Introduction to Variable Stock-Bond Ratio

Jan.09, 2008 in Investment Opinions, U.S Hot Stocks

The variable stock-bond ratio simply means that the stock percentage is progressively reduced according to a pre-determined formula as prices go up and is progressively increased as they go down.

A variable ratio plan has to be “anchored” to the market usually in the form of a market index. Allowances can be made for as wide price swings as the investor thinks possible; an upward “secular” or long term trend can be taken into consideration, if desired; various safety device can be used to insure against complete immobility of the plan if the market should cease to operate in the channel anticipated.

The usual; method is to decide upon the market level or the area which is considered normal This is usually called the median line.

Projecting the median line or zone upon which they are willing to operate may be a difficult decision. The decision is left up to the individual. The reader is urged to make up his own mind which best fits his own view of the future.
(I was very comfortable with the median line calculation methods based on a monthly high/low for a ten year period). Once the decision is made, the important thing is to stick to it and not let emotional thinking interfere with adherence to the plan. There has been no period yet when patience would not have paid large dividends. For as long as stock market records are available, bull markets have been followed by bear markets, and vice versa. And while the tops and bottoms have come at various levels, as measured by any market index, there is nevertheless a fairly clear pattern that has repeated itself over and over again. Except for the abnormally high 1929 peak and the equally abnormal 1932 low, bull market highs and bear market lows have fallen within an orderly channel.

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