David Prosser: A short cut for the undecided investor

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The Independent Online

Outlook Still can't decide whether to look to the new year with hope or experience? Well, here's one happy thought for the penultimate trading day of 2010. Over the past 40 years or so, a remarkably simple yardstick has often proved a reliable indicator of what is to come.

The "rule of 20" as it is known, does not give day-by-day buy or sell signals, but has proved a good test of how fairly valued the market really is. The rule requires you to add the price-earnings ratio for a given market to the prevailing rate of consumer price inflation: a total below 20 implies more gains to come, while 20 or more suggests it is time to think about selling.

With the Footsie currently on a P/E of around 12.5, and the retail price index suggesting inflation is at 4.7 per cent, the rule of 20 suggests there is more upside to come from UK equities. That is not to say it will be delivered in 2011.

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