In his paper, Portfolio Selection, Markowitz led with: “The process of selecting a portfolio may be divided into two stages. The first stage starts with observation and experience and ends with beliefs about the future performances of available securities. The second stage starts with the relevant beliefs about future performances and ends with the choice of the portfolio. This paper is concerned with the second stage.” What about the first stage? Many ‘buy-and hold’ believers have reiterated their mantra in concert with Dr. Markowitz. But is that what he intended? Yes, stocks have more risk than bonds and historically have realized higher returns. BUT, what if your timeframe isn’t 75 to 100 years? What if it is 10 or 20 years? For that, you could observe historical 10 to 20-year horizons for your assumptions. One characteristic that is blatantly obvious for the starting level of valuation is the market valuation as determined by the price/earnings ratio (P/E) or better yet the cyclically adjusted price to earnings aka CAPE ratio (Shiller). As you can see throughout the past century, when the CAPE is above average, subsequent returns are below average and vice versa. EPS & S&P 500 may find the next few years will have below-average profit margins and returns.