Portfolio Allocation Shocker — Timing Beats Rebalancing!

Investors seeking guidance on how to set their portfolio allocation have been hearing for 25 years now that short-term timing does not work. It may be that for the next 25 years they will be hearing a seemingly contradictory bit of advice — that long-term timing does work.

Portfolio Allocation The contradiction is a surface one. The same historical stock-return data that shows that short-term timing (changing your portfolio allocation with hopes of receiving a benefit within one or two or three years) rarely works also shows that long-term timing (changing your portfolio allocation with hopes of receiving a benefit within 10 years and of seeing that benefit grow dramatically over 30 years) almost always works.

The reason is that investing is primarily an emotional endeavor in the short-term. Thus, short-term price changes are unpredictable and timing in anticipation of them is generally futile. In the long-term, however, the economic realities of stock investing come to dominate price changes. Thus, as your time horizon expands, your odds of making effective asset allocation changes in response to changes in valuation grow better and better and better.

The Investor’s Scenario Surfer, the third calculator developed by John Walter Russell and Rob Bennett to provide realistic guidance on the true message of the historical stock-return data, offers strong support for a shocking claim — rebalancing is not the way to go for a long-term investor seeking the optimal asset allocation. The better investing strategy is to go with a higher portfolio allocation when prices are low and a lower portfolio allocation when prices are high.

The Investor’s Scenario Surfer uses a random number generator to permit investors to test various portfolio allocation strategies without putting money at risk. The calculator tells the investor what annual return he would have received for each year of a hypothetical but realistic 30-year returns sequence, and permits him to make changes in his portfolio allocation at the beginning of each year. By comparing his results to the results that would have been obtained had he followed any of three rebalancing strategies, the investor can see with his own eyes the great benefits that generally follow from adoption of a valuation-informed asset allocation strategy.

Stock Portfolio Allocation Strategy A unique feature of the new calculator is that the random number generator contains two screens aimed at making the results obtained more true to the results likely to be obtained in real-world investing. Many investing calculators are built on the assumptions of the Efficient Market Theory, that the market price is a rational price and that there is no way for an investor to know in advance whether his long-term return on the stock portion of his portfolio allocation is likely to be better or worse than average. The Scenario Surfer rejects this assumption. Its results reflect more accurately the historical data itself, which shows that stocks provide far better long-term returns when purchased at reasonable prices (as common sense tells us they must).

Thus, the Sample Results that appear above show that following a practice of lowering the stock portion of your total portfolio allocation when prices go to extremely high levels pays off big time in the long run. Stocks are often the best investment class for the long run, just as the famous book title asserts. However, there are exceptions, according to the asset allocation calculator. When the P/E10 (the valuation assessment tool used in all three investing calculators developed by Russell and Bennett) level goes above 20 (the number was 29 in October 2007, when this article was posted), it is generally a good idea to reduce the percentage of stocks in one’s portfolio allocation to 30 percent or less.

To run your own scenarios with the Scenario Surfer, please click on the “Clear All Entries” button at the top of the page. Then choose a portfolio amount and a Treasury Inflation-Protected Securities (TIPS) return amount (portfolio allocation amounts not held in stocks will be assumed to be earning the rate of return you specify as the TIPS return). Next choose a P/E10 value for the beginning of the 30-year investing scenario that will be examined (you may want to experiment with valuation levels other than that which applies today to gain a sense for how much more fun stock investing will become again once prices return to more reasonable levels). Finally, enter stock allocation percentages on a year-by-year basis as the Surfer reports your results for the earlier year and indicates the updated P/E10 value to be used in selecting your portfolio allocation for the new year.

Portfolio Allocation CalculatorThe Sample Results show a case in which following a valuation-informed portfolio allocation strategy caused a portfolio valued at $100,000 to grow to a value of $624,156 (these numbers are inflation-adjusted, so the growth shown here is real growth) at the end of 30 years. The Scenario Surfer shows that the same returns sequence would have generated a final portfolio value of $401,052 for an investor following an 80-percent-rebalancing portfolio allocation strategy. Someone following a 50-percent-rebalancing asset-allocation strategy would have obtained a final portfolio value of $338,817. And someone following a 20-percent-rebalancing asset-allocation strategy would have obtained a final portfolio value of $261,889.

The Sample Results show the results of only a single returns sequence. There are of course an unlimited number of possible scenarios. So you need to run the Scenario Surfer numerous times to gain a full sense of the power of valuation-informed portfolio allocation strategies. What you will find is that long-term timing consistently beats rebalancing. In some cases the benefit of paying attention to valuations will be greater than what is suggested by the Sample Results and in some cases the benefit will be not as great. In rare cases rebalancing will provide a better 30-year return. The calculator shows clearly, however, that the odds are with the investor following valuation-informed portfolio allocation strategies.

John Walter Russell is the owner of the Early-Retirement-Planning-Insights.com web site, at which he provides over 500 articles reporting on his original and groundbreaking research into the true message of the historical stock-return data. Russell’s research is the engine of the new calculator.

Rob Bennett is the owner of the PassionSaving.com site and the author of Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work. Rob is the leading voice of the New School of Safe Withdrawal Rate (SWR) Analysis, a school that seeks corrections in the Old School SWR studies, studies likely to cause millions of busted retirements in days to come in the event that stocks perform in the future anything at all as they always have in the past.

The article “Valuation Ratios and the Long-Run Stock Market Outlook: An Update,” by John Y. Campbell and Robert J. Shiller, provides background on the P/E10 tool, the tool that makes this portfolio allocation calculator unique. The P/E10 tool captures the reality ignored in much of today’s “expert” investing advice, that the valuation level at which an index fund purchase is made has a large bearing on the long-term results obtained from it. All of the stock returns reported by the calculator assume a purchase of the S&P index and all assume that stocks will perform in the future at least somewhat as they always have in the past.

Asset Allocation Strategies P/E10 fell to between 5 and 6 in 1921 and 1932, and to between 6 and 7 in 1922 and 1982 (the starting-point of the huge bull market). The highest recorded P/E10 value is 44 (reached in early 2000, perhaps the ending point of the huge bull market). A moderate P/E10 value is 14. P/E10 exceeded 24 in 1928, 1929, 1930, 1966, and in all the years from 1995 through late 2007 (when this article was posted). Low P/E10 values translate into high long-term returns. High P/E10 values (20 or above) translate into low long-term returns.

The Investor’s Scenario Surfer is intended to serve as a guide to how changes in stock valuation may affect asset allocation strategies. Please understand that the calculator developers are learning right along with the users of the new tool. Please check what you learn from the calculator against the information provided by other sources and know that many big-name experts take issue with the idea that valuations affect stock returns or that they do so in a predictable way. The portfolio allocation calculator is a learning tool. Please do learn from it, but please also strive to take a skeptical attitude toward all investing advice, including that supported by the findings of the Investor’s Scenario Surfer.

New Ideas on Asset Allocation Management

The first new idea on asset allocation management is that buy-and-hold investing is a lot harder to pull off than you have been told.

Buy-and-hold investing makes sense. But the difficulty of buy-and-hold investing has been greatly understated.

How to Get RichWhy? Because buy-and-hold investing became popular during the longest and strongest bull market in the history of the United States. Bull market psychology has influenced just about everything you have heard about buy-and-hold. You won’t know the full story until we have been in a serious bear market for a good bit of time.

Don’t wait for the bear market to adjust your asset allocation management strategies. Anticipate the adjustments you will be making when the bear market comes. Make those changes now, while you can still obtain good prices on any stocks you need to sell to bring yourself to a realistic long-term stock allocation.

The second new idea on asset allocation management is that it is a good thing to change your stock allocation as you learn more about how stocks really work.

Buy-and-hold investing requires that you stick with a general investing strategy for a long period of time. That’s fine, in general terms. It’s not reasonable, though, to expect to stick to a single strategy in all its details.

Why? Because you are learning new things about how to invest all the time. If you are doing things right, you should be a better-informed investor at age 30 than you were at age 20, and a better-informed investor at age 40 than you were at age 30, and so on. It would be crazy to give up the benefits of becoming better informed in deference to your desire to be a rigid buy-and-hold investor.

Your asset allocation management ideas should not be fixed in stone. Don’t make changes for no good reason. But accept from the beginning that some adjustments will be needed to reflect the learning process you will undergo as you become a more experienced investor.

The third new idea on asset allocation management is that ideas that are perceived as sensible in bull markets are not perceived as sensible during bear markets.

Investing is a tricky business. It’s in part about numbers. It’s in part about human psychology. During bull markets, people view stocks as being safer than they really are and as a result they focus on the numbers stuff. During bear markets, people view stocks as being more dangerous than they really are and as a result they focus on the psychology stuff.

Asset Allocation Strategy

Buy-and-hold investors experience both bull markets and bear markets during the course of their investing lifetimes. So they need to develop asset allocation management ideas that work in both sorts of markets.

Don’t take the bull market hype as. Accept the stuff that makes sense. Question the stuff that doesn’t seem to add up.

The fourth new idea on asset allocation management is that the worst strategic choice of all is to stick to a flawed strategy even after discovering that you went with too high a stock allocation.

If you are over-invested in stocks, you will feel tempted to go into denial when stock prices begin to fall. Don’t do it. You have probably enjoyed big gains during the bull market. The first price drop is likely not going to cancel out all of your gains. Swallow your medicine, make the necessary changes in your asset allocation management ideas, and get on with your life.

Denial will put you in a worse place. If you truly are over-invested in stocks at the beginning of a bear market, there’s a good chance that you will be selling somewhere down the line. It’s better to sell when prices are still not all that bad than to wait until they drop even lower. That’s real pain, a pain that can be avoided by being honest with yourself in the early days of a bear market as to any flaws in your initial asset allocation management ideas.

The fifth new idea on asset allocation management is that few investors are able to stick with the conventional strategies for any length of time.

Rick Ferri, author of All About Asset Allocation, offers his view on asset allocation management in a recent article in Smart Money magazine. Ferri says: “Behavior is by far the worst detriment to portfolio management. People sit down in an academic environment to study this, and they’ve done a good job. Of all those people, maybe 50% get to the point to take the next step and implement their allocation strategy. Many don’t actually implement it. It’s a kind of procrastination in getting it implemented. If it does get implemented, maybe 30% of those people will maintain the allocation after one rebalancing, one year. Something happens, they try to time the market or start chasing something, or believing the herd mentality…. By five years, of all the people who created an investment plan (30%) to begin with, maybe 10% of those actually follow through with their plan.”

Only one in three adopt an asset allocation strategy in accord with what the “experts” say. Of those, only one in ten stick with it.

Asset Allocation Management

That’s a sign that there is something seriously wrong with the conventional asset allocation management ideas. People listen to descriptions of the strategies. For some reason, though, the ideas do not take. Perhaps there is too much numbers mumbo-jumbo for the typical investor to make sense of. Perhaps the conventional strategies defy common sense in some respects.

The bottom line is that investors do not stick with these strategies. These strategies are not strategies that often work in the real world.

Perhaps you will be the one in ten who are able to stick with these strategies after adopting them. But the probabilities are otherwise. I don’t think that it’s a good idea to place too much confidence in your ability to beat the odds.

The sixth new idea on asset allocation management is that the key to developing a strategy that you can maintain for some time is integrating your investing goals with your life and work goals.

Investing experts like to write and talk about investing topics. That’s no surprise. That’s what you would expect.

It causes their advice to be less effective than it would be if they took a more holistic approach, however. If you begin worrying about losing your job, that’s going to affect how much risk you are willing to take in your asset allocation strategies. If your daughter expresses a desire to go to a private college in a few years, that may make you feel less comfortable with the idea of experiencing a big drop in portfolio value at a time a good many years before you plan to retire. Many people who say that they can afford to hold stocks through price drops that last 10 or 20 years are in reality in no position to do so.

Money is the fuel you use to pursue all of your most important life goals. Asset allocation management ideas that do not take non-investing realities into account are flawed asset allocation management ideas.

The seventh new idea on asset allocation management is that the effect of valuations must be taken into account in the development of your strategies.

Asset Allocation Plan

Say that stock valuations are at moderate levels on the day you first develop your asset allocation plan. Say that, after assessing all of the factors that need to be considered, you determine that your stock allocation will be 50 percent.

Should your allocation remain at 50 percent when valuations go to high levels? I say “no.” Stocks do not offer as strong a value proposition at times of high valuation as they do at times of moderate valuation. If 50 percent was the right stock allocation at moderate valuations, then something less than 50 percent is the right stock allocation at high valuations.

It follows, of course, that an investor who determines that 50 percent is the right stock allocation at times of moderate valuations should be going with a stock allocation of something greater than 50 percent at times of low valuations.

Asset allocation management is risk management. Since the risk associated with stock investing rises with increases in valuation, the rational asset allocation management plan is the one that adjusts stock allocations up and down in response to changes in valuation levels.

Have you ever heard the recommendation that investors “Stay the Course!” with their asset allocation management plans? That’s generally good advice. Unfortunately, many investment advisors fail to detail what it means to “Stay the Course!” Are you really staying the course if you permit changes in valuation levels to increase the risk level of your stock allocation? Only according to the most hyper-technical and artificial interpretion of the phrase. To truly stay the course you set for yourself of taking on a specified level of risk, you must adjust your stock allocation in response to changes in valuation levels.

The eighth new idea on asset allocation management is that common sense counts for more than expert opinion.

One big problem we all face when engaging in asset allocation management is that we worry that we do not know what we need to know to set or change asset allocations effectively. There’s money involved. So we want to make good decisions. But we have non-investing jobs to do that take up most of our time. We can’t be experts at investing too. So we are inclined to defer to expert opinion on asset allocation management questions.

Asset AllocationThat’s not always such a good idea. Experts can offer good advice on many investing topics. But the most important thing with asset allocation management is not making so big a bet on stocks that you find yourself unable to maintain your asset allocation when prices drop. Only you know what sorts of losses you can sustain without feeling a sense of panic. You are the expert on what makes you tick. So you often need to tune the experts out and be guided by your own counsel.

This is especially so when stocks have been doing well for a number of years. Most experts greatly underreport the risks of stocks when prices are high. Why? Because many of their clients or readers do not like to hear about the downside of stock investing at times when prices are going up and they are trying to rationalize higher stock allocations. Many experts do what they do for money and often tailor their statements so as not to offend their most aggressive and least prudent readers and clients.

If it is your goal to adopt effective long-term asset allocation strategies, you often need to go against the grain of the most popular expert opinion of the time. You often need to go with higher stock allocations than what many experts advise during bear markets and with lower stock allocations than what many experts advise during bull markets.

You are the one who has to live with the results of your asset allocation management efforts. Inform yourself of what the experts say, by all means. But also listen to your gut, and don’t let expert opinion intimidate you into making asset allocation choices with which you do not feel comfortable.

The ninth new idea on asset allocation management is that lower stock allocations often generate larger long-term returns.

Stocks are a high-growth asset class. On paper, it often appears that those seeking strong long-term returns should be investing most of their money in stocks.

It’s not necessarily so.

Investing in stocks is a great way to grow your portfolio, to be sure. The key to great long-term returns, though, is to not only talk the buy-and-hold walk but also to walk the buy-and-hold walk. That means not being too greedy when setting your stock allocation.

Help with Asset Allocation

Do tap into the juicy long-term returns offered to those who invest in stocks for the long run. But don’t overdo it. Go with too high a stock allocation, and you may end up selling stocks when prices head downward. That’s the worst possible thing you can do.

Those who go with lower stock allocations often end up realizing greater long-term returns in the real world.

The tenth new idea on asset allocation management is that your strategies need to be grounded in something objective.

There will be times when you will be tempted to abandon your asset allocation management plan. You need something strong to hold onto at those times to maintain your faith in your earlier decisions.

I suggest grounding your stock allocation decisions in what the historical stock-return data says about how stocks perform over the long term. The benefit of the historical data is that it is an objective source of insights.

The lessons of the historical data (presuming that the data is being analyzed properly) do not change from bull market to bear market or from bear market to bull market. The historical data always says the same thing,. The steadfastness of the historical data can be a source of reassurance at times when many of the experts are rewriting their asset allocation management advice.

The eleventh new idea on asset allocation management is that we don’t know it all yet.

The investing literature is anomalous. On the one hand, there are all sorts of books and articles and research papers exploring extremely detailed questions. On the other, there is often little consensus on the most fundamental questions.

Look over the technical stuff, and you will be inclined to believe that mankind’s knowledge of how to invest is well-developed indeed. Take a look at the differences of opinion evident in discussions of the most fundamental questions and you will be led to marvel at the lack of progress that we have made in unraveling the mysteries of investing.

Balanced PortfolioIt’s the fundamental stuff that matters most. It’s the fundamental stuff that drives analyses of technical questions. So the reality is that we have not advanced very far in our understanding of how to invest effectively for the long term.

The Financial Freedom Community has made some major advances during The Great Safe Withdrawal Rate Debate. But it would be a mistake to come to believe that we have it all figured out at this stage of the proceedings. We have unearthed some important clues as to how to invest successfully for the long run. But it’s important to keep in mind that there are more asset allocation management questions that remain unanswered today than there are asset allocation management questions for which we know for sure the right way to proceed.

Craft an asset allocation management strategy that you can stick with for the long term. But don’t write it in stone. Paradoxically, the true buy-and-hold investor is the investor who recognizes the need to maintain some flexibility in his or her asset allocation management plan.


About Our Unique Asset Allocation Calculator

Question #1 on the Our Unique Asset Allocation Calculator — What Does the Scenario Surfer Do?

It allows you to experience the ups and downs of the stock market without putting money at risk. The asset allocation calculator (see tab at left marked “Scenario Surfer”) generates realistic returns sequences going out 30 years so that you can see how various asset allocation strategies are likely to fare in the real world.

Question #2 on Our Unique Asset Allocation Calculator — Aren’t There Other Calculators That Do Something Similar?

Asset Allocation Calculator The Scenario Surfer is based on the research of John Walter Russell, owner of the www.early-retirement-planning-insights.com site. That means that it shows dramatically different results for stocks purchased at times of high valuations than for stocks purchased at times of moderate or low valuations, just as is the case with the historical stock-return data itself. Most existing calculators ignore the effect of valuations (by mixing the data for wildly different valuation levels into one big bowl of Data Soup) and thus report artificial and misleading “findings.”

Question #3 on Our Unique Asset Allocation Calculator — Does Knowing the Starting-Point Valuation Level Tell You All That You Need to Know to Be Able to Report Long-Term Returns With Precision?

By no means. The starting-point valuation level is a big factor. Chance is also a big factor. The asset allocation calculator relies on random number generation to simulate the effect of chance. The results are not purely random, however. The odds of obtaining good results from stocks are better for purchases made at times of moderate or low valuations, just as is the case in real-life investing. The aim was to make the asset allocation calculator as true to life as possible.

Question #4 on Our Unique Asset Allocation Calculator — Isn’t It a Rejection of the Efficient Market Theory to Say That Stocks Offer a Better Long-Term Value Proposition at Times of Low Prices?

investment calculator Yes, that’s so.

This calculator is rooted in a rejection of the Efficient Market Theory. My view is that the Efficient Market Theory is probably the worst thing that ever happened for middle-class workers hoping to achieve financial freedom early in life. If you are a confirmed fan of the Efficient Market Theory, this calculator is going to bum you out.

Question #5 on Our Unique Asset Allocation Calculator — How Can I Be Sure That Your Calculator Is Entirely True to Life?

You cannot be entirely sure. Even the authors of the calculator (John Walter Russell and Rob Bennett) are not entirely sure. We’re working on it! We’re working on it!

The calculator is based on John’s innovative research, which he began in response to the controversy raised by a post that Rob made to a Motley Fool discussion board that kicked off a remarkable series of discussions referred to now as The Great Safe Withdrawal Rate Debate. Thousands of investors have participated. A good number of experts have been consulted. Hundreds of research inquiries have been explored. We believe that John’s findings will stand the test of time. But it is important that you understand that a limited number of people have done research on these questions and that it would be unwise to place total confidence in these findings at this time.

Question #6 on Our Unique Asset Allocation Calculator — So Is It Safe to Rely on These Findings Or Is It Not?

The world of investing research is a mess today. Most of the research available to us today is rooted in a belief in the Efficient Market Theory, which has been discredited. Only a small number of “experts” are brave enough today to acknowledge that today’s dominant investing model does not stand up to serious scrutiny. Acknowledging this reality means rewriting all the textbooks starting at Page One. It’s a big job!

investing calculator

Investors are today living in the Twilight Zone. The old model has failed us. The new model is only now being born and has not yet been subjected to sufficient testing to justify total confidence in it. My take is that we all need to work together to sort things out the best we can. If we see people placing too much confidence in the old model, we should warn them of the risks of doing so. If we see people placing too much confidence in the new model (I call it The Investing for Humans Model — I would, wouldn’t I?), we should warn them of the risks of doing that.

The risks of placing one’s confidence in the old model are so great that I feel compelled to speak out strongly against it. But I think that prudence demands that my advocacy of the new model be reined in by a certain measure of humility until enough smart people have studied it in depth for us to be sure that there are no big flaws in the thinking of the many Retire Early Community members who made contributions to its development.

We need more research based on the new Investing for Humans model to replace the research that was done under the old Efficient Market Theory model. While we are in a time of transition from the old model to the new one, caution (combined with an appropriate measure of excitement over our breakthrough findings) is advised.

My advice is to not make use of the asset allocation calculator unthinkingly. Read the investing articles at this site and at John’s site, which contains a good bit of additional material on this asset allocation calculator. Ask John and Rob questions about what you read. Check what has been said by the other experts cited. Spend a little time going over the historical data yourself so that you have some idea where John and Rob are coming from with their investing ideas. If everything checks out and makes sense, then you are in a position to consider taking action based on what you learn from use of the Scenario Surfer.

Even then, be sure to stay open to hearing criticisms of the methodology of the calculator. Never rely on the advice of only one or two experts in making investing choices that can cause you to lose real money in the real world.

The bottom line on all this? Whatever you do, don’t sue me!

Question #7 on the Our Unique Asset Allocation Calculator — Do You Not Understand That These Warnings Leave Me More Confused Than Ever?

Those are encouraging words. The first step to getting investors at a point at which they are able to develop confidence in a long-term investing strategy is getting them to shake off their belief in the dogmas of earlier days. That stuff doesn’t work.

We hope that this asset allocation calculator is going to be a big help in pointing people to what does. But we very much do not want to repeat the mistakes of those who went before us. Our goal is to put forward the best information available to us, but in a spirit of humility so that our tentative assessments will be questioned and strengthened and changed over time. I think it is fair to say that so far the new model has stood up to every test (and there have been a good number of tests over the course of the past five years, to be sure — I sometimes get the feeling that I am back in school again, except that this school is a school in which every instructor believes in giving pop quizzes every day!).

asset allocation strategy

Feeling confused today is appropriate, given what the “experts” have been telling us for the past 30 years about how to invest effectively for the long run and given what we have in recent years learned that the historical stock-return data itself tells us on this important question. If you are feeling confused, I feel that I have done my job. Feeling confused is a big step forward over feeling confidence in claims that defy common sense.

It may help for me to let you know that examining the historical data in realistic ways has helped me over time to feel less confused rather than more so. The Investing for Humans model makes sense. The fact that the data supports the core principles of this approach rather than refutes them has caused my confidence to grow stronger each time I explore new questions rather than causing me to become hostile to questioning of my strategies (I think it can fairly be said that most of today’s “experts” are hostile to questioning of the conventional advice).

My take is that the benefit of taking into consideration the message of the historical stock-return data is that the historical data is objective evidence. It makes all the difference in the world to have something solid to turn to for sorting things out when different “experts” put forward equally dogmatic claims that contradict each other. I have no problem with the idea of people offering their personal opinions, but I like opinion to be labeled as opinion and fact to be labeled as fact. When I look at the historical stock-return data in an analytically valid way, I am learning the facts of long-term stock investing. Knowing the facts makes it a whole lot easier to understand what is behind all of the conflicting expressions of personal opinion (often labeled as fact).

Experts who have not ever checked their strongly held opinions about stocks against the facts (or who, worse yet, have relied on analytically invalid methodologies to ascertain what the facts are) often become defensive when challenged by the facts. Not good. When I see defensivness in an investing advisor, I run. I am a big believer in buy-and-hold investing and I do not believe that defensiveness and buy-and-hold strategies work at all well together. Implementing buy-and-hold in the real world requires confidence and calm in the face of serious challenges to one’s strategies. “Experts” who become upset when questioned about their ideas do not strike me as being the sorts of people likely to point the way to successful implementation of buy-and-hold investing strategies.

Feeling confused is a natural reaction to learning about the state of investing knowledge that applies today. We have “experts” demanding our continued support of ideas that simply do not stand up to scutiny. And we have new ideas that show a great deal of promise but that have not yet been examined by enough people for a long enough time to justify complete confidence just yet. In these circumstances, confusion is an appropriate response. This is a time for learning and it’s when we are confused about a matter over which we know in time we want to possess clarity that we learn the most.

Our new asset allocation calculator is above all a learning tool. Run some scenarios! Learn! If you have in earlier days placed your confidence in the conventional gibberish re how long-term stock investing works, learning will cause you to experience a good bit of confusion. Go with that feeling! My advice is that you view confusion as a step forward.

There’s a saying that it’s not what you don’t know that hurts you the most, it’s what you know for certain that just isn’t so. I believe that that very much applies in the investing field. What the Retire Early community has discovered in recent years is that the reason why the conventional investing advice has never seemed to quite add up is that it really does not quite add up. To identify what really works we first need to let go of the failed ideas of the past.

The most important thing we need to know is what we don’t know. We don’t “know” that rebalancing is a good idea. We don’t “know” that market prices are efficient. We don’t “know” that long-term timing is impossible. Once we know what we don’t know, it becomes possible to know things about investing that really are so.

Hopelessly confused? Good! That puts you above 80 percent of the “experts” bringing in big gobs of money by spouting nonsense about how long-term stock investing works. The truly confused are in good company today. Common sense is “confused,” according to the experts. The historical stock-return data too is “confused,” according to the experts. Even the experts themselves are confused, according to the experts (one of the things we have learned in our community discussions is that the big-name experts have a habit of offering on some occasions statements that are in complete conflict with statements they have offered on other occasions). Oh my!

asset allocationAcknowledging that you are feeling confused is a plus. Acknowledging that you are confused means that you have reached a point at which you are at least able to be honest with yourself about how much you do not now know. Those who have reached that point are several steps ahead of most of the guys and gals bringing in the big bucks to tell the rest of us how to invest. It sounds paradoxical, but I think it is a valid point all the same — the true investing experts of today are the ones most struggling with their confusion!

You’re the true expert. John and I created the asset allocation calculator to provide you a tool to learn things about stock investing that most of today’s experts dare not publicly acknowledge is so.

Question #8 on Our Unique Asset Allocation Calculator — What Is the Biggest Difference Between What This Calculator Says and What Earlier Ones Have Said?

This asset allocation calculator says that rebalancing (to rebalance is to sell stocks when prices rise and to buy stocks when prices fall for the purpose of maintaining the same stock allocation despite prices changes that would otherwise cause the percentage of one’s portfolio held in stocks to increase during times of rising prices and to decrease at times of falling prices) does not work. There is some merit in the idea of sticking with the same stock allocation at a time of rising prices because that is better than permitting one’s stock allocation to go higher at times of overvaluation. As a general rule, though, the historical data shows that it is better to hold more stocks when stocks are being sold at good prices and to hold fewer stocks when stocks are not being sold at good prices. When stock prices are as high as they are today (this article was posted in October 2007), you should have a significantly lower stock allocation than what made sense for you when stocks were selling at more reasonable price levels.

Question #9 on Our Unique Asset Allocation Calculator — Have You Truly Gone Flat-Out Bonkers?

There are more than one or two who have put this idea forward as a live possibility. My personal view is that my Bonkomometer is turned not more than a few degrees above what is required to get though the day in this Consumer Wonderland of ours in the year 2007.

I think it would be fair to say that my wife Boo is the person best positioned to say for sure. She flips back and forth on this important question.

Question #10 on Our Unique Asset Allocation Calculator — What If I Try the Calculator and Don’t Like What It Tells Me About the Risks of Investing in Stocks Today?

stock allocation

We offer a Double-Your-Money-Back Guaranty for all of our customers who are not pleased with the numbers that pop up for those testing what is likely to happen to a strategy calling for a high stock allocation at today’s price levels. Such a deal!

Bonus Question #11 on Our Unique Asset Allocation Calculator — Can’t You Be Serious for Ten Minutes?

I can imagine circumstances in which I might be able to pull it off for ten minutes. At a funeral of a loved one, for example.

Forming expectations of hearing serious responses from old Farmer Hocus for a period of time extending much beyond that is pushing the stress capacity of the Bonkomometer to its limits, to be sure.