In an earlier article I introduced the concept of using current market conditions to tactically rebalance between stocks and bonds around a long-term strategic asset mix. This methodology I call the “Dynamic Model” approach to managing the asset mix. In this article, I will explain the model’s methodology and compare its' back-tested performance to a static 60/40 stock/bond asset mix.
Many investors assume that their strategic asset mix is somehow sacrosanct. They have been told that they should rebalance back to the strategic targets if their portfolio gets out of whack. This is despite the fact that the quality of the analysis behind the setting of the strategic asset allocation is usually subjective and often quite weak. I believe that using current fundamentals to estimate expected returns of stocks and bonds should guide the tactical rebalancing around the strategic targets.