Price to Earnings Ratios Gone Wild – A Measure for Investors to Follow?

by Darwin on September 27, 2009

I came across this visual and thought it was worth sharing.  With data from Robert Shiller’s Irrational Exuberance, this BusinessWeek chart highlights the massive secular trends that span years at a time where Price to Earnings ratios of the companies that comprise the S&P500 rarely actually stay around the mean of 16.3, but they do tend to cross back and forth and stay on one side or the other over long spans.  In taking a look at just the past few decades, it matches up with the benefits of investing heavily in stocks starting in the early 80s and lightening up around 2000 (the Internet bubble and the euphoric buying that occurred does look rather ridiculous in retrospect in this context).

When looking at retirement portfolios over long periods of time, perhaps worth using this Price to Earnings ratio and mean of 16.3 as an additional data point in determining your allocation to US stocks?  This is contrary to the premise of just setting it and forgetting it, but for people looking to rebalance and revisit their allocations annually or so, perhaps this is worth considering.


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1 Mark Wolfinger September 27, 2009 at 3:18 pm

If willing to exercise judgment and not simply live and die by someone else’s rules, taking P/E into consideration is a beneficial idea when allocating assets to the stock market.

However – it may represent a duplication. A high P/E ratio corresponds to higher stock prices – and thus, there is already a reason for selling some stocks when asset re-allocation time arrives.
.-= Mark Wolfinger´s last blog ..How I Beat The Market And Bought A Candy Bar With My Profits; a Guest Post =-.

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