Asset Allocation Interactive projects future returns for roughly 40 asset categories using a valuation-based approach rooted in market math. Research Affiliates oversees $188 billion in investment strategies and provides methodologies for RAFI funds offered by major asset managers. The framework implies that buying at very high valuations usually leads to weak performance in subsequent years, while buying at more reasonable prices supports stronger outcomes. Current conditions show rising yields making Treasuries and cash more attractive, while U.S. large caps appear to offer poor prospective returns. The contrast between improved fixed-income appeal and diminished equity expectations is especially pronounced for broad large-cap exposure and mega-cap technology.
"You might summarize its message as "when you're buying at extremely rich prices, you'll usually fare poorly in the years ahead, and vice versa." That's a credo you'll seldom hear from Wall Street, but it's worth adopting as a North Star, especially in today's near frenzy that drove the S&P to an all-time high on May 14-after gaining 22% in the past year on top of an already towering valuation."
"Here's the dynamic that's heavily swaying the Asset Allocation Indicator: The big rise in yields has made dull but super-safe Treasuries-the 10-year just hit 4.7%-a lot more attractive while the boom in U.S. large caps has rendered the class as a whole an extremely poor buy. The contrast between the big loss of promise on the equity side and rise in fixed-income's appeal is so jarring that Treasuries and even cash look like a better bet than the S&P 500 in general, not to mention the likes of the Mag 7."
"Most of all, the formula that Interactive deploys for positing the gains-to-come is basic, convincing, and rooted in bedrock market math. You might summarize its message as "when you're buying at extremely rich prices, you'll usually fare poorly in the years ahead, and vice versa.""
#asset-allocation #valuation-and-future-returns #fixed-income-treasuries #equities-large-caps #investment-strategy
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