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.
WayToWealth Guy says
Thanks for the post Rob. Just one question, what advice would you give to the layman today when it comes to retirement and investing? Retirement planning is outdated and ineffective. But for millions of people, it is their only ‘blind hope’. I do think the buy and hold play will work for some people, especially those that do not want to mind their money.
Rob says
Thanks for your kind words, WaytoWealth Guy.
I recommend Valuation-Informed Indexing.
Here’s a link to an article that describes the concept:
http://freefrombroke.com/2011/01/value-informed-indexing-less-risky-way-to-invest-in-stocks-buy-and-hold-investing.html
Rob