Using Asset Allocation to make money in a Flat Market: Dynamic Asset Allocation Works!

» DennisL - Dynamic Asset Allocation Works!

Copied from the "U.S. Stock Market" thread:

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Author: Rande
Date: July 13, 2002 10:15 AM
Subject: Cyclical....secular....suckular

First, an update:
VTSMX (3/24/00 - 9/21/01) -38.2%
VTSMX (9/21/01 - 3/19/02) +27.1%
VTSMX (3/19/02 - 7/12/02) -21.5%

Did a cyclical bull give way to a cyclical bear? Is it still a secular bear with cyclical mini-bulls and mini-bears? Is it nothing more than a series of bull-bear-bull-bear-etc. of varying lengths? Perhaps it's a subjective definitional issue, wholly dependent on one's mindset and choice of time horizon? As always, at least for intelligent investors with a truly long-term time horizon and a suitable asset allocation, it's a moot debate.

Maybe you've been investing for decades, maybe you started in the mid-90s. Maybe, Lord have mercy, you just started investing in early 2000. I can relate. I bought my first stock (DIS) in 1973. But, whenever you started investing, chances are at some point you either read or were told that investing is a long-term prospect. Did you believe it then, or was it just an academic exercise? Well, it's no longer academic and the primary question at this point is: Do you believe it NOW? You've lived through one of those bear markets that, up until now, you've only read about and your answer to this question will separate you from those who are destined to sit on pins and needles and those who can relax with confidence for the rest of their investing lives.

The Total Market stats above are telling. Those who say you can/should sidestep adverse markets by moving back and forth from investments to cash and back again might suggest you were a fool to sit through it all. But what's the reality? How many were able to get out in March of 2000, back in in September of 2001, and then back out again in March of 2002? What typically happens, and we've seen it, is the temptation to pull that cash out and then put that cash back to work again is overwhelming. But the results of improper timing can be even more devastating than sitting tight with an appropriate allocation, particularly when considering transaction costs and income taxes. Moreover, those who are able to weather the storm with a suitable investment policy are FREE to live their lives without the angst of worrying about when/if to get back in. Take the "balanced" investor, for example:

12/31/99 - 7/12/02
50/50 Total Stock/Total Bond -4.5%

Losing 4.5% isn't much fun, but it's a lot better than it might have been were the decical point moved one place to the right!

Bottom Line: If your portfolio was suitably allocated all along, chances are you have come through this period of adversity intact with even greater conviction and confidence about the long term than you ever thought you had (not unlike an untested soldier who finds he had more courage than he thought he had prior to being battle tested). However, if your portfolio was unsuitably allocated to begin with chances are you are in one of two places at this point: either you have gained the resolve to take action and get your financial house in order, or you have given in to emotion and thrown everything you've learned out the window.

The future still lies ahead. What kind of investing future will it be for you? One of confident, intelligent discipline within a lifelong plan of slow and steady wealth accumulation? Or a future of constant action frought with worry over what your next move might be?

They say that for those who don't really know themselves already, the market can be expensive to learn. What have you learned?

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Author: DennisL
Date: July 13, 2002 5:00 PM
Subject: Re: Cyclical....secular....suckular
In response to message posted by Rande:

Good to see our friendly and wise professor delivering another "lesson" in prudent and long-term investing to us, the students of personal finance and investing.

You are so right.

Regulars know that I am a 50% stocks - 40% bonds - 10% cash kind of guy who uses nothing but the total market index funds for the stock and bond portions.

By doing DCA and deploying some of Kirk's variable asset allocation ideas (more frequent rebalancing), my results since 12/31/99 are actually a little better than the -4.5% of the hypothetical 50/50 investor:

2000: +1.7%
2001: +1.2%
2002 YTD: -4.5%

Total: -1.6%

Simplicity sure is nice. So are enjoying life and sleeping very well at night.

Thank you, friendly professor, for showing me the right way.

-- posted by DennisL