Very interesting equation. It does however ask you to tactically shift your asset allocation between stocks and bonds as risk free rate changes, and potentially having you inadvertently sell low and buy high, no?
Great point. I would say an equation like this has most use for someone when they are first deciding on their asset allocation.
It might be worth factoring in when doing an annual rebalance/portfolio review, but I personally wouldn't use it to shift my allocation every time there's a move in interest rates.
On the implication that moving from stocks to bonds when rates rise would inadvertently sell low and buy high.
For the bonds, you would be buying low as when rates rise bond prices fall.
Very interesting equation. It does however ask you to tactically shift your asset allocation between stocks and bonds as risk free rate changes, and potentially having you inadvertently sell low and buy high, no?
Hey Ali,
Great point. I would say an equation like this has most use for someone when they are first deciding on their asset allocation.
It might be worth factoring in when doing an annual rebalance/portfolio review, but I personally wouldn't use it to shift my allocation every time there's a move in interest rates.
On the implication that moving from stocks to bonds when rates rise would inadvertently sell low and buy high.
For the bonds, you would be buying low as when rates rise bond prices fall.
For stocks it's not quite as black and white. Sometimes higher rates mean stocks fall, but not always and not always by a lot. I've written about that in more detail here: https://open.substack.com/pub/benlefort/p/should-you-worry-about-rising-interest?r=r7ti9&utm_campaign=post&utm_medium=web