Beyond Diversification: What Every Investor Needs to Know About Asset Allocation

4

Shorter-Term Macro Signals and Something About Driving a Truck

Finance has borrowed a lot from macroeconomics.

—JPP

WE’VE SEEN THAT ALMOST ALL VALUATION SIGNALS WORK reasonably well across markets, perhaps more than most investors realize. Correlations between equity valuation signals and forward returns almost always have the expected sign. In fixed income markets, yield ratios seem to be remarkably predictive.

I wouldn’t make the statement that investors can make a lot of money if they mechanically follow simple valuation-based strategies, but as we’ll see in Chapter 12, systematic strategies that combine valuation with momentum signals have worked well in backtests and in practice. As for nonsystematic processes, when I described our ...