From an old post :-
Benjamin Graham has this to say in The Intelligent Investor. ‘Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this : by way of TIMING and the way of PRICING. By timing we mean the endeavour to anticipate the action of the stock …… . By pricing we mean the endeavour to buy stocks when they are below their fair value and to sell them when they rise above such value. … We are convinced that the intelligent investor can derive satisfactory results from pricing …. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up a speculator and with a speculator’s financial results This distinction may seem rather tenuous to the layman, and it is not commonly accepted in Wall Strret.’.
It is difficult to find a reliable measure as is discussed by Smithers’ in Valuing Wall Street who ends up favouring Q. Our own preferred stocks valuation measure is the dividend yield (DY), because it is readily available, quickly comparable between Asset Classes and therefore meaningful. But as DY tends to drift over the decades, maybe in line with the Krondatieff long wave, some adjustment is needed from time to time, dependent on whether markets are capital-hungry or capital-sated (as today). So there we have an immediate problem to blind following of valuation measures!!!
It is difficult to maintain the discipline. William Bernstein has this to say in The Intelligent Asset Allocator. ‘…. when you rebalance your portfolio in order to maintain your target allocation, you purchase more of an asset that has declined in price, and has thus gotten cheaper. When you actually increase the target portfolio weighting of an asset when its price declines and it gets cheaper, you are simply rebalancing in a more vigorous form – you are “overbalancing”. …. Dynamic asset allocation gets a bad rap because most investors change their allocations around in response to changes in economic or political conditions. As we have discussed this is a poor approach . In the author’s opinion, changes in allocation that are purely market-valuation driven are quite likely to increase return. Rebalancing requires nerve and discipline; overbalancing requires even more of both of these scarce commodities. Very few investors, small or institutional, can carry it off’.
http://thismatter.com/money/investments ... -plans.htm
see Constant Ratio v Variable Ratio
There are other aspects to such mechanical adjustments.
+ Whether other Asset Classes are able to offer useful diversification possiblities
+ Whether the investor is giving reasonable thought to the rate at which any target is approached. An immediate jump will unsettle the system; the investor knowingly or not being part of a control system. This applies equally to the popular Constant Ratio Formula Plan
Would also add that it is near impossible to determine whether Constant Ratio or Variable Ratio outperforms, as there are so many means of applying the latter. As noted in previous post it is for individual investors to decide, maybe dependent on how value-concious they happen to be?
Would concur that it is all about investor comfort.
Following own convictions rather than dictates of others.
Being able to 'stay the course' with that conviction whatever that course may be.
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