His specific example of such a policy:
“The fund’s Asset Allocation Policy is to have 80% invested in stocks and the remainder in bonds when the market value of stocks is 60% of the total value of stocks and bonds, with the proportions to be determined each period using the adaptive asset allocation formula.”
So, for example, if the total bond market value were to expand greatly over a period of time due to an explosion of debt and a drop in prevailing interest rates, while stock values dropped or stayed steady, then the market value of stocks might drop to 50% of the total value of stocks and bonds.
Figure 3 on page 25 shows the suggested adaptive allocation most clearly. At a 60% market valuation for stocks, the fund's stock allocation is 80%. When the market valuation of stocks drops to 50%, the fund's stock allocation would be around 73%. If the market valuation of stocks drops to below 45%, the fund's stock allocation would drop below 70%.
As it happens, this last set of numbers is pretty close to current conditions. The effect is that a fund's 80% stock / bond mix chosen for the "normal" 60/40 mix of stock and bond values in the total combined market might be adjusted to 70% today.
I get the math, for the most part. But I'm having some trouble with the premise that there is a "normal" mix of stock and bond total market values.
Seems to me that the total debt market value over time is highly susceptible to non-economic factors, like the government policy and regulation mix that determines how easy mortgage and consumer debt is to obtain. Or, in the other direction, a tax code change that encourages companies to go public and sell stock, leading to an increase in the total stock market value that is not market-based.