"Risk-Bounded Buy-and-Hold" asset allocation - a procedure and its derivation

A Practical Guide to Risk-Bounded Stock Investment

by Arthur Copeland Eschenlauer

This is a practical guide to a risk-assessment procedure that, historically (when applied to portfolios whose stock component tracks the S&P 500 stock index), would have produced almost 50% better "reward for the risk taken" than would have either a 100% stock portfolio or a strictly balanced 60% stock portfolio:

The approach presented there is:

to employ total world (including US and international) index funds for stocks (to reduce price volatility and maximize diversification);

to reinvest returns of stock in stock and returns of bonds in bonds;

to maintain the allocation within each account type (e.g., taxable, Roth IRA, Traditional IRA) to maximize protection and opportunity;

to estimate the value (and risk) of the S&P 500 index (which is applied as a proxy for the world market) based on the actual Shiller PE/10 in relationship to its projected value;

to shift the composition of portfolio incrementally ("dollar-cost averaging") toward stocks as stocks become reasonably priced (i.e., below the "buy boundary");

to shift the composition of the portfolio incrementally ("dollar-cost averaging") toward bonds as stocks become rather over-priced (i.e., above the "sell boundary");

to leave the allocation alone most of the time (rather than periodically "rebalancing" the portfolio).

(Opposite boundaries would seldom be successively crossed because of they are widely separated.)

"Buy as the bears appear; hold while the air is clear; sell as stocks get too dear."

This procedure is not new; a similar procedure was practiced more than 70 years ago, but it seems to have fallen out of fashion (unjustifiably, in my assessmnet).

Derivation

The derivation of the "Risk-bounded buy-and-hold" stock allocation strategy is described in the PDF here:

Motivation

A fixed stock-to-bond ratio has some disadvantages (regarding risk-of-loss and reward-for-risk-of-loss-taken) that are seldom discussed, but which I discuss here.

Disclaimer

All investment involves risk. I am not a financial advisor; I am merely presenting the results of my investigations. These documents are not financial advice; please treat them with a commensurate degree of skepticism. If you cannot serve responsibly as your own financial advisor, please hire one. Thank you.