I’ve posted Entry #306 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Nine Rules for Exercising Price Discipline When Buying Stocks — Part Three.
Juicy Excerpt: There are lots of ways to exercise price discipline when buying stocks. You could increase your stock allocation a tiny bit each time valuations go down and decrease your stock allocation a tiny bit each time valuations go up. Or you could limit your allocation changes to a tiny number by making them only in circumstances in which it is imperative that they be made. Stocks offer a reasonably strong long-term value proposition so long as the P/E10 level remains below 20 and it is rare (except in recent years!) for the P/E10 level to remain much above 20 for an extended period of time.
In my early days of working with the calculators, I made an effort to limit my allocation shifts as much as possible. I was influenced by the relentless anti-timing preaching of the Buy-and-Holders. I knew that it did not make sense to avoid the exercise of price discipline altogether but I tried to comply with the conventional wisdom to the extent possible by waiting until the case for a change in allocation was so strong that it could not be denied.
Over time, I’ve become more comfortable with the idea of making more allocation changes. I still don’t make them at all frequently. But I permit myself an allocation change whenever a significant valuation change takes place. The only downside to frequent allocation changes is the costs associated with making them. Those costs are small compared to the benefits obtained by choosing the proper stock allocation.