The Shiller Index Identifying Value Reducing Risk

When it comes to financial planning for retirement people often think that the keys to planning a comfortable retirement are to save early and to save often. While yes, this is true, it is not quite so black and white, because it also matters how you save.

When you plan for retirement the general idea is to make as much money as you can, and then to save it for later. While saving a little bit at a time can prove to be an efficient method of saving, so can investing in value-based markets.

In today’s blog post we are going to discuss one of the most proven investment tools, the Shiller Index. Continue reading as we discuss what this rules-based equity index is, how it operates, and how it might benefit you in investing for your future.

What Is The Shiller Index?

When it comes to investing, it pays to know what you are doing. But not all of us are financial advisors or registered investment advisors. Because of this, indexes, or investment frameworks, like the Shiller Index, are developed so that people can have a basic understanding of the proper ways to invest in different situations.

Robert J. Shiller is a professor of economics and finance at Yale University that helped co-develop the Shiller Index with a global financial services firm known as Barclays. By combining Shiller’s knowledge in finance and economics and the investment banking and wealth management expertise of Barclays, they were able to build the Shiller Index. But aside from money, what is its purpose?

What Is Its Purpose?

The Shiller Index was created to help people make well established financial decisions that follow a rules-based system — thus reducing risk. When it comes to investing it is incredibly important to control emotion. By following a rules-based approach like the Shiller Index, the investor is able to make emotionless decisions while resting assured that the investment was made based off of a well-established system of investment principles.

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How Does It Work?

There is always a defined set of rules that are used to invest in the four major market sectors of the United States economy. Each day, the index can allocate and divide the money and a portion of the Shiller Index. How the money is divided and allocated is determined by the stability of the equity market in order to reduce risks and to increase potential returns. Sound pretty nice, right?

The Shiller Index is all about identifying values and reducing risks so that you can efficiently save for your future retirement. Within the Shiller Index, there are two major focuses that best ensure that good investments are being made — value investing and risk control.

Value Investing – Value investing is no new strategy. In fact, it has been a popular investment style since the 1930s. At its simplest, value investing is recognizing that the most money can be made when assets are bought at a low price, later to be sold at a high price. While the concept is rather clear, it is not so black and white when investing, being why proven indexes like the Shiller Index is used to predict market values over time, as well as the risk involved with those asset values.

Risk Control – It is often said that “you have to spend money to make money,” but what is not discussed is the risk associated with losing money. When the market starts to move rapidly — whether it moves up or down — the risk of loss increases exponentially. Because of this, it is important to invest in assets that have reduced exposure to market fluctuations, or not invest as much at times that the market is unstable. By avoiding risks, you can limit your potential for short-term losses.

The CAPE ratio, a core aspect of the Shiller Index, is a tool that was developed by Shiller to identify assets that might be undervalued. Being that undervalued assets tend to have lower risks, the CAPE ratio allows investors to look at an asset and its earnings over a 10 year period of time while adjusting for inflation. The CAPE ratio then gives the asset a “score” that determines how undervalued, or safe, the asset is.

What Makes It Different from Other Indexes?

Sure, there are a great number of proven indexes that you can utilize within your retirement investment strategies. But the Shiller Index truly is a diamond in the rough. Essentially, what sets this innovative index apart from others is that it sees higher annual returns while it also sees less market volatility.

In fact, in the last two decades the Shiller Index saw 33 percent more annualized returns than the S&P 500 Price Index while also experiencing 55 percent less volatility. But why is this important? Well, to put it simply, it creates a higher rate of return while experiencing less risk of asset losses. As a volatility controlled index (VCI) the Shiller Index is an excellent tool to utilize in investing in your future.

Helping You See Smoother Returns

As we have discussed above, the end-game is to make enough money to retire to a life of comfort. The Shiller Index is not a be all end all solution to investing — it is simply a tool, or methodology, that allows for you to do so safely.

The Shiller Index offers a way to measure the volatility of the market, as well as how to respond with your assets. This is done by moving, or reallocating, funds between different equity sectors that have been determined to be viable by Shiller Index and your cash account.

This daily reallocation or shift in assets is between two forms — equity and cash. Equity is typically best when the markets are growing stability while cash is best for minimizing risks during volatile market patterns with large, short-term swings.

Let P.A. Berg Help You Plan Your Financial  Future

When it comes to planning for your retirement, simply working and saving is hardly ever enough. Because of this, it is important to invest — with the problem being that it can be just as easy to make money than lose money in the markets. Because of this inherent risk with investing, it is important that you utilize tools like the to ensure that your financial strategy is operating efficiently while reducing risk.

Financial jargon and investment strategies are confusing — but that doesn’t mean you should avoid investing entirely. P.A.Berg Retirement Solutions is here to help — because you don’t want to miss out on your opportunity to make some money in the markets that you can invest towards your future retirement.

So what are you waiting for? Schedule an appointment with Patrick Berg today, or request a free evaluation. It is never too early to begin investing for a more comfortable retirement — and it is our goal to show you how to do just that.

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