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  • Bill Smith 2012-04-07 10:56
    JUDS1234567: I was very impressed with the two recent articles you had written “Dollar Cost averaging with a Brain” and “Dollar-Cost Averaging with a Brain: One
    Thanks for the kind words--glad you enjoyed the article and concept.  

    On the 1st question:  I use the "bond-parity" concept, which is the price at which you'd be indifferent to owning bonds vs. stocks.  Basically, if you invest in stocks you want a higher return than bonds, so I only invest in the index when the expected return is higher than the corporate bond.  Off the Bloomberg link, I use the corporate bond coupon as the comparison point (now at 5.1%, it used to be 5.8%).  On that page you'll notice the average redemption yield (3.96%) is lower than the coupon, which means people have been buying bonds to the point where your expected yield is lower than the yield on the face of the bond.  But in the end I make a stock/bond comparison.  You can add a margin of safety if you wish over the current bond coupon.

    In addition to looking at the absolute valuation, as indicated on that one chart, I also look at the return in relation to the 10 yr T-bill which tells you alot also.  So if the market expected return were to drop to 2% then to me that would be clear sign of overvaluation.  

    On the 2nd question:  I reallocate as valuations dictate, there's not calendar method or requirement here.  If things are getting toppy, then I begin trimming.  I definitely look at this every 2 weeks when new money is set to go into the account, but in practice I actually look at it everyday.    

    On the last question:  yes, the average redemption rate is what you'd expect to get on average if you were buying bonds right now, vs. the coupon which is the yield on the face of the bond (and what it would otherwise be).  The two, however, don't have to line up, and seldom do, depending on greed/fear for that instrument.  

    My current allocations are:
    S&P:  15%
    Int'l:  58%
    Cash:  27% (this is actually a short-term bond fund)

    I added to the S&P last August, and started Int'l in Nov.  I have no intentions on buying the S&P until it corrects to a more fair price.  And I feel I have enough Int'l, so for the time being new money is going into cash.  

    This market valuation article I wrote last May illustrates the mental experiment I go through.  It may offer some other perspective.  

    http://www.gurufocus.com/news/134879/market-musings--current-market-valuations-may-2011

    Again, glad you enjoyed the articles.  Let me know if you still have any questions and I'll be happy to field them.

    v/r
    Bill
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