Allocation rules are often necessary for disciplined portfolio management, but they create the possibility of committing an investor to a portfolio that's overly aggressive, overly conservative, or just dumb. The February 2018 market correction was an important test for my own allocation rules. Here I discuss the resulting changes I made to them, and how those changes helped prepare me for the bear market selloff in December.
I began using formal allocation rules in early 2017. They cover a wide range of factors including cash, bonds, value stocks, single stocks, and certain strategies within and across asset classes. I wanted the rules to be flexible enough to allow for things like buying dips in stock prices, so I originally designed formulas which adjusted the rules (one example being the minimum amount of cash I was required to hold) based on market conditions and stock valuation measures.