Let's say you have a 60/40 stock/bond allocation. If stocks *double*, with no gain in bonds, what's your allocation become?
Answer: 75/25
(i.e. before: 60K/100K, after: 120K/160K)
Over time, bonds will probably grow, so you'd likely be closer to 70/30.
Here's a table showing what happens to the allocation ratio, assuming bonds are unchanged, when stocks double or halve. I also calculated how much of a stock increase is needed to raise the allocation of stocks by 10%
Code: Select all
Orig alloc after 100% stock growth After 50% drop stock growth to reach next 10% threshold
stocks bonds stocks bonds stocks bonds historical return, 1926-2020**
30 70 46.2 53.8 17.6 82.4 55.6% 7.7%
40 60 57.1 42.9 25.0 75.0 50.0% 8.1%
50 50 66.7 33.3 33.3 66.7 50.0% 8.6%
60 40 75.0 25.0 42.9 57.1 55.6% 9.0%
70 30 82.4 17.6 53.8 46.2 71.4% 9.4%
80 20 88.9 11.1 66.7 33.3 125.0% 9.7%
90 10 94.7 5.3 81.8 18.2 inf 10.0%
100 0 100.0 0.0 100.0 0.0 n/a 10.2%
** historical return from https://investor.vanguard.com/investing/how-to-invest/model-portfolio-allocation
This suggests that if you set a rebalancing strategy where you rebalance when stock allocation has drifted by an absolute 10%, your stocks have likely grown by over 50% (which isn't necessarily a bad thing, mind you, but it is good to understand).