Tactical Asset Allocation During Cheap Markets by Wesley R. Gray, Alpha Architect
In our last post, we looked at tactical allocation using valuation metrics and trend-following measures.
Our conclusion from the analysis is that discerning robust trading signals based on market valuations is difficult at best.
This research piece attempts to dig a little deeper and addresses the following questions:
- Opportunity Costs
- How do other asset classes perform during different CAPE regimes? Why go all-in on equity if bonds are the asset class that outperforms?
- Diversification
- Do we abandon diversification and shift heavily into equities following cheap markets?
- Real Equity Premium
- CAPE ratios are absolute pricing measures, but what we care about is the equity premium. If equity is expected to earn 15%...
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- CAPE ratios are absolute pricing measures, but what we care about is the equity premium. If equity is expected to earn 15%...
