Asset allocation methodology

[drm7]

Many experts advise to have certain percentage allocations to equities and cash in your portfolio. Assuming you rebalance every month using current market values, there might be a situation where you end up with close to zero cash and 100% equities if the equities just keep dropping and you keep on buying them.
Is there any logic in this? How do you prevent your allocations from diverging too much from your target percentage values?

As long as you keep the same *percentage* of stocks/cash, then you will never run out of cash. An extreme example:

70/30 stocks/cash asset allocation in a $100,000 account
$70,000 stocks
$30,000 cash

Stocks fall by 50%
$35,000 stocks
$30,000 cash
$65,000 total
Rebalance to:
$45,000 stocks
$19,500 cash
$65,000 total

Stocks fall by 50% AGAIN
$22,500 stocks
$19,500 cash
$42,000 total
Rebalance to:
$29,400 stocks
$12,600 cash
$42,000 total

Stocks fall by 50% YET AGAIN(!!)
$14,700 stocks
$12,600 cash
$27,300 total
Rebalance to:
$19,110 stocks
$8,190 cash
$27,300 total

So, even with an absolutely brutal 87.5% drawdown in your stock portfolio, you will still have $8,190 in cash after the last rebalancing. You won't run out of cash, but you will probably question your stock-picking skills!

 

[Cabin111]

Here is what I would do if I had $300,000. to $500,000. to invest. First...Own a house. Even if you have a mortgage (which would be low), you can control how you keep your house. If you need to buy one, find the worst house in the best location (location location location)...Look it up. You can always fix it up if you are young. It is also for inflation protection...We may get super inflation because of the government printing money. Next depending on the age...Say 50 years old, I would have about 50-60% in US stocks. Add 10 to 20% foreign stocks (China, Asia, Canada, Europe). 6 months of savings in a money market fund for emergencies...Money you can get to quickly. Bonds are so low (lowest they have ever been for quality), I would forgo them and invest the rest is QQQ.

For the most part you can control the house. If it's in a good location, even if prices drop, it can be sold. After that, you are at the mercy of many outside forces...

Also readjust quarterly or yearly on the stocks. You may want to look into "DRIP" investing or just fund a 401K with a you paycheck into a general stock fund (S&P 500)...Automatic readjustment.