Rodc wrote:...I do not believe in tactical allocation/market timing based on valuations
I will stick to rebalancing which is a half measure (after all you either sell what is high to buy what is low, or you direct new money in to what is low) and I think a better approach...
Let me see if I understand:
Your allocation percentages (12.5, 7.5, 20) remain constant targets
(and you rebalance every so often in order to return to such percentages), while "tactical allocation
" changes the target percentages based on (observed and expected) valuations. Is this correct?
Basically yes. There may be people who use other measures for "tactical" allocations, but the idea is to use some estimates of future returns and adjust (and if you really want a reasonable approach you have to factor in how confident you are in those estimates, you have to factor in estimates ofrisk since risk is half of the risk/return relationship you care about, and how confident you are in the risks, and really, the correlations and how confident you are in them).
My weights get adjusted every few years when I do a deep dive on how things are progressing. I review goals (maybe I want to retire earlier), current situation (is my job or my wife's job pretty secure or very shaky?), has income gone up or down, are the retirement and college portfolios higher or lower than target, etc. Then I adjust savings rate, allocations. I might adjust goals. In other words taking into account the full current situation and personal outlook I make a new plan. Things have never been out of whack enough for this to result in major changes but I have made modest mid-course changes.
Personally point estimates of future expected returns come with such high uncertainly (errors), and future risk is also so hard to estimate, not to mention correlations between assets, that if I were to factor them in, accounting for all this extreme uncertainty, it would result in a rather minor adjustment. I do not know the "optimal" allocation between stocks and bonds to better than at best 10%. I am currently at 60/40, but I could not make a fully rational argument that says 65/35 is clearly too much in stocks or that 55/45 was clearly too low in stocks. Not sure I could really even do that for 7/30 or 50/50. By the time you get to 40/60 or 80/20 I could. Not to mention my rebalance bands are 5%. So if a "tactical" shift is going to be on the order of 5% it is lost in the noise, and even a shift of 10% is very hard to justify - even if I believed in tactical shifts. And the data simply do not, in my mind, justify shifts that are larger.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.