Faculty Publications

Title

Is a High CAPE Cause for Alarm? Part 2: Valuation-Based Asset Allocation

Document Type

Article

Publication Date

7-9-2015

Abstract

In my last post, I discussed the origins of the PE10 (a.k.a. cyclically-adjusted price-earnings ratio, or CAPE) and how it has been used to map market performance. Discussion around PE10 focuses primarily on how to adjust expectations about future stock market returns based on its value. A more controversial topic is whether it is beneficial to adjust strategic asset allocation in response to where PE10 is currently situated. Can otherwise passive and conservative long-term investors exploit PE10 to obtain improved retirement planning outcomes? Will it perform better than a fixed asset allocation strategy with the same average allocation to stocks?