By Dr. Francis Bayes, WCI Columnist

Other Boglehead-inspired, buy-and-hold investors must surely dream about juicing up their portfolio’s annual return. I do. Even Dr. Bill Bernstein, who advises investors to stop playing if they have won the game, must have done so when he was in his accumulation phase. After all, he wrote about different ways to juice up a Boglehead-ish portfolio in his book, Rational Expectations.

Someone in their accumulation phase, i.e., saving for financial independence, should increase their allocation to stocks if their savings will not be adequate when they stop working. This should be a rigorous process in which they consider: 1) How much more could they save each year?; 2) How many more years could they work?; 3) What is the expected return of stocks? One should change their asset allocation only after they review those questions.

Even when they are on track to meet their financial goals, someone who plans to own stocks for 20-30 more years should consider buying even more stocks—instead of maintaining their asset allocation—under some circumstances. One’s financial plan could include such circumstances as indications for changing their asset allocation.

Here are some important disclaimers:

  1. One should stop reading this column if they don’t have a financial plan, (about half of the audience according to the most recent WCI survey).
  2. “Buying more stocks” means increasing one’s allocation to equity index funds (e.g., VTSAX, SPY), not individual stocks.
  3. Just because one can, it does not mean they should. But if these are not generally harmless, WCI would not have allowed this column to run.*
  4. If you could not tolerate the bear market of 2022 with your current asset allocation, then this column is not for you.

*I can picture someone–most likely Dr. Jim Dahle–commenting, “This is too much work.” But as the OG WCI also likes to say, there are only so many ways to write about why one should “buy and hold.”

If I have not triggered you yet, here are three stock market circumstances and two personal circumstances in which you might want to increase your allocation to stocks in order to increase your expected annual return.


Stock Market Circumstances


#1 When Stock Ownership Is at the Lowest

J.P. Morgan supposedly said, “In bear markets, stocks return to their rightful owners.” Bernstein interprets the “rightful owners” to be the wealthiest investors with “unimpaired capital.” Although Vanguard continues to demonstrate that its retail investors tend not to sell stocks during bear markets, the Federal Reserve’s data suggest otherwise. The percentage of stocks as households’ net worth decreases with each recession and stock market crash (first figure below)—in part due to households selling stocks (second figure).

equities and mutual funds shares

Regardless of who the “rightful owners” tend to be, a mature individual investor who follows the WCI principles should believe that they are one of the rightful owners. If one already has a 100% allocation to stocks, they should increase their savings rate. If one has an allocation to safer assets, they should rebalance into stocks AND also buy more stocks than usual with future savings for financial independence. As Bernstein said,

“Investing is an operation that transfers wealth to those with a strategy and can execute it from those who do not or cannot.”

When should one stop?

One could have a threshold-based rule—similar to the one that Bernstein recommends in Rational Expectations–by buying more stocks than usual until their allocation is greater than 1.2x (e.g., increases from 80% to 96%). Or one could just be a contrarian. When the short-term return becomes positive (e.g., YTD, one-year) or the media declare the bear market to be over, mature investors could return to their normal allocation (gradually, not instantly, as I explain in #2 below) as immature investors feel confident about stocks again.

More information here:

Watching Stocks Return to Their Rightful Owners


#2 When the Stock Market Is at an All-Time High

Momentum is a legitimate “factor,” just like size and value. For an active investor, the trend matters as much as valuations, whereas for a buy-and-hold investor, holding “momentum stocks” is risky. Still, one can consider the S&P 500 index, which Warren Buffett prefers over a total stock market index, to be a momentum strategy as well.

The disclaimer “past performance is no guarantee of future results” exists because investors tend to buy stocks after they have gone up. We would all like to “buy the dip.” But we feel better when we are riding the wave rather than swimming against it. Consider this: six-, 12-, and 24-month returns are higher on all-time high days than on all other days.

When should one stop?

Bernstein would disagree with buying more stocks than usual at an all-time high because he recommends decreasing allocations on the upside (e.g., a 1% decrease in stock allocation for every 10% increase in stock price). He also recommends checking valuation metrics such as the Shiller CAPE ratio, which is the ratio of the S&P 500’s current price to the 10-year average of inflation-adjusted earnings. But this is likely too much work for most WCI readers (including myself!).

If figuring out when to start buying fewer stocks is too challenging, one should not start buying more stocks at new all-time highs. An appropriate middle ground might be to continue with the usual stock allocation, regardless of price or valuation changes (aka “My crystal ball is cloudy”). At least with the knowledge that all-time highs beget all-time highs, one should tune out those who call every all-time high a bubble.


#3 When the Media Says an Asset Class Is Dead

I am writing this in April 2023. Remember when value was dead or when international stocks were no longer worthwhile for diversification? Maybe next year, we will also forget that all the small and regional banks, which are a significant part of small cap value index funds, were supposed to disappear. (Meanwhile, I hope this column does not come back to bite me!)

“Staying the course” with an underperforming asset class is already challenging, so increasing its allocation could be unthinkable. An average member of the WCI community is likely an above-average investor, so the underperformance must be bad enough to start hurting when WCI community members are questioning their allocation on podcasts and forums or when Jim has to write a lengthy defense like he did with small cap value in May 2020.

International stocks and small cap value stocks have outperformed the S&P 500 since those posts. Although we need to wait to see if their recent outperformance will continue, there are parallels to the 2000s when they outperformed the S&P 500 (e.g., relative valuations, growth stocks bubble). Such posts on WCI might be a good indicator to increase one’s allocation to an asset class 1.1x or more.

When should one stop?

Similar to the contrarian approach for #1 above: immature investors look at an asset’s most recent performance, and slightly immature investors look at its 10-year performance, which is often the longest duration listed on websites (besides “max” or “since inception”). A mature investor knows that even 10 years is too short. Perhaps, they should return to their original allocation when everyone can see that the asset class has outperformed VTSAX or SPY for 10 years.

buying more stocks

More information here:

How Do Financial Habits Form – And Can They Be Changed?

Splurge on This, Not on That


Personal Circumstances


#4 When You Pay Off All Your Debt

Debt is like a negative bond. If one has been buying stocks with debt, they have been using leverage. If they have (knowingly or unknowingly) tolerated the stock market volatility with debt, why not increase their stock allocation without debt?

Someone who does not flinch at the volatility might have a 100% stock allocation in their portfolio for financial independence. One may consider loans to be a negative bond. With $100,000 in stocks and $50,000 in student loans, they actually have an “asset allocation” of more than 100% stocks (150% stocks) since they are now investing on leverage. However, lots of people don't think about their debt as part of their asset allocation and so might be able to tolerate that more aggressive allocation just fine behaviorally speaking. Later, they might be inclined to start buying “positive bonds,” such as the Total Bond Market Index Fund (VBTLX), with 33% of their future savings for financial independence.

Or, while they are young, they could test their risk tolerance before they take out new loans in the future (e.g., a mortgage). Even with the US Treasuries paying 4%-5% interest, someone in their 20-30s who paid off their loans might need to take more risk in the long-term. They could increase their stock allocation gradually (say, 1.1x) until they find their theoretical sweet spot. If they do so in a bull market, most of their increase in stock allocation could come from not rebalancing. If they do so in a bear market, they would be buying even more stocks when they are cheaper, thereby increasing the odds of higher future returns.

More information here:

The Best Ways to Use Debt to Your Advantage


#5 When You Will Die with Too Much Money

This is here for completeness, as this is beyond my pay grade.

The sequence of return risk (SORR) is why one needs to decrease their allocation to risky assets when they retire. Much has been written about it. Briefly, SORR is the long-term effect of negative stock market returns in the initial years of retirement. Many consider the five years before and 10 years after the year of retirement to be when the SORR is the greatest.

When one no longer fears the SORR—which is easier said than done—they can consider increasing their allocation to riskier assets such as stocks. If one might end up with too much money at death, they should consider buying even more stocks. Their charities or heirs will appreciate it.


‘If You Can'

In his booklet, If You Can (available for a free download), Bernstein outlines five hurdles that investors must overcome to succeed in saving and investing for retirement. This column is for those who have overcome the first two hurdles: spending too much money and not understanding the theory and practice of finance. The circumstances above are related to the other three hurdles: learning the financial and market history, overcoming yourself, and discerning good financial advice.

I hope that this column at least encourages one person to stick to their financial plan. During the accumulation phase, the moments when one wants to sell stocks are usually when they should buy stocks. They can afford to now buy even more stocks, but they should not stop buying.

[Founder's Note: Warren Buffett famously said, 

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

Likewise, Nathan Rothschild said:

“Buy when there's blood in the streets.”

These quotes mostly illustrate the fact that stocks bought at times of maximum pessimism tend to have the best returns. Whether this can actually be done in practice by the typical investor is a completely different question. I admit that when markets are down, I feel motivation to find more money to invest. But the truth is that since I'm already fully invested, the only way to do that is to spend less (which I don't want to do) or work more (which I also don't want to do.) So while “I allowed this column to run,” I do have enough reservations about it to include this note.

This post is mostly talking about “tactical asset allocation”—that is changing your stock-to-bond ratio in a moderate amount based on expected future returns, i.e., being more conservative when returns are expected to be low and more aggressive when returns are expected to be high. In essence, this is market timing lite. While careful study will reveal that lots of smart investors (Bernstein, Bogle, Buffett, etc.) have written about this, you need to recognize that, like all market timing, it requires a somewhat functional crystal ball for success. That's something I don't have, so I don't do this. In fact, this is a question we ask our Recommended Financial Advisor list before approving them to advertise here. More than a tiny amount of tactical asset allocation, and we simply won't sell them an ad.

The Dahle family approach over the last two decades has simply been to follow our written investing plan (currently 60% stock, 20% real estate, and 20% bonds). When do we buy more stocks? When we have more money to invest. And when the percentage of our portfolio invested in stocks drops below 60%. That's it. Boring? Absolutely. Effective? Absolutely. There's no guessing about the future. There's no stress. We always know what to do. Some months, we get a better deal on the stocks we buy than others. It forces us to automatically buy low. I'd say buy low and sell high, but we really don't sell. Like Nick Maggiulli, we “Just Keep Buying.” If you do decide to incorporate a little tactical asset allocation into your investing plan, do it in a prescribed, automatic way you decided on beforehand and wrote down. And good luck.]

What do you think? In what other circumstances should you consider buying more stocks? Comment below!