No. of Recommendations: 5
My theory is based on the idea, that the more you buy when it looks like the world is going to end, the more you can make. But you are still ignoring where the money is going to come from to buy stocks. You can't just handwave this away.
A large allocation to cash or bonds as the source-of-funds is going to greatly reduce your overall portfolio return.
Have you done any work to backtest your proposed strategy? It's easy to download the historical quotes for stocks & bonds (VFINX and VBMFX). Load them into an excel spreadsheet and code up the rules for moving money back and forth. I think the results will be interesting. And a surprise to you.
Take a look at this PV run:
https://www.portfoliovisualizer.com/backtest-portf... and play with the rebalance frequencies, even no rebalance.
Notice two things:
1) The (re)balanced portfolio has lower CAGR, better MaxDD and better Sharpe & Sortino ratios.
2) The (re)balanced portfolio
ALWAYS has a lower value than the 100% S&P500 portfolio.
Yes the drawdowns are higher, but the drawdowns start from a higher level. The top at Aug 2000 the portfolio values are $88K for 100/0 vs. $64K for balanced.
Change the withdrawals from none to 4%/yr to simulate retirement and the 100/0 is _still_ better than balanced.
At the same time, you have to sleep at night. That is why my strategy is one of over rebalancing, but not so much that I will lose sleep.I don't mean to be harsh, but get over it. Try to leave your emotions out of it. The best way to sleep at night is knowing that the FACTS are that keeping a large bond/cash allocation is costing you money. A lot of money. Also the FACTS are that rebalancing is primarily cosmetic and has no real effect.
