I’ve posted Entry #52 to my Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Rebalancing Never Works.
Juicy Excerpt: Determining your stock allocation properly is a three-step process: (1) Identify the P/E10 value that applies; (2) Compare the 10-year return you are likely to obtain from stocks with the return you are certain to get by investing in super-safe asset classes like Treasury Inflation-Protected Securities (TIPS) and IBonds; and (3) Decide how much of a premium you should insist on to be willing to take on the volatility of stocks (I invest heavily in stocks only when they are paying a long-term return at least 2 percentage points greater than the return being paid by the super-safe asset classes).
When stocks are paying high long-term returns, you should be heavily invested in stocks. When stocks are paying low long-term returns, you should not be heavily invested in stocks. It’s that simple.