Countercyclical Indexing is based on a simple premise – a “balanced” index such as 60/40 is a relatively inefficient rebalancing approach because it always rebalances back to an equity weighting that is unbalanced in terms of where the relative asset class risk comes from. This is because 85% of the volatility in a 60/40 portfolio comes from the 60% stock slice.
This is exacerbated across market cycles as the stock market booms and busts. This leaves the investor overexposed to drawdowns when stocks are riskiest and exposes them to high levels of behavioral risk. As John Bogle explained in 2018, it makes more sense to rebalance against what the relative market cap is doing in order to mitigate behavioral risk and portfolio volatility.
This can be achieved using a systematic countercyclical strategy that buffers the stock market risk and better balances the relative asset class risks. That is the goal of the Discipline Index – to construct a systematically rebalancing index that accounts for the relative risks of stocks and bonds to help you reduce portfolio volatility and stay the course.
The Discipline Index is our baseline asset allocation metric that measures the relative risks of stocks and bonds across time. The Index measures macroeconomic and financial conditions to quantify the current risks in the market to provide a systematic model for a diversified indexing approach that helps better balance risks in a portfolio across time.
(Updated as of November 1, 2022)
Why Does Countercyclical Indexing Work?
White Paper – What Is Countercyclical Indexing?
The Best Investment Strategy – Discipline