This extends my investigation into the effects of switching allocations between stocks (i.e., the S&P500 index) and TIPS according to P/E10 (i.e., the current price of the S&P500 index divided by the average of the last ten years of earnings) in a less-than-perfect manner.
These investigations let you know the penalty of buying high and selling low as well as the rewards of investing properly.
This particular investigation shows what can happen in the accumulation stage.
Procedure
I set up my latest Deluxe Calculator V1.1A07 (which is a modified version of the Retire Early Safe Withdrawal Calculator version 1.61 dated November 7, 2002) for switching allocations between stocks and TIPS. I set the expense ratio at 0.00%. I rebalanced all portfolios annually. I selected the CPI for making inflation adjustments.
I made deposits of $1000 per year for 30 years. To do this, I set the initial balance to $1000 and I set the withdrawal rate equal to (100%), which means minus 100%, of the initial balance. I recorded portfolio balances.
I set the P/E10 thresholds to 3-12-20-80. The thresholds of 3 and 80 eliminate the effects of allocations other than the three programmable selections. [The allocation with P/E10 less than 3 was 100%. The allocation with P/E10 greater than 80 was 0%. The software sets both of these extreme conditions. They never occur because P/E10 has always been between 3 and 80 throughout the historical record.]
I collected data for TIPS with interest rates of 0.0%, 2.0% and 4.0%.
Conditions Examined
In this investigation, I set the stock allocation equal to 50% when P/E10 was below 20 and either 100% or 10% when P/E10 was above 20. Both conditions are selected to highlight the effects of emotional decisions on long-term investment results. The first condition shows what happens when an investor is caught up in the euphoria of high stock returns and jumps in when valuations are high. The second condition shows what happens when an investor is reluctant to invest when valuations are high but still wants a little bit of exposure to the market at all times.
P/E10 is not perfect for revealing these effects. The best comparisons would be made strictly on price drops. However, the earnings part of P/E10 varies slowly (since it is the average of the most recent ten years of earnings) while the price component (or index value) is current. If prices drop 25% or 30%, P/E10 will not change by an identical amount but it will come close.
Summary
I have included tables that show real balances at 10, 20 and 30 years in the post that follows this one.
When the TIPS interest rate is 4.0%, the data generally favor keeping stock allocations at 10% when valuations are high.
There are exceptions, however. There are instances that favor 100% stock allocations while prices are continuing to rise. We see the effect of the 1960s in the data. At 10 years, 1955-1956 and 1958-1959 show the effect of rising prices during the late 1960s. At 20 years, we can see the same thing for sequences beginning in 1945-1946 and 1948-1949. At 30 years, we can still see this in 1936 (but not 1935) and 1938-1939.
We see the effect of the recent bubble in the 1966-1972 data at 30 years.
We see similar effects when the TIPS interest rate is 2.0%. There are a few more conditions favoring the 100% stock allocation when P/E10 exceeds 20.
When the interest rate of the TIPS is set to 0.0%, there are numerous conditions favoring the 100% stock allocation.
This is the story behind these numbers. The return of alternative investments must be considered when making comparisons such as these. The data generally favor lowering stock allocations when prices are high (e.g., when P/E10 is greater than 20). But the data will favor the 100% stock allocation if the investment alternative is sufficiently poor.
Have fun.
John R.
More about Imperfect Allocation Switching
Moderator: hocus2004
Accumulation Phase: 4% TIPS
Real balances after investing $1000 per year.
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
10% stocks when P/E10 > 20.
4.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
100% stocks when P/E10 > 20.
4.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Differences in favor of a 10% allocation when P/E10 > 20.
4.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
2.0% TIPS tables are next.
Real balances after investing $1000 per year.
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
10% stocks when P/E10 > 20.
4.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 22822 57561 116931
1922 16150 44579 106151
1923 14654 42307 102216
1924 17536 44742 99937
1925 14985 43627 110740
1926 18208 50195 124180
1927 19227 41323 118210
1928 17563 37805 106779
1929 17599 37131 118272
1930 18516 42268 126169
1931 17681 47158 128516
1932 15956 49249 135139
1933 14382 44549 115746
1934 14497 41793 117334
1935 15248 49693 117269
1936 16473 52568 112314
1937 14137 51830 109571
1938 13804 49120 111042
1939 14000 55416 108427
1940 14792 54158 102996
1941 14914 49121 92054
1942 16011 52861 95706
1943 16780 52556 100516
1944 16139 54404 85263
1945 18754 53083 70215
1946 17653 45084 66805
1947 18401 46515 70765
1948 17916 48793 68067
1949 20263 48216 68520
1950 17756 41438 59977
1951 17226 40286 61944
1952 18031 41253 57270
1953 16959 41293 60734
1954 17657 35569 63698
1955 16578 28758 61211
1956 15689 30898 63524
1957 15098 30726 69989
1958 15225 28552 67670
1959 14707 28462 69373
1960 14198 28100 72672
1961 14001 29454 69589
1962 14093 26860 76458
1963 14571 29474 76102
1964 12693 31264 76559
1965 10839 31215 75510
1966 12200 33466 76420
1967 12455 37503 77744
1968 11507 35646 78746
1969 11685 36599 79289
1970 11958 39196 80510
1971 12878 38102 80944
1972 12003 42238 78999
100% stocks when P/E10 > 20.
4.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 17333 34660 76968
1922 12505 27601 71483
1923 11618 27042 70643
1924 14261 29541 70929
1925 12522 29815 80871
1926 15677 35594 93524
1927 17030 30381 91625
1928 11444 28926 85434
1929 12151 29509 97519
1930 13551 34823 107055
1931 13623 40077 111808
1932 12666 42531 119078
1933 11791 39192 96557
1934 12362 37720 100131
1935 13454 45814 111080
1936 15138 49765 113718
1937 13479 50231 100108
1938 13804 49120 111075
1939 14000 55416 110051
1940 14792 54158 88680
1941 14914 49121 79400
1942 16011 52861 82711
1943 16780 49012 87056
1944 16139 50810 74029
1945 18754 54058 61147
1946 17653 47943 58357
1947 18401 43736 62013
1948 17916 48902 59880
1949 20263 49040 60544
1950 17756 35795 53236
1951 17226 34959 55274
1952 18031 35977 51383
1953 15839 36202 54790
1954 16566 31371 57789
1955 16992 25554 55884
1956 16775 27659 58330
1957 14279 27702 64613
1958 15377 25938 62825
1959 15080 26086 64834
1960 12410 25965 68313
1961 12395 27444 65814
1962 12644 25243 72771
1963 13299 27990 73002
1964 11657 29806 76553
1965 9986 29796 71886
1966 11399 32182 89595
1967 11941 36588 106723
1968 11090 34872 127383
1969 11414 36082 155177
1970 11958 39196 169671
1971 12878 38102 151570
1972 12003 42238 122617
4.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 5489 22901 39962
1922 3645 16979 34668
1923 3036 15265 31573
1924 3275 15201 29008
1925 2462 13812 29869
1926 2531 14601 30656
1927 2197 10942 26585
1928 6119 8879 21345
1929 5448 7622 20752
1930 4965 7445 19114
1931 4058 7081 16708
1932 3290 6718 16061
1933 2590 5358 19189
1934 2134 4073 17203
1935 1794 3879 6189
1936 1335 2804 (1405)
1937 658 1599 9463
1938 0 0 (33)
1939 0 0 (1624)
1940 0 0 14315
1941 0 0 12654
1942 0 0 12996
1943 0 3543 13460
1944 0 3594 11233
1945 0 (976) 9069
1946 0 (2859) 8448
1947 0 2779 8752
1948 0 (109) 8187
1949 0 (824) 7976
1950 0 5644 6741
1951 0 5327 6670
1952 0 5276 5887
1953 1120 5091 5944
1954 1090 4198 5909
1955 (414) 3204 5327
1956 (1085) 3238 5194
1957 819 3024 5376
1958 (152) 2613 4845
1959 (372) 2376 4539
1960 1788 2135 4359
1961 1606 2011 3776
1962 1449 1617 3688
1963 1272 1485 3100
1964 1036 1458 7
1965 853 1418 3624
1966 800 1284 (13176)
1967 514 914 (28980)
1968 417 773 (48637)
1969 271 517 (75888)
1970 0 0 (89160)
1971 0 0 (70626)
1972 0 0 (43618)
Accumulation Phase: 2% TIPS
Real balances after investing $1000 per year.
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
10% stocks when P/E10 > 20.
2.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
100% stocks when P/E10 > 20.
2.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Differences in favor of a 10% allocation when P/E10 > 20.
2.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Next comes data for 0.0% TIPS.
Real balances after investing $1000 per year.
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
10% stocks when P/E10 > 20.
2.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 21207 49906 94821
1922 14979 38650 86219
1923 13612 36772 83230
1924 16345 38996 81530
1925 13985 38133 90692
1926 17064 44050 102066
1927 18062 36291 97308
1928 16397 33292 88044
1929 16475 32788 97788
1930 17364 37407 104362
1931 16585 41793 106254
1932 14951 43628 111606
1933 13489 39468 94756
1934 13636 37093 96275
1935 14364 44181 95477
1936 15564 46835 90868
1937 13353 46172 87968
1938 13049 43704 88437
1939 13236 49306 85632
1940 13985 48101 80614
1941 14094 43524 71948
1942 15128 46809 74833
1943 15860 46164 78740
1944 15250 47805 66802
1945 17736 46268 55025
1946 16683 38959 52476
1947 17366 39862 55673
1948 16891 41542 53683
1949 19121 40805 54267
1950 16742 34846 47667
1951 16245 33989 49509
1952 17013 34928 45960
1953 15876 35078 48993
1954 16548 30283 51627
1955 15439 24578 49868
1956 14518 26554 51968
1957 13884 26503 57447
1958 13931 24706 55654
1959 13413 24770 57293
1960 12902 24557 60173
1961 12789 25858 57717
1962 12948 23664 63618
1963 13466 26087 63424
1964 11776 27773 63416
1965 10099 27797 62124
1966 11435 29874 62462
1967 11719 33543 63108
1968 10851 31884 63473
1969 11046 32748 63443
1970 11322 35074 63923
1971 12200 34041 63732
1972 11362 37725 61684
100% stocks when P/E10 > 20.
2.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 16666 31533 65677
1922 11983 25078 60989
1923 11126 24588 60282
1924 13669 26873 60483
1925 11982 27125 69009
1926 15008 32400 79792
1927 16283 27576 77998
1928 11023 26215 72530
1929 11677 26700 82656
1930 12974 31431 90362
1931 12994 36097 94000
1932 12057 38248 99878
1933 11221 35197 81576
1934 11774 33860 84578
1935 12805 41110 94496
1936 14407 44623 97480
1937 12787 44916 86375
1938 13049 43704 96283
1939 13236 49306 96139
1940 13985 48101 78038
1941 14094 43524 69669
1942 15128 46809 72481
1943 15860 43811 76283
1944 15250 45424 64737
1945 17736 48748 53347
1946 16683 43566 50900
1947 17366 40057 54027
1948 16891 45181 52123
1949 19121 45698 52722
1950 16742 33620 46342
1951 16245 32806 48168
1952 17013 33730 44750
1953 15084 33894 47741
1954 15779 29281 50347
1955 16333 23788 48674
1956 16248 25729 50765
1957 13926 25707 56160
1958 15091 23992 54450
1959 14885 24086 56103
1960 12304 23910 58971
1961 12218 25211 56611
1962 12393 23103 62452
1963 12952 25544 62390
1964 11279 27139 65850
1965 9596 27037 62194
1966 10918 29121 77932
1967 11390 33012 93266
1968 10540 31360 111932
1969 10827 32368 137042
1970 11322 35074 150543
1971 12200 34041 135357
1972 11362 37725 110207
2.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 4541 18373 29145
1922 2997 13572 25230
1923 2486 12184 22948
1924 2676 12122 21047
1925 2003 11008 21683
1926 2056 11650 22274
1927 1780 8715 19310
1928 5375 7077 15514
1929 4798 6088 15133
1930 4391 5976 13999
1931 3591 5696 12254
1932 2894 5380 11728
1933 2268 4271 13180
1934 1862 3233 11697
1935 1559 3071 981
1936 1157 2212 (6613)
1937 567 1256 1593
1938 0 0 (7846)
1939 0 0 (10507)
1940 0 0 2575
1941 0 0 2279
1942 0 0 2352
1943 0 2353 2457
1944 0 2381 2065
1945 0 (2480) 1678
1946 0 (4607) 1576
1947 0 (194) 1646
1948 0 (3638) 1560
1949 0 (4893) 1544
1950 0 1225 1326
1951 0 1183 1342
1952 0 1199 1211
1953 792 1185 1252
1954 769 1002 1279
1955 (894) 790 1194
1956 (1730) 825 1203
1957 (42) 796 1287
1958 (1160) 714 1204
1959 (1471) 684 1190
1960 598 647 1202
1961 571 647 1106
1962 555 561 1166
1963 514 544 1034
1964 497 634 (2434)
1965 503 759 (70)
1966 517 753 (15470)
1967 328 531 (30158)
1968 311 524 (48459)
1969 219 381 (73599)
1970 0 0 (86619)
1971 0 0 (71624)
1972 0 0 (48524)
Accumulation Phase: 0% TIPS
Real balances after investing $1000 per year.
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
10% stocks when P/E10 > 20.
0.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
100% stocks when P/E10 > 20.
0.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Differences in favor of a 10% allocation when P/E10 > 20.
0.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Have fun.
John R.
Real balances after investing $1000 per year.
50% stocks / 50% TIPS at 4.0% when P/E10 < 20.
10% stocks when P/E10 > 20.
0.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 19703 43359 77339
1922 13893 33587 70447
1923 12647 32042 68180
1924 15242 34078 66916
1925 13058 33424 74722
1926 16002 38765 84383
1927 16979 31959 80557
1928 15315 29396 72989
1929 15428 29030 81270
1930 16288 33187 86742
1931 15560 37128 88257
1932 14014 38742 92594
1933 12658 35051 77908
1934 12833 32999 79330
1935 13539 39370 78040
1936 14713 41815 73785
1937 12619 41212 70866
1938 12339 38954 70664
1939 12519 43946 67853
1940 13226 42792 63312
1941 13324 38630 56451
1942 14299 41517 58762
1943 14995 40607 61972
1944 14413 42068 52610
1945 16779 40382 43372
1946 15771 33708 41488
1947 16393 34203 44111
1948 15927 35417 42664
1949 18047 34587 43336
1950 15789 29355 38223
1951 15323 28744 39944
1952 16057 29659 37245
1953 14864 29899 39921
1954 15511 25879 42271
1955 14378 21095 41040
1956 13434 22928 42944
1957 12768 22972 47621
1958 12751 21486 46212
1959 12238 21668 47753
1960 11732 21571 50263
1961 11694 22815 48271
1962 11911 20946 53348
1963 12460 23190 53239
1964 10938 24770 52870
1965 9420 24841 51408
1966 10730 26752 51321
1967 11035 30085 51474
1968 10239 28589 51393
1969 10447 29368 50983
1970 10724 31450 50970
1971 11562 30473 50401
1972 10759 33759 48386
100% stocks when P/E10 > 20.
0.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 16030 28724 56255
1922 11484 22816 52233
1923 10656 22386 51634
1924 13103 24479 51766
1925 11465 24710 59103
1926 14369 29531 68321
1927 15569 25063 66634
1928 10618 23791 61792
1929 11224 24195 70308
1930 12423 28416 76552
1931 12396 32570 79324
1932 11480 34457 84083
1933 10681 31664 69178
1934 11216 30446 71703
1935 12190 36952 80683
1936 13715 40080 83867
1937 12133 40231 74800
1938 12339 38954 83777
1939 12519 43946 84294
1940 13226 42792 68919
1941 13324 38630 61339
1942 14299 41517 63722
1943 14995 39228 67047
1944 14413 40676 56774
1945 16779 44033 46670
1946 15771 39654 44515
1947 16393 36746 47193
1948 15927 41807 45486
1949 18047 42646 46025
1950 15789 31621 40441
1951 15323 30822 42077
1952 16057 31652 39066
1953 14370 31757 41698
1954 15033 27346 43968
1955 15703 22154 42493
1956 15742 23943 44287
1957 13584 23864 48931
1958 14812 22199 47305
1959 14693 22247 48669
1960 12200 22029 51038
1961 12043 23174 48829
1962 12145 21159 53753
1963 12611 23334 53489
1964 10911 24739 56836
1965 9220 24567 54006
1966 10458 26392 68049
1967 10866 29838 81830
1968 10020 28253 98747
1969 10273 29093 121503
1970 10724 31450 134085
1971 11562 30473 121311
1972 10759 33759 99384
0.0% TIPS, Real balances after investing $1000 per year.
Year, at year 10, at year 20, at year 30
Code: Select all
1921 3674 14635 21083
1922 2409 10771 18213
1923 1991 9656 16545
1924 2139 9599 15150
1925 1594 8713 15619
1926 1633 9234 16062
1927 1410 6896 13924
1928 4696 5606 11197
1929 4204 4835 10961
1930 3866 4771 10189
1931 3164 4558 8932
1932 2534 4285 8510
1933 1977 3387 8730
1934 1617 2552 7627
1935 1349 2418 (2643)
1936 997 1735 (10082)
1937 486 981 (3934)
1938 0 0 (13112)
1939 0 0 (16441)
1940 0 0 (5607)
1941 0 0 (4888)
1942 0 0 (4959)
1943 0 1379 (5075)
1944 0 1392 (4164)
1945 0 (3652) (3298)
1946 0 (5946) (3027)
1947 0 (2543) (3082)
1948 0 (6390) (2822)
1949 0 (8060) (2689)
1950 0 (2266) (2217)
1951 0 (2077) (2133)
1952 0 (1994) (1820)
1953 494 (1858) (1777)
1954 478 (1467) (1697)
1955 (1325) (1059) (1453)
1956 (2308) (1015) (1342)
1957 (816) (892) (1310)
1958 (2062) (713) (1093)
1959 (2455) (580) (916)
1960 (468) (458) (775)
1961 (350) (359) (558)
1962 (234) (214) (405)
1963 (151) (144) (250)
1964 27 31 (3966)
1965 199 273 (2598)
1966 272 360 (16727)
1967 169 247 (30356)
1968 219 335 (47354)
1969 174 275 (70521)
1970 0 0 (83115)
1971 0 0 (70910)
1972 0 0 (50998)
John R.