Do Stock Allocations of 120 Percent or of a Negative 20 Percent Ever Make (Hypothetical) Sense? The point of all of the investing materials at this site is that the idea advanced so relentlessly by Buy-and-Holders that market timing (price discipline!) is not required for all investors is dangerous nonsense. The Investor’s Scenario Surfer makes the point in a compelling way by generating realistic stock returns for a 30-year time-period one year at a time and letting the user of the calculator make a decision after each year as to whether he wants to stick with the same stock allocation or change his allocation to something more appropriate to the new valuation environment. The calculator reports the returns obtained by Buy-and-Hold portfolios using a 20 percent stock allocation, a 50 percent stock allocation and an 80 percent stock allocation so that the user can see with his own eyes how much of a difference it makes in the long term to engage in intelligent market timing.
Unfortunately, there are limits to how much you can benefit from the market timing concept. The Surfer does not permit you to choose stock allocations of greater than 100 percent (which would require borrowing to buy stocks) or of less than 0 percent (which would require going short on the market). The Extreme Allocation Speculator is the same calculator with these options added to the mix. It permits the user to choose a stock allocation as high as 120 percent or as low as a negative 20 percent.
Please understand that I do not endorse the use of such extreme options. I would not use them myself and I would not urge anyone else to use them. I view extreme options as dangerous.
So why develop a calculator that permits you to make use of them? As a learning tool. The Scenario Surfer shows the benefits of market timing in a compelling way. But the full reality is that valuation-informed market timing would be an even more powerful tool if such extreme allocation choices could be employed. They can’t – or at least they shouldn’t. Promise me that you will not make use of extreme allocation choices in real life. That said, please feel free to use the calculator to examine the possibilities in a hypothetical, speculative manner.
If market timing were a bad thing, it would offer super bad results when used in an extreme manner. The idea behind this calculator is to explore how extreme allocation choices would perform in a world in which they weren’t so dangerous for the purpose of seeing just how important it is to purchase stocks in the same manner (paying attention to price) as you purchase everything else you buy in this consumer wonderland of ours.