort of environment (assuming you think a bear market is coming relatively soon).
), our clients who have planned cash needs within the next 5 years all “own” high quality corporate bonds timed to mature at date of need. We simply don’t speculate on bonds but use them for their intended purpose – not as an investment but as a way to guarantee liquidity when you need it with a higher return that our clients would get from MM accounts.
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