This podcast/video/blog is for informational use only.  We are not making investment recommendations.  This is not an appropriate investment for everyone.  As with any investment, please read the prospectus and discuss it with your financial planner.

This strategy does not consider your age, risk tolerance, cash needs, RMD distributions or tax consequences.  I am looking not as a total portfolio strategy but a plan for an IRA or Roth IRA account as part of a comprehensive plan.

We do monthly trading with this strategy, which can generate considerable capital gains, that’s why I recommend using an IRA or Roth IRA account.

The purpose is to give some direction to the amount of stocks vs bonds in an account based on the relative value of the market at any given time.  With this, we hope to take advantage of ups and downs in the market by rebalancing and selling stocks when the market is high and buying them when it’s relatively low. Some of the best gains are made by buying stocks when the markets are low.

The equity (stock) portion of the portfolio could be invested using ETFs but for the large-cap US stock portion of the portfolio we are trying to outperform an index by using 10 undervalued stocks in various industries. As with the rest of the portfolio we are rebalancing monthly. Unlike the remainder of the portfolio we are changing the 10 stock holdings.

Our general strategy is to generate an investment policy based on the investor’s time horizon and risk tolerance. We use individual bonds, treasuries, or CDs to cover the investor’s cash flow needs for up to 10 years out. The cash flow needs are covered so that the investor does not need to worry about market conditions to meet their needs.


The Cyclically Adjusted Price-Earnings (CAPE) ratio of a stock market is one of the standard metrics used to evaluate whether a market is overvalued, undervalued, or fairly-valued.

This metric was developed by Robert Shiller and popularized during the Dotcom Bubble when he argued (correctly) that equities were highly overvalued. For that reason, it’s also casually referred to as the “Shiller PE”, meaning the Shiller variant of the typical price-to-earnings (P/E) ratio of stock.

It’s most commonly applied to the S&P 500, but can be and is applied to any stock index. The main benefit is that it is one of several broad valuation metrics that can help you determine how much of your portfolio should reasonably be invested into equities based on the current relationship between the price you pay for them and the value you get in return in the form of earnings.

The S&P 500 Shiller CAPE Ratio is defined as the ratio the S&P 500’s current price divided by the 10-year moving average of inflation-adjusted earnings.

CAPE Ratio

10 year average           26.9

100 year average         17.6

10 year minimum        13.4

10 year maximum        44.0

10 year median            26.0

Standard deviation     6.3

Currently, in December, 2019, the CAPE Ratio is 33.6. Which is high compared to the 100 year and 10 year averages.  However, it is not near the all-time maximum of 44.0. The CAPE has trended higher over time

We are using the CAPE Ratio to determine the bond to stock balance.  Each month we look at the CAPE index and adjust the stock to bond distribution accordingly.  When the CAPE Ratio is low, stocks are undervalued. When the CAPE Ratio is relatively high, the stock market is overvalued.

CAPE Ratio    stocks  bonds

under 15          90%     10%

15 to 20           80%     20%

20 to 25           70%     30%

25 to 30           60%     40%

30 to 35           50%     50%

35 to 40           40%     60%

30 to 35           30%     70%

40 to 45           20%     80%

over 45            10%     90%


Most of the portfolio is handled using Exchange Traded Funds (ETFs). An ETF is a basket of securities (stocks, bonds, commodities, mix) that trade on an exchange, just like a stock. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes.

An ETF’s expense ratio is the cost to operate and manage the fund. ETFs typically have low expenses since they track an index. For example, if an ETF tracks the S&P 500 index, it might contain all 500 stocks from the S&P making it a passively-managed fund and less time-intensive. However, not all ETFs track an index in a passive manner.

The CAPE Ratio determines the amount of stocks vs bonds in the account. The other parts are fixed as follows:

ETF                                                     Percentage

Short term bonds                                25% of bond amount

Intermediate term bonds                     50% of bond amount

Long term bonds                                 25% of bond amount

International developed stock             17% of stock amount 

Emerging foreign stock                       17% of stock amount

Small-cap US stock                             7% of stock amount

Mid-cap US stock                               7% of stock amount

Large-cap US individual stock           53% of stock amount

The purpose is to have a diversified bond and stock portfolio. The ETFs can be broad funds for each asset class or Sustainable, Responsible, Impact investing (SRI) funds. We use SRI ETFs because that is a priority for me and many of my clients. I feel responsible companies is a good long-term filter on companies and industries.


The individual stock portion of the portfolio is made up of 10 individual stocks. With equal amounts going to each stock. We are focusing on undervalued large-cap US stock.

These are the guidelines we are using:

  • We are using the stocks in the MSCI USA ESG (Environmental, Social, Governance) Screened Index. The MSCI USA ESG Screened Index is an index composed of U.S. companies that have positive environmental, social and governance characteristics. They are screened for exposure to thermal coal, oil sands, civilian firearms, nuclear weapons, tobacco, UN Global Compact violators, and other controversial industries. You could use an S&P 500 index.
  • We are using Morningstar’s fair market value to determine if a company is currently undervalued. We select the 10 most undervalued companies each month that also meet the other criteria.
  • Only one stock from any single industry will be used. We have exposure to 10 different industries.


Each fund and stock will move by a different amount compared to the others each month. We rebalance back to these balances each month. The goal is to sell when a fund or stock outperforms the average return and buy when a fund or stock underperforms the average return. Volatility will help our overall return.

Each month we evaluate the CAPE and adjust the stock/bond balance, if needed.

We evaluate the stocks each month and select the top stocks, replacing any that are not as undervalued.

What makes this possible for relatively small accounts is that there is now no transaction fee for buying and selling stocks and ETFs at many brokerage houses.


We will report on our returns vs various indexes and track how we perform.

Please contact AIO Financial if you have any questions.