Asset allocation is a completely different question than stock picking. I can see where you're coming from Jamese20. It all makes sense now but you've got to bear in mind your audience. I'm assuming 90% of people on these boards are from the US/Canada. They are extremely likely to have the vast majority of their stock portfolio in the US market. I would if I was a US citizen living there. That's why VTSAX is quoted so much on here. In the US its not marketed as a US fund but a total stock market fund. We think of a total stock market fund as something that invests globally. You may have had more success on the UK board if you had an allocation question.
So for US people they don't really care about any thoughts of the US being overvalued. That for them is market timing. They will just keep buying regularly and be quite happy being primarily in their home market. I'm assuming most US people are at least 80% invested in the US. Please any US people jump in here if I'm talking nonsense there.
If you are not talking about dancing in and out of the market and you are wanting to invest in index funds then I can see where you're coming from, but from a UK perspective. We are not likely to invest 90% of our portfolio in the FTSE100 as a US person may in their total stock market fund. We are also not going to be 90% in the US either. Most Vanguard global trackers here in the UK will have 50-60% allocated to the US. If you think that's too high then that's fine. Most global funds won't suit you. I think you have a couple of options:
1. Vanguard LifeStrategy 100 is approx 40% in the US
2. You use separate UK, Europe, US, Japan, Asia-Pacific, Emerging markets and Bond tracker funds to allocate exactly what you want to each geographical area.
However option 2 takes more effort to manage and you lose some of the simplicity with regards to rebalancing of a global tracker. You then also have the issue of when do you decide one of the regions is now undervalued and which is overvalued in order to rebalance appropriately. Also why do you think you know better than Vanguard do in how they have allocated their LifeStrategy fund for example?
Excellent points. There are two parallel conversations going on, one of which is about portfolio construction. And if you look at Bogleheads or wherever, there are tons of different example portfolios. Which is to say, there is no consensus on a single-best portfolio. Certainly, a non-US person would approach portfolio construction differently that a US person. On various threads here at MMM, you might (or might not) get a bit of push back if you suggested say, international stocks, but only a bit. Because after all, most big US companies have operations overseas, so there is some international exposure that way. But others might say Europe stocks aren't correlated well with US stocks, so there's a benefit in that regard.
Similarly, lots of people here like the simplicity of owning just VTSAX (and maybe some bonds). However, that's a large cap strategy, and backtesting shows a blend of large and small caps increases returns )but also increases volatility). So, I don't think the conversation should end at 100% VTSAX. But some disagree. Point is, there are lots of logical ways to construct a portfolio.
However (and this is the other part of the conversation) IMO it is not logical or valid to construct a portfolio based on current P/E ratio. As I mentioned above, P/E is at best weak predictor of future returns, and P/Es can be wacky in either direction for very long periods of time. And lets say that OP is correct, and US markets tank relative to the rest of the world. Then what do you do? Look at P/Es again and adjust? How often do you do that? And what are the thresholds for adjustment? And are the adjustments time-based (say, yearly), or value based, dependent on P/Es? And final question: Do we know that this type P/E-based construction even works? You can see there is a lot to this, and I can see lots of ways to blow your fingers off.
If there is one immutable rule of investing it is that the less you fiddle with your portfolio, the better your returns. Trying to pick winning markets ahead of time will require lots of fiddling. Caveat investor.