There is a robust debate these days about whether today’s high stock market valuations are justified.
Valuation is a poor timing tool because it wasn’t meant to be a timing tool; it’s a risk evaluation tool. Valuations are not high because things are good today; they come from high expectations about the future.
The TIPS market offers a unique opportunity right now. 10-year TIPS yields are over 2%, a real return that is high enough that you can likely improve the expected performance of your 60/40 portfolio by merely replacing nominal Treasuries with TIPS.
REITs have historical real returns similar to stocks (roughly 6.5% for each) and a fairly low correlation as well. This could allow a more meaningful reduction in your regular equity allocation without sacrificing potential return. You’d also be shifting from an expensive asset to a cheap one.
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Because the goal of investing is to accumulate real wealth - an enhanced ability to pay for goods and services - the ultimate focus of the long-term investor must be on real, not nominal, returns.
