“An Investor Who Goes With 60 Percent Stocks at Times of Moderate Valuations Needs to Be at 90 Percent Stocks When Valuations Are Insanely Low and at 30 Percent Stocks When Valuations Are Insanely High.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Here is the simple formula for a secure retirement:

1. Maximize your income
2. Save as much as you can (20% minimum)
3. Avoid debt
4. Invest in low cost funds
5. Stick with a 60/40 or 70/30 portfolio depending on your risk tolerance
6. Always maintain an adequate emergency fund for unexpected expenses and/or gaps in employment

That is it.

The only one that I object to is #5. Both 60/40 and 70/30 are perfectly reasonable as an AVERAGE allocation (my personal inclination would be to favor 70/30). But, given the 43 years of peer-reviewed research showing that valuations affect long-term returns, an investor who fails to adjust his stock allocation in response to big valuation shifts is permitting his risk profile to go wildly off the mark. An investor who goes with 60 percent stocks at times of moderate valuations need to be at 90 percent stocks when valuations are insanely low and at 30 percent stocks when valuations are insanely high.

That one change is the difference between Buy-and-Hold and Valuation-Informed Indexing. Learning that we need to make that change is the biggest advance in our understanding of how stock investing works in the history of personal finance. We should be telling everyone about the importance of always, always, always practicing valuation-based market timing. Once we get the vast majority of investors on board, I think it would be entirely realistic to believe that we would never need to endure another bull market. Which means that we would never need to endure another bear market or another economic collapse. I can live with that, you know.

My best wishes.

Rob