Tldr let PE multiples trigger a rebalance into value.
Thoughts?
Did some quick analysis on S&P 500 PE ratio. Current PE is not a good measure due to 2020 earnings but the estimated earnings for 2021 are 205 which puts sp500 around 22 times earnings
I'll take 2010 earnings of 89 and bump it up to 90 for best case analysis. Assume way above average earnings growth of 7.2%. For 11 years to get us to 2021. How much am I willing to pay for earnings if recent average is 16 times earnings with 19 being the extreme? 20 of course. I'm a long term investor.
I'll divide by 10 because I'm looking at spy.
90×1.07211×20÷10 = 386
Ok. We should be here. Earnings are much higher than expected due to the stimulus.
If we take current record earnings with a 20 PE the extreme shouldn't be at 450 until roughly 2 years from now.
End of this year plus 1.5
205×1.0721.5×20 = 4,550
Here's the strategy:
When I see earnings multiple rise to these heights I move from something like SPY to VTV. Value.
The percentages can be customized for risk tolerance but that's the general idea. Let PE trigger a rebalance.
An example portfolio may be SPY 80% QQQ 20%. Add to and hold for a decade. Notice the sky high multiples, move all QQQ into VTV. Move half of spy into VTV. Keep adding to SPY QQQ in the same 80/20 ratio even though you're buying high, doesn't matter. Hold and add for another decade and watch as PE come back to normal either through mind blowing earnings or prices drop.
Either easy you've protected your earnings and can weather a correction.
Submitted August 30, 2021 at 07:21AM by BeaverWink https://ift.tt/3gKkJ9h
