The Zone System (Asset Allocation Research)
The Zone System is a 20 year old tool that share-market investors can reliably use to make judgements on the future direction of share prices. It uses five zoning formulas that identify when the share-market is significantly undervalued, undervalued, fair value, overvalued and significantly overvalued.
The Zone System first came to prominence when it accurately picked the 1987 crash, and this was later monitored with the accurate identification of the 2001 tech wreck and the 2007 GFC peaks. Equally, it also identified the early 1990’s, 2003, 2009 and 2012 as periods of significant undervaluations (which also proved accurate).
The publication of the Zone System has typically been limited to the exclusive reporting in The Investing Times. The Investing Times was established by Australia’s former number 1 financial adviser, Austin Donnelly, who was also the original advocate and creator of the Zone System.
ZONE SYSTEM EXPLAINED – WHITEPAPER (PDF opens in a new tab)
The application of the Zone System takes many forms, with some readers of the Investing Times using it as a tool to strictly set their asset allocation, whilst others use it as a guide along with other tools such as the Robert Shiller PE ratio and the Benjamin Graham Yield Gap. In every edition, the Investing Times runs the Zone System on more than 10 global markets to provide a broad view of equity valuations and the potential pockets of value within it.
The performance of the Zone System has proven to be stellar and significantly higher than market averages. By way of explanation, 112 years of analysis proved that a “significantly undervalued” indicator leads to >2x the market average return and >3x the “significantly overvalued” indicator returns. It also has between 11%-29% less risk of a negative return (refer to page 3 of the whitepaper for details). Said another way, the significantly undervalued zone generates returns that average in excess of 15% whereas the significantly overvalued averages only 4% return with considerably higher risk.