- SPDR Gold Shares (NYSEArca: GLD)
Stocks: S&P 500. Using a formula developed by economist Robert Shiller, the S&P’s P/E multiple stands at a high 20 and dividend yield is just above 2%. If investors want a 10% return on stocks, then earnings need to increase 8%, with a 3% inflation and 5% annually in real terms. However, earnings usually reflect GDP, which grows around 3% over the long run – a 3% real GDP growth isn’t enough to lift profits 5%. The only solution is a fallback to historic P/Es of about 14, which would require a 29% correction. [Spotlight: SPY]
- SPDRs S&P 500 (NYSEArca: SPY)
You don’t have to sit out bubbles if you have a sell strategy and you stick to it. We use a very simple trend following strategy. It is easy to get caught inside of a bubble and then miss warning signs that are telling you to get out. This is why we have an 8% stop loss – once a fund declines 8% off the recent high or dips below its 200-day moving average, we get out. This protects us from further losses and eliminates emotional decision making. More on trend following can be found in The ETF Trend Following Playbook.
For more information on trend following, visit our trend following category.
Max Chen contributed to this article.