What To Do With Your Investments Right Now

By in Advanced Investing, Asset Allocation, Guest Post, Investing | 2 comments

Ten Tactical Asset Allocation Considerations

Guest post, Rob Bennett

I advocate the tactical asset allocation or Valuation-Informed Indexing Model for understanding how stock investing works. This is the model rooted in the research of Yale Economics Professor Robert Shiller. It is similar to the far more popular Buy-and-Hold Model in all respects but one — Valuation-Informed Indexers believe that risk increases with increases in valuations and that investors thus must adjust their stock allocations in response to big valuation shifts to have any hope of keeping their risk profiles constant.

Say that you are currently going with a 70 percent stock allocation and that you are anxious that stock prices have risen too high. Set forth below are ten tactical considerations suggested by the research done by those in the Shiller camp for those trying to decide what to do with their investment portfolios today.

tactical asset allocation


Use Tactical Asset Allocation and Decide What To Do With Your Investments Now

Tactical Consideration #1: There Are Times When You MUST Change Your Stock Allocation Even Though There Is a Good Chance That You Will Not Be Proven Right for Doing So for Some Time.

There’s a good reason why you are worried. Stocks are an insanely dangerous asset class at today’s prices. The thing that holds most of us back from lowering our stock allocations at times like these is that we are afraid that we will be making a mistake and will feel like fools. The research says that you are probably right to feel that way. You really do need to lower your allocation. But there is a good chance that the wisdom of doing so will not be evident for six months or a year or even longer. Getting your allocation right always pays off in the long term but rarely pays off in the short term. Make your changes knowing that and it won’t bother you if it takes some time for you to be proven right.

Tactical Consideration #2: You Will Be Getting a Payoff for Going With a Lower Stock Allocation Even If Prices Don’t Fall for Some Time.

Say that you lower your stock allocation from 70 percent to 30 percent and that prices continue marching upward for another 12 months. Did you make a terrible mistake? No! Risk is higher when prices are higher. If prices continue their march upward, that just increases the case for going with the lower stock allocation. Smart investors want to obtain good results over a lifetime, not for just a one-year or two-year time-period. There is a mountain of research showing that keeping your risk profile constant is the smart way to invest.

Tactical Consideration #3: Earning a Lower Return on Your Portfolio for a Few Years Is a Small Price to Pay for Minimizing the Hit of a Price Crash.

The most common objection I hear when I advise investors to lower their stock allocations is that non-stock asset classes are offering very low returns today. That is so. And it doesn’t matter. It is hard for the human mind to appreciate how much damage can be done to your retirement hopes by a single price crash that takes place when you are heavily invested in stocks. Your total lifetime loss will be more than the number of dollars by which your portfolio value declines. You will also lose the benefit of compounding returns on those lost dollars for decades to come.

Tactical Consideration #4: Rational Thought Will Not Reveal to You When Prices Will Fall.

The difference between the Buy-and-Hold Model and the Valuation-Informed Indexing Model is that Buy-and-Holders believe that prices are set by the actions of rational investors while Valuation-Informed Indexers believe that it is investor emotion that is the dominant influence. A rational analysis would tell you that, once prices get too high, they will fall. Emotional investors often respond to insane price jumps by pushing prices even higher. Don’t even try to outguess the market. It cannot be done if the market is controlled by emotion.

Barbara’s comment; Timing the markets requires knowing when to get in and when to get out. This is a more difficult tactic than meets the eye. Many investors are uncomfortable picking when to adjust their allocations.

Tactical Consideration #5: Even Investors Who Say That They Are Not Worried About High Prices Are Experiencing Fears.

If investors are emotional, it follows that you cannot trust what they say. It is not that they are liars. It is that they lie to themselves (we all do). So don’t pay attention when “experts” say that there is nothing to be worried about. It is because so many of us are suppressing our concerns that things have gotten so out of hand. Take no comfort in the fact that many investors are sticking with their high stock allocations.

Tactical Consideration #6: The Research Says to Expect a Price Drop of 65 Percent.

There have been four secular bear markets in the history of the U.S. market. There has never been one that ended before the P/E10 value dropped to 8 or lower. That’s a price drop of more than 65 percent from where we stand today.

Tactical Consideration #7: Small Allocation Changes Make a Difference.

I believe that most investors should today be going with a stock allocation of about 30 percent. Many view that as too extreme a recommendation to act on. I don’t know everything. I could be wrong. Perhaps you would feel more comfortable going from 70 percent stocks to 50 percent stocks. Don’t fail to make the modest adjustment because the more dramatic change strikes you as too extreme a choice.

Tactical Consideration #8: Shiller Expects a Crash This Year and He Is Currently at 50 Percent Stocks.

I don’t think it is possible to say whether the crash will come this year or in 2015 or in 2016. But Shiller has said publicly that he expects a crash this year and that he is going with a 50 percent stock allocation today. Shiller is a whole big bunch smarter than I am.

Tactical Consideration #9: Plan Today What Steps You Will Take Following the Crash.

The great thing about stock crashes is that they make stocks available at better prices. If the P/E10 value falls to 8, the most likely ten-year annualized return for stocks purchased after the crash will be 15 percent real. Don’t miss the stock-buying opportunity of a lifetime. Lower your stock allocation now while promising yourself to increase it after the crash.

Tactical Consideration #10: Prices May Remain Low for Five Years or Longer.

Don’t be surprised if stock prices don’t jump immediately after the crash. It takes time for investor psychology to change. It is common for prices to remain at insanely low levels for five years or even longer following a crash.

Rob Bennett developed The Stock-Return Predictor, a calculator that employs a regression analysis to reveal the most likely 10-year return on stocks starting from any valuation level. His bio is here.

After considering these tactical asset allocation principles, do you think it’s now time to change your asset allocation?


  1. Nice post Barb. I never considered reducing my exposure but I can see the way you are thinking. This post has definitely given me something to think about. Thanks for sharing.

    • Nick, This post is not designed to advise you on investing. It’s more of an article to get you thinking about scenarios. That said, your age, risk tolerance, investing time horizon, and personal investing philosophy should drive your investments. Best regards.

      Barbara Friedberg

      September 17, 2014

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