Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Buy-hold-rebalance automatically accounts for valuations via rebalancing. You tend to ignore that fact since it doesn’t support the HocoAgena. Reality and Bat$hit Crazy Hocomania seldom meet.
Rebalancing does not account for valuations. Say that an investor determines that the proper stock allocation for someone with his risk tolerance is 80 percent stocks at a time when prices are at fair-value prices. Then prices double over the course of the year. Rabalancing will cause the investor to sell some stocks at the end of the year, the amount that he needs to sell to get back to an 80 percent stock allocation. But stocks are no longer selling at fair-value prices following a doubling in price. This investor is not going with a higher stock allocation than what is proper for someone with his risk tolerance.
This is the flaw at the core of the Buy-and-Hold project. This mistake always kills investors in the end. Unfortunately, it does not kill them quickly. It is like smoking four pack of cigarettes a day. The smoker can look at results at the end of one year and say to himself: “I’m doing fine, there’s no reason why I shouldn’t keep doing this!” But in the end it is going to get to him. It’s the same with the Buy-and-Holder. It kills you in the long run. You can get away with going with the wrong stock allocation for a long time but you cannot get away with it indefinitely.
No one ever has, according to the historical return data available to us. The trick is to turn to the peer-reviewed research for guidance re what works in the long run rather than the emotions you experience while testing out the strategy in your own life. Your tests are focused on one side of the equation — you see all the temporary benefits that follow from employing a pure Get Rich Quick strategy but you don’t see the downside until it it too late to do anything about it. The only way to see the entire picture is to open yourself to considering the peer-reviewed research because valid research is OBJECTIVE and can reveal long-term effects that your personal experience just does not catch up on.
I hope that helps a tiny bit, Long-Time.