It may be better, then, to simply allocate your assets in a way that provides the combination of relative profits and stability you desire and, meanwhile, not worry about the markets' ups and downs.

However, if you want a bit more profit bang for your buck, there is a way to benefit from big swings in the averages after they occur, thus "timing" by not timing the markets.

If that allocation were left untouched, it might appreciate at an average annual rate (before taxes and with all dividends and capital gains reinvested) of about 8%.

But, instead, set targets for the equities portion. Excluding the anomalous 1990s, stocks have gone up, on average, about 10% annually.

So, if you begin on about the first of January with $10,000 in stocks, set a year-end equities target of $11,000.

Then, set a higher and lower threshold above and below that, of, say, 5%. Think of your equity values as on an upward glide path, with a five percent tolerance. If they rise more than 5% above or fall more than 5% below that target path, corrective action is appropriate.

In the above example, you begin with $10,000 in stocks and $5000 in bonds and with a year-end stocks target of $11,000 and a 5% threshold, which means that, for the year, equities must be kept within 95% - 105% of $11,000 (or $10,450 - 11,550).

If, by year-end, the stock market has really surged and your equities are now worth, say, $12,550, or $1000 more than your upper target threshold, $1000 of them will be sold off, while the stock market is high, and the proceeds used to buy more bonds and/or money market account shares.

If, on the other hand, the equities markets have taken a terrific beating and yours have fallen to, say, $9450, you'll use $1000 worth of net assets from your bonds and/or money market accounts to buy more equities, while they are low.

The 5% threshold assures you won't be just a day-trader, switching all the time, and that, when you do take action, it will make a real difference: buying low and selling high.

Once you have made a trade based on this system, you will need to set new targets.

If you have just raised a low stock portfolio up to its bottom threshold ($10,450 in our example), this becomes the new beginning level from which to set a new target for the next year-end, i.e. $10,450 + 10% = $11,495.

On the other hand, if you've just reduced your stock or stock mutual fund portfolio to assure the upper threshold ($11,550 in the above example), this becomes the new beginning level from which to set a new target for the coming year-end, i.e. $11,550 + 10% = $12,705.

Because the stock market tends to go up more than down, you will likely, over time, see more new targets based on higher valuations of your equity portfolio; and this strategy may help you attain somewhat better equity returns than in a simple, set it and leave it allocation.

Meanwhile, in case the "bottom drops out" of the stock market, you have plenty of funds waiting in the wings, from the bond and/or money market account assets, with which to buy up good equity bargains. Indeed, as you exceed your targets, the reserve of money market and/or bond assets keeps growing.

While this strategy has advantages whether or not your assets are in tax-deferred, mutual fund accounts, it works best if the profits are tax-deferred and if index funds, with low transaction and annual management expenses, are used.

This method is likely to give the investor an edge, combining greater safety with somewhat higher overall returns, than in a simple buy-and-hold allocation. Over time, perhaps an otherwise 8% overall annual return could become 10%, a difference which, in a number of years, can be considerable:

If the investor also adds to the portfolio periodically, the allocations, targets, and thresholds should be increased accordingly.

Thus, if to the original $15,000 ($5000 in bonds and $10,000 in stocks), an additional $10,000 is added at the end of the first year, if the first year's equity target was achieved, and if the initial bond assets returned 6%, the new initial allocation targets and thresholds will look like this (with the added $10,000 allocated so as to restore the 1/3 bond vs. 2/3 stock allocations):

After 30 years, with an average 10% overall annual return, beginning investment of $15,000, and with $10,000 more added each year-end, your total, excluding taxes (hopefully deferred), would be worth: $1,906,680.

While there is some evidence that more frequent adjustments (quarterly, for example) in the equity portfolio, when checks show it is above or below its threshold, are somewhat better in terms of long-term returns, the system works just fine, and gives some benefit, if transactions are limited to once a year, and then only used if one's assets are outside their target/threshold "glidepath."

Though not a quick way to become a millionaire, this approach can be a reliable, safe strategy for achieving financial security.

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.