No. of Recommendations: 6
Excellent study, Ted. Thoroughly enjoyed visiting "CAPEtown" with you, and loved your analogies. I have long suspected there there were "dark alleys" with using CAPE, and you helped shine the light on these.
I've always wondered - what are you going to do about a high CAPE value if you are a Millenial or GenZ investor with 30 years to go before retirement? Are you going to stop maxing out your 401K into an index fund every paycheck? IMO, that would not be advisable.
The next 10-year period may deliver lower than average market returns. Or it may not. As you showed, CAPE was not able to predict that consistently.
Along similar lines, a paper came out recently - "Why the High Values for the CAPE Ratio in Recent Years Might Be Justified"
The author says "Relying solely on historical CAPE averages to forecast equity returns may therefore prove unreliable. The findings in this paper indicate that investors should incorporate multiple factors, including required return and expected earnings growth, when forming capital allocation decisions across asset classes. Rotating out of the equity market simply because the CAPE Ratio shows that the equity market is too expensive might not produce the desire outcome investors hope for."
https://www.mdpi.com/1911-8074/16/9/410In other words - don't time the market!
