With CAPE sitting at ~37 right now, the "wait for cheap valuations" argument is everywhere. So we actually tested it.
setup: $500/month, Jan 1994 to Dec 2025, $192,000 total contributed. All strategies competed on the same budget. Cash waiting periods earned the Fed Funds rate.
Full rankings by final portfolio value:
1. Perfect Timer (theoretical) $1,137,488
2. CAPE <= 15 $1,125,046 … only invested 5 months out of 384. Statistically meaningless.
3. CAPE <= 25 $1,042,926 … 85-month dry spell
4. Faber 10-Month SMA $992,120 ✓ only practical strategy that beat DCA
5. Monthly DCA $984,594 … the boring baseline
6. Value Averaging $979,755
7. Below SMA-200 $933,826
8. Hybrid 60/40 CAPE<=20 $922,234
9. Crash Buyer -20% $917,045
10. Crash Buyer -10% $893,253
11. CAPE-Proportional SIP $877,604
12. CAPE <= 20 $828,693 … dead last
The finding that surprised me most:
CAPE stayed above 20 for 192 consecutive months at one point, which is 16 years. An investor following this strategy sat in cash from 1994 to 2009 waiting for "cheap" valuations that never came. The strategy only deployed capital 5% of the time across the full 32 years.
The loss vs just investing every month: $155,901.
What about today's CAPE ~37?
Historically, starting from CAPE ~37, the median 10-year forward real CAGR is about 0.6%. That's genuinely low. But the backtest shows that waiting still costs more than investing at elevated valuations because you don't know when it corrects, and cash drag compounds against you.
Faber's 10-month SMA was the one exception worth noting. It beat DCA by ~$8K while keeping dry spells short (max 18 months) and was actually followable behaviorally.
Curious what others are doing with new contributions right now given current valuations.
Happy to share the full breakdown if anyone wants to go deeper
We backtested 12 investing strategies on 32 years of S&P 500 data. CAPE-based timing came dead last
byu/ValueEquities ininvesting
Posted by ValueEquities
5 Comments
You should explain what the Faber 10-month SMA thingy is.
I don’t necessarily invest based on valuations, considering some stocks are always overvalued. I do adhere to market sentiment, and prefer to only start topping off positions when they’re below their 50 day SMA, and when sentiment is neutral to fearful.
I feel dumb. What’s CAPE?
Ya I think the CAPE is worth paying attention too, but it might not apply during massive economic disruptions like what we’re seeing with AI.
For example, why should we care what NVIDIAs earnings were 10 years ago? They made cards for gamers then.
Or maybe the CAPE ratio should be compared to the money supply? That might be interesting. CAPE/M2 supply or something.
Or maybe we are in for a big crash? I don’t know. But your example shows DCA did pretty damn well so that’s what I’m gonna keep doing.
Why are you saying today’s CAPE is 37? I think it’s closer to[ 41](https://www.gurufocus.com/economic_indicators/56/sp-500-shiller-cape-ratio).
Anyway, there’s some pretty compelling research done by ERN suggesting that (unsurprisingly) there is still a decent correlation between high CAPE (and especially very high >40 CAPE) and lower returns – see the great graph [here.](https://earlyretirementnow.com/2016/12/21/the-ultimate-guide-to-safe-withdrawal-rates-part-3-equity-valuation/)