Set forth below is the text of a thread-starter that I recently put to the Goon Central board:
You say that valuations really do affect long-term returns but that this insight is not “actionable.”
The suggestion is that staying at the same allocation is a neutral choice, one that does not require an “action.”
You don’t have to do anything to remain at the same allocation. In that literal sense, doing so is a non-action. But most Buy-and-Holders rebalance. That’s an action. So we are ALL taking actions. The question is not — Did you take an action or not? The question is — Did you take a smart action or a dumb action?
The rebalancer returns to the allocation he had before that year’s gains or losses. He takes an action to stay with the aim of keeping his allocation constant. He deliberately chooses not to adjust his stock allocation.
Is that a good idea or a bad idea? That’s the question.
If valuations affect long-term returns, the choice to remain at the same allocation in the face of dramatic valuation changes is an action/choice to change one’s risk profile dramatically.
The difference is not that VII involves actions and Buy/Hold does not. It is that VII requires actions to keep one’s risk profile roughly constant and Buy/Hold forbids such actions.