Tuesday, October 23, 2007

Greg goes on a learning quest and obtains deep understanding!

Have you ever wanted to believe something was true? So much that you kept searching the internet until you found enough articles that backup up your position? Do you remember finding what you desired and not seeing the any contrary information? Did you tell you friends how wrong they are by citing fact after fact and anecdote after anecdote?

Well I have been on such a quest, but my results are different, I have actually found the truth. (The previous paragraph does not apply to me, obviously) I have correlated results from 3 sources. So what is my new found belief:

You can do better than just blindly rebalancing to your target allocation.

The first source is the Money-guy podcast. In one of his podcasts, Brian mentioned how he reduced his allocation of commodities because oil is overpriced. Then, 2 weeks later, he responded to criticism that his commodities trade was market timing. On the contrary, he states that he was "taking advantage of opportunity." He explained that if you make these decisions based on market valuation, you can increase your profits. Wow! Cool. He also gave us a hint that small stocks are overvalued now and large stocks aren't. Start selling!

Now the second source is the entire book I read called "The Intelligent Asset Allocator" This book was mostly a horrible, "go buy index funds," boring read, but it actually did make a few points about asset allocation. 1. You should buy asset classes which have been down recently. 2. Since trends are persistent for some time, you shouldn't rebalance often, maybe once per year or when the auto-correlation(Don't ask me to explain it) is a certain way. 3. Maybe increase your exposure by 0.1% for every 1% the asset goes down. 4. How about value cost averaging instead of dollar cost averaging? and 5. All this is psychologically difficult.

Phew. sorry about that boring synopsis. Are you still with me? We are talking about a new found belief!
The last source is an entire book written about asset allocation called: Book coverUnderstanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio

I have only read the introduction, but it claims it will actually explain asset allocation in more detail and 300+ pages!

Ok so to recap. I believe now that I can change my asset allocation based on "valuation" of certain assets to increase my returns, but I just don't know how to do it.

Do you believe me or shall I start citing facts and anecdotes?

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