The Vasser Plan: Learning To Use Your Judgment

by David Jenyns on November 19, 2007

The Vassar Plan, although originally a moving average plan, changed so often while it was in use that it really fits in no single category, and was finally abandoned altogether. However, it was the first variable-ratio formula plan ever to receive wide publicity and is relatively simple in its principles.

The plan was conceived in 1938 at a time when investors were still mindful of the dismal market experiences of the 1929 and 1937 declines. To begin with, the plan was based on “the monthly mean price of the Dow-Jones Industrial Average for the years 1930-38,” which was 136.15.1 Therefore, 135 was taken as the median. The percentages of stocks and bonds to be held in the account were to be adjusted after each 10-point drop from this median, and after each 15-point rise.

Adjustments were made only if the market crossed an action point going away from the median, which is another way of saying that the halfway rule was to be followed: no purchases of stocks above the median, no sales below.

The plan assumed, on the one hand, that the market would continue to follow a path similar to the one it traced during the 1930-38 period, but on the other hand it ignored the fact that the Dow-Jones average fell to around 40 in 1932, which is more than 60 percent below the maximum-stock position provided for. Oddly enough, however, the market limits in the plan105 and 195 turned out to be remarkably close to actual experience for several years. The fund was fully invested in stocks at the low of about 90 in 1942, and was completely in bonds at the high of 212 in 1946. From that point on, the plan ceased to function at all well.

Actually, it was modified during this period to be based on a 10-year moving average of the market index, but the outer limits remained the same. The main difficulty with the formula, clearly, was that the median and therefore the maximum point at which stocks could be held was much too low. Also, the restrictions placed on operation of the fund by the halfway rule prevented taking advantage of the fluctuations of the 1947-1949 period, during which time a few profits could have been snagged even though the plan was essentially wrong. The median was moved up to 145 when it became apparent that the fund was being paralyzed by the formula, but this didn’t help because the market never fell that far.

Finally, the old formula was given up entirely, and a new method worked out. This was based on an arithmetic trend, i.e., a trend line drawn on an arithmetic-scale chart of the average, following the general direction of market movement over the years. Since this moved the median only up to 160 (the market missed dropping this low by less than two points in 1949), it was not very effective in improving the formula.

The upshot of Vassar’s experience was that the formula method was thrown out entirely, and the investment advisors of the fund now depend exclusively on their judgment. At last report, the college had 44.3 percent of its endowment in common stocks, a proportion presumably decided upon independently of mechanical rules.

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