Withdrawal Rates, Savings Rates, and Valuation-Based Asset Allocation

While most everyone would agree that valuations matter, the question remains as to whether clients with a long-term outlook (such as those planning for retirement) can hope to act successfully on information about valuations. This article provides favorable evidence based on the historical record for long-term conservative investors to obtain improved retirement planning outcomes (lower savings rates, higher withdrawal rates) using valuation-based asset allocation strategies. This is illustrated with a specific example comparing a 50/50 fixed allocation strategy to a Graham and Dodd inspired valuation-based strategy with a stock allocation of 25, 50, or 75% determined by the value of the cyclically-adjusted price-earnings ratio with respect to its median value up to that point in history. Important caveats are discussed. But even if clients or advisors decide against adopting valuation-based asset allocation, advisors may at least be able to use the findings of this research to help persuade clients to stay the course and not give in to the temptation to change their asset allocations in the “wrong direction,” such as increasing stock holdings after valuations rise or panicking and selling stocks after a plummet in valuations.