I’ve posted Entry #23 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Why Rebalancing Doesn’t Work in Stock Portfolios.
Juicy Excerpt: When the P/E10 level is 7 (half of fair value), the fair-value magnet (stocks always move in the direction of fair value in the long term) is pulling the P/E10 level up hard and there is virtually no chance of a valuation drop (we never go below 7). So you could go with an 80 percent stock allocation and still enjoy a Risk Level Two for your portfolio.
However, when the P/E10 level is 28 (double fair value) the magnet pull is pulling the P/E10 level down hard and there is a virtual certainty of a stock crash (we have never gone to a P/E10 of 28 and not experienced a crash in the following years). So an 80 percent stock allocation would at that price level translate into a RIsk Level Ten.
Why would the same investor go with a Risk Level Two at one time and at a Risk Level Ten at another time? This makes no sense.