Asymmetric Rebalancing in Withdrawal Phase

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
lazyday
Posts: 3849
Joined: Wed Mar 14, 2007 10:27 pm

Asymmetric Rebalancing in Withdrawal Phase

Post by lazyday »

A retiree might limit rebalancing into equities, so that in down markets we won’t deplete the portfolio if stocks continue to fall. Bear market risk isn’t severe for an accumulator, because stocks are bought at low prices. A retiree has the opposite situation, withdrawing from a shrinking portfolio. Rebalancing could accelerate this.

Prior posts have suggested simple one direction rebalancing, away from but not into equities. Instead I propose, for example

:!: Never rebalance into equities unless: CAPE is below its long term average. Apply separately for US, DevelopedExUS, and EM equity allocations.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by livesoft »

I think this would be a behavioral error.
Wiki This signature message sponsored by sscritic: Learn to fish.
cherijoh
Posts: 6591
Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by cherijoh »

It sounds like an inappropriate AA for the withdrawal phase if you are that concerned about a shrinking balance. What you are suggesting is market timing.
User avatar
Sbashore
Posts: 952
Joined: Wed Feb 20, 2008 9:38 pm
Location: USA

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Sbashore »

This is a strategy based on market timing. I prefer to avoid that. What I do is limit my rebalancing to once a year per equity asset class. For example, one buy and one sell of Total Stock Market Index Fund per calendar year.
Steve | Semper Fi
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by nisiprius »

I view a lot of strategies as being the result of an inappropriate struggle between greed and fear.

Greed drives people to use an asset allocation that is too high for their risk tolerance. They are unwilling to give up the potential reward of a high stock allocation. But the proof that it is really too high is that they are unwilling to truly accept the risk. Their high stock allocation triggers fear. They want to have it both ways, and they kid themselves that they can get the risk premium without actually taking the risk, by adopting some kind of strategy that, they believe, will give them the good parts of stock market behavior without the bad part.

The dumb way to handle the problem is to keep the stock allocation down to the level at which it is possible to behave properly and stick to the plan.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
Sbashore
Posts: 952
Joined: Wed Feb 20, 2008 9:38 pm
Location: USA

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Sbashore »

nisiprius wrote:I view a lot of strategies as being the result of an inappropriate struggle between greed and fear.

Greed drives people to use an asset allocation that is too high for their risk tolerance. They are unwilling to give up the potential reward of a high stock allocation. But the proof that it is really too high is that they are unwilling to truly accept the risk. Their high stock allocation triggers fear. They want to have it both ways, and they kid themselves that they can get the risk premium without actually taking the risk, by adopting some kind of strategy that, they believe, will give them the good parts of stock market behavior without the bad part.

The dumb way to handle the problem is to keep the stock allocation down to the level at which it is possible to behave properly and stick to the plan.
Don't think this is the case all the time. My asset allocation might be viewed as aggressive for someone in retirement, but when you view my situation in total, it's actually quite appropriate. I'm not struggling between greed and fear, but rather putting rules in place to prevent actions based on greed or fear, in some future unknown scenario.
Steve | Semper Fi
leonard
Posts: 5993
Joined: Wed Feb 21, 2007 10:56 am

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by leonard »

So you're suggesting that people begin market timing in the withdrawal phase? if so, why wait until then if they can successfully time the market?
Last edited by leonard on Sun Feb 08, 2015 6:47 pm, edited 1 time in total.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
ourbrooks
Posts: 1575
Joined: Fri Nov 13, 2009 3:56 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by ourbrooks »

Actually, there's a study by Wade Pfau in which he looks at market timing based on whether or not the CAPE is above it's long term average. His result was that it works and delivers about 1% more per year than buy and hold. Only one problem, it's unlikely that any retiree would actually use it, because it requires staying out of the market for very long periods, even decades, and then going back in briefly, just after a major crash has occurred.

The proposal by lazyday has the same problem. Someone who followed it would end up very rarely rebalancing into equities. They'd have had reduced exposure to equities during most of the recent market run up. When they did go back in, they'd increase their equity exposure only by one year's worth of rebalancing. I suppose you could repair this flaw by recording by how much you should have rebalanced and doing a much larger rebalance into equities when the market has crashed and when CAPE finally drops below its long term average. Most retirees have a hard enough time staying the market during a crash; I have a hard time imagining many of them making large equity purchases at that point.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Browser »

Larry Swedroe has stated that he uses asymmetric rebalancing as well. He doesn't rebalance into equities and simply harvests equity gains when the equity allocation drifts higher than his rebalancing band. He does this to reduce "left tail risk" from protracted bear markets. He says that choosing this approach is more appropriate for those with a "low marginal utility of wealth"; i.e., people whose "greed or need" motive is lower in nisiprius's terms. It's more appropriate for folks who are concerned about preserving their existing wealth than getting richer and would seem relevant for many retirees.

I've thought of the OP's strategy of rebalancing into equities only when CAPE is below its historical average. Two problems: it's been above it's historical average for most of the last two decades, except for one brief period in 2009, so you wouldn't have rebalanced into equities for a really long time. Second problem is that, if this strategy were to work it would take at least a decade or longer to play out. You have to ask yourself if you have the staying power to see it through; no immediate gratification. Historically, if you had started buying more stocks when CAPE dropped below average you would have been buying while it continued to drop lower and lower for years. 2009 was an anomaly because you didn't have to wait long for the market to bottom out - but that was very rare. When you are trying to catch falling knives it can sometimes be a painful experience until the knives stop falling.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
midareff
Posts: 7711
Joined: Mon Nov 29, 2010 9:43 am
Location: Biscayne Bay, South Florida

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by midareff »

Interesting posts. There seem to be a few issues in decumulation from invested assets. The first (IMHO) is you never want to have to sell equities to fund your life in down years. Also in my opinion, and I have no studies to back this up, is that withdrawals are best made from price stable shorter term FI/bond funds that are regularly replenished, either from intermediate term bonds or from equities in up years.

As an example... lets suppose you two domestic index funds and two international index funds in your taxable account along with a short term and intermediate term bond fund. Let's further say the bond funds have sufficient assets for seven or eight years of withdrawals in today's environment, and (keeping the math simple) the four funds have $100K in each. After distribution of dividends to your bank (spending money) the funds are first rebalanced annually back to the original $100K value with any excess funneled to the bond fund(s) being used for monthly withdrawals. It is expected that 30 years of inflation will reduce that $400K to a not very wealthy "real" amount by life's end. When RMD is reached a similar strategy is used for annual distributions.

A similar strategy is employed in IRA's when RMD starts except the FI/bond funds $ is projected to be safe to end of life, a number which will change with time.

Finally, ceilings and floors are established for the bond funds values. Exceed the ceiling and go book a three week cruise or double up to your favorite charities. Drift below the floor and the frills are appropriately reduced.

As far as asymmetric rebalancing from bonds to equities is concerned .... FI/bonds are my "safe" money and if I take a zero return for 5 years, while projecting inflation at 3% or a bit more, if I had "safe" money over my "safe" to end of life requirement I'd say.. well, why rebalance out of "safe" FI/bonds at all if you have enough? I assume you retired with enough, now risk some of it to make more? I'm not thinking that interests me much although I expect other opinions and styles will vary to do what they think is best for them.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Browser »

You can check this website to get an idea of the historical trajectory of the market when it has dropped below the historical average of CAPE in the past. Quite commonly, the market continued down or went back and forth until it bottomed in the single digits many years later. The most notable periods were really bad times for equities such as the early 1900s until 1920, the 1930s until post WWII and the 1970s. If you can imagine rebalancing into equities year-after-year in these periods by selling your safe assets, then the "rebalance into equities when CAPE is below average" strategy is for you. You can see the little teaser when CAPE dipped just below average in 2009 and then departed for the moon. It would be really foolish to hope for a repeat of that.

http://www.multpl.com/shiller-pe/
We don't know where we are, or where we're going -- but we're making good time.
Topic Author
lazyday
Posts: 3849
Joined: Wed Mar 14, 2007 10:27 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by lazyday »

ourbrooks wrote:Actually, there's a study by Wade Pfau in which he looks at market timing based on whether or not the CAPE is above it's long term average. His result was that it works and delivers about 1% more per year than buy and hold.
Thanks, will read this. http://papers.ssrn.com/sol3/papers.cfm? ... id=2497053
Only one problem, it's unlikely that any retiree would actually use it, because it requires staying out of the market for very long periods, even decades, and then going back in briefly, just after a major crash has occurred.

The proposal by lazyday has the same problem. Someone who followed it would end up very rarely rebalancing into equities. They'd have had reduced exposure to equities during most of the recent market run up.
Say the allocation is 30% US, 20% ExUS, 10% EM, 40% Bonds. During the runup, each time the US market is at a new peak, you will be above 30%. If you rebalance at those moments, you will sell stocks to return to 30%. It's only during downturns that you will be underweight because you don't rebalance, you sit it out until stocks are affordable.
I have a hard time imagining many of them making large equity purchases at that point.
When US CAPE finally drops below its average, we could either rebalance all the way back to 30% right away, or do it slowly. For some of us the hard part will be not buying "cheap" stock as it falls, before it gets down to historical CAPE.

Splitting the CAPE decision into US, DevExUS, and EM means there will likely be separate smaller opportunities to rebalance into equities over down years. As markets fall, EM might reach historical CAPE first. We can then rebalance it back up to 10% while leaving the % in other equity fixed.
Topic Author
lazyday
Posts: 3849
Joined: Wed Mar 14, 2007 10:27 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by lazyday »

Browser wrote:Two problems: it's been above it's historical average for most of the last two decades, except for one brief period in 2009, so you wouldn't have rebalanced into equities for a really long time.
Over our lifetime, I think volatility-risk adjusted returns are lower than if we rebalanced normally, but to me the strategy is about trading lower shortfall risk for lower returns and/or higher volatility, depending if we use a higher equity allocation than we would if we rebalanced normally.
Historically, if you had started buying more stocks when CAPE dropped below average you would have been buying while it continued to drop lower and lower for years. 2009 was an anomaly because you didn't have to wait long for the market to bottom out - but that was very rare.
Yes. This is also true for normal rebalancing, but here it is worse because you might grow accustomed to not buying equity, and now have to keep buying in a bad economy with mob psychology working against you.

On the bright side, you are buying equity when it has a good Shiller earnings yield, and probably a good dividend yield. For bargain hunting types, it might seem relatively easy.

For the US allocation, instead of using CAPE for the buying decision, we could instead use 4% current dividend yield as the requirement to rebalance to equity. The high yield might help the behavioral problem. (Not sure dividend yield would work well for other regions.)
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Browser »

Then there's always the idea of not rebalancing at all. Asymmetric rebalancing (rebalance only from equities to bonds) has the problem that you're trimming off the right tail of total returns also because you keep reducing your equity allocation during bull market periods. While that puts a cap on drawdowns that can occur because your equity allocation may drift higher than your tolerance, it does so at the cost of reducing your long term returns. As Bogle says, if you can tolerate the higher volatility from not rebalancing then you shouldn't do it. He doesn't think it really does much for you at the end of day and really isn't necessary. I'm sort of in that camp. I agree with the idea of not selling bonds to buy stocks because I don't want to get caught feeding the next eternal Japanese-style bear. And I'm not interested in selling stocks to buy bonds either unless I'm lucky enough that my stock allocation gets really pumped up because I've been making tons of money and my need to take risk has consequently declined.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
Leif
Posts: 3705
Joined: Wed Sep 19, 2007 4:15 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Leif »

lazyday wrote:A retiree might limit rebalancing into equities, so that in down markets we won’t deplete the portfolio if stocks continue to fall. Bear market risk isn’t severe for an accumulator, because stocks are bought at low prices. A retiree has the opposite situation, withdrawing from a shrinking portfolio. Rebalancing could accelerate this.

Prior posts have suggested simple one direction rebalancing, away from but not into equities. Instead I propose, for example

:!: Never rebalance into equities unless: CAPE is below its long term average. Apply separately for US, DevelopedExUS, and EM equity allocations.
I've wondered about this myself.

I know for me during 2008/9 I rebalanced a couple of times from cash to equities using a classic Swedroe band of +-5% (or +-25% if the target allocation is < 20%). After that the blade began to sting. This was at a time when I'm working, with probably 10+ years until retirement. However, I never sold (except to TLH). Once I'm retired I can imagine that it will be much more difficult rebalancing into equities with the thoughts of Japan in mind.

I don't know the answer, if there is one. CAPE, or perhaps a wider downside band (perhaps 2X) before rebalancing. I guess if the desire to protect against a Japan scenario then you just don't rebalance into equities in a drawdown.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Browser »

If you want to use CAPE or some other valuation measure as a trigger for buying or rebalancing into stocks, you have the dilemma of finding a threshold that is sensitive enough to trend changes in market prices to get you into more equities in a timely fashion but not so sensitive that it throws off signals that have you riding a falling knife. That's always the problem with timing, whether its valuation-based, momentum-based, or whatever.

If you take the long view regarding these strategies, what you generally find is that -- if you're very, very patient -- they can help reduce the volatility of your stock returns somewhat, but they don't help improve your absolute returns. Take the CAPE timing strategy, for example. Following that strategy would keep you out of buying more equities, either directly or indirectly through rebalancing, for long stretches of time -- compared to not using the strategy. Your average equity allocation will consequently be lower than it would otherwise be. The net result of this is that portfolio volatility would be lower, but so will your portfolio returns over the long run because of the lower average equity allocation.

As Nisi pointed out, it might make more sense just to determine the max equity allocation that you can stick with over the long pull and just leave it at that. Using timing signals might be nothing more than a closet method of lowering your average allocation over time to the level you're comfortable with.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by in_reality »

Browser wrote: As Nisi pointed out, it might make more sense just to determine the max equity allocation that you can stick with over the long pull and just leave it at that. Using timing signals might be nothing more than a closet method of lowering your average allocation over time to the level you're comfortable with.
I disagree. It may be just how we view it but I see rebalancing into the riskier asset as increasing your total lifetime contribution to riskier investments.

If I invest 10k @ 50% equities 50% bonds, then obviously I have contributed $5000 to stocks.

If stocks fall 50% and I rebalance, now will have $3750 in stocks and $3750 in bonds. However, I will have purchased $6250 in stocks and $3750 in bonds to get back to 50%-50%.

If stocks keep falling (think Japan) another 33.3%, and I dutifully rebalance to $3125 bonds and $3125 stock for a total purchase of $6875 in stocks and $3125 bonds to get back to 50%-50%.

Where will it stop? I can't know. Since I can't not determine what the market will do, and can not predict how much in stocks I will end up purchasing in order to keep a 50%-50% allocation, I prefer to commit myself to not contributing more than 50% of my money into the riskier asset.

I wouldn't have a timing method to start buying stocks again personally. I would just take drawdowns against the outperforming asset (bonds) until either stocks recover or by bonds are drawn down to the same level as stocks. If stocks did recover marvelously, yes I would rebalance out of them into the safer asset. This is my plan anyway.

I am comfortable allocating 50% of my money in retirement to equities. I will not go beyond that no matter what the market does.
User avatar
Leif
Posts: 3705
Joined: Wed Sep 19, 2007 4:15 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Leif »

Browser wrote:
If you take the long view regarding these strategies, what you generally find is that -- if you're very, very patient -- they can help reduce the volatility of your stock returns somewhat, but they don't help improve your absolute returns. Take the CAPE timing strategy, for example. Following that strategy would keep you out of buying more equities, either directly or indirectly through rebalancing, for long stretches of time -- compared to not using the strategy. Your average equity allocation will consequently be lower than it would otherwise be. The net result of this is that portfolio volatility would be lower, but so will your portfolio returns over the long run because of the lower average equity allocation.
First off, at least in my case, it would only be used to rebalance within say a +-5% band (10% wide). I'm thinking when I retire it will be at 40/60. So without any other considerations I would rebalance when equities drop below 35% or raise above 45%. In retirement the risk I'm considering is catching the knife and making retirement withdrawals. And doing that over an extended period (i.e., Japan).

Do I just "let it ride" on both the up and down side and let withdrawals bring me back to my allocation? Do I trim on the upside (and bolster cash and bonds). On the equity downside do I let equities climb back up on its own pace?

As Larry said for himself in another rebalancing post, he has no need for risk so he will not rebalance on the downside. I also have a very low need for risk. My other options to go to a 30/70, but while that makes a Japan scenario less of a problem it is still pouring money down the gopher hole.
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Dandy »

There is no magic safe approach for rebalancing in retirement. If you follow Wm Bernstein's approach of securing your retirement with 20-25 years worth of drawdown needs in "safe" products (I would say to age 90 vs a set # of years) and allocate the balance however you want -- you don't have much of a rebalancing issue.

If equity markets do poorly and you have fixed income money not tied to your "safe" portfolio you can choose to rebalance or not -- it won't likely have any effect on your secure retirement. If equity markets do well you may rebalance or take your drawdown needs from the risk portion of your assets and have an even more secure retirement funding.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Browser »

Well, I guess I agree that in retirement it might make sense to not rebalance into stocks when they lose value. That certainly reduces left tail risk which is important when you are taking portfolio distributions. But, by not rebalancing you also reduce your chances of recovering losses when (if) stocks recover so you are truncating the right tail of portfolio returns over time also. You have to weigh these risks.

That is one problem with an equity-centric portfolio in retirement. For example if you were 60% in stocks and the market were to take another 40% hit, or more, (which is certainly possible) you might be down by 20% - 25% net in total portfolio value which, along with an annual distribution of 4%, knocks you down by perhaps one quarter to one-third. Your expected portfolio lifespan has now probably decreased from 25 years to 15 years at your planned spending rate.

If you don't rebalance into equities, then you've effectively locked yourself into a scenario where you have no choice but to drastically reduce your living standard. Recall, that the Bengen and Trinity studies on portfolio longevity were all predicated on maintaining a fixed equity allocation by rebalancing, which allowed the portfolios (at least historically) to eventually recover to some degree from large equity drawdowns. But if you do rebalance into equities, you could end up throwing even more money down the rathole in a protracted bear market.

So -- it's probably NOT a great idea to retire and have to depend heavily on equities to fund your spending. Or, you could end up on the horns of this kind of dilemma. My sorta rule is that you probably shouldn't have more than about 30% in equities in retirement. Then you can handle what comes your way without being faced with painful choices. If you can't retire with that low an equity allocation then maybe you should consider the possibility of delaying retirement, earning some income in retirement, setting your planned spending rate significantly lower, etc.
Last edited by Browser on Wed Feb 11, 2015 11:36 am, edited 2 times in total.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
Leif
Posts: 3705
Joined: Wed Sep 19, 2007 4:15 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Leif »

in_reality wrote:
Where will it stop? I can't know. Since I can't not determine what the market will do, and can not predict how much in stocks I will end up purchasing in order to keep a 50%-50% allocation, I prefer to commit myself to not contributing more than 50% of my money into the riskier asset.

I wouldn't have a timing method to start buying stocks again personally. I would just take drawdowns against the outperforming asset (bonds) until either stocks recover or by bonds are drawn down to the same level as stocks. If stocks did recover marvelously, yes I would rebalance out of them into the safer asset. This is my plan anyway.

I am comfortable allocating 50% of my money in retirement to equities. I will not go beyond that no matter what the market does.
Does that mean you will never buy stocks? Or only to the extent that you sold them when they were up?
User avatar
Leif
Posts: 3705
Joined: Wed Sep 19, 2007 4:15 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Leif »

Browser wrote: So -- it's probably NOT a great idea to retire and have to depend heavily on equities to fund your spending. Or, you could end up on the horns of this kind of dilemma. My sorta rule is that you probably shouldn't have more than about 30% in equities in retirement. Then you can handle what comes your way without being faced with painful choices. If you can't retire with that low an equity allocation then maybe you should consider the possibility of delaying retirement, earning some income in retirement, setting your planned spending rate significantly lower, etc.
I agree. I'm aiming at 40/60. Perhaps that with a wider band +-10% (20% wide) so that I only rebalance into equities when the market is screaming SALE!
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Browser »

Leif wrote:
Browser wrote: So -- it's probably NOT a great idea to retire and have to depend heavily on equities to fund your spending. Or, you could end up on the horns of this kind of dilemma. My sorta rule is that you probably shouldn't have more than about 30% in equities in retirement. Then you can handle what comes your way without being faced with painful choices. If you can't retire with that low an equity allocation then maybe you should consider the possibility of delaying retirement, earning some income in retirement, setting your planned spending rate significantly lower, etc.
I agree. I'm aiming at 40/60. Perhaps that with a wider band +-10% (20% wide) so that I only rebalance into equities when the market is screaming SALE!
I'm thinking along the same lines, but with a lower equity allocation because I don't think I need more. I've also had the idea in mind that if equities really go on sale I'd jump in. But I know I probably wouldn't for a few reasons: First, I won't know when the sale price is right. I'd hate to jump in when I think they're really cheap and then have them lose another 50%, which has happened before in history. If I was that smart I'd be a millionaire because I would have gone 100% into equities back in 2008 when the S&P hit 666 (the mark of the beast). I jokingly said that I'd go "all in" if it did, but when it did I was sure it would lose another 25, 50%, who knew? Second, unless stocks tank pretty soon, by the time they do I'll be too old to care about increasing my stock allocation, be to scared to do it, or probably won't need to anyway. So, I figure it's a nice idea -- kinda like thinking what I'd do if I won the lottery.
We don't know where we are, or where we're going -- but we're making good time.
Topic Author
lazyday
Posts: 3849
Joined: Wed Mar 14, 2007 10:27 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by lazyday »

Dandy wrote:If you follow Wm Bernstein's approach of securing your retirement with 20-25 years worth of drawdown needs in "safe" products (I would say to age 90 vs a set # of years) and allocate the balance however you want -- you don't have much of a rebalancing issue.
This is great if your portfolio is big enough for bonds to fund the retirement you want, to age 90.

But even if your bond allocation is small and you retire young, there's still something of a LMP-ness to bonds. Even at age 40 with 0 yield, you can take 2% a year from TIPS with no sequence of returns risk. Not so for stocks.

Rebalancing from bonds when you can't absolutely depend on 2% from stocks will increase risk in some sense. Example from other thread.
Last edited by lazyday on Sat Feb 14, 2015 5:52 am, edited 1 time in total.
Topic Author
lazyday
Posts: 3849
Joined: Wed Mar 14, 2007 10:27 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by lazyday »

Browser wrote:The net result of this is that portfolio volatility would be lower, but so will your portfolio returns over the long run because of the lower average equity allocation.
As Nisi pointed out, it might make more sense just to determine the max equity allocation that you can stick with over the long pull and just leave it at that.
I agree that expected returns are reduced with the OP CAPE strategy. But I believe shortfall risk is reduced. Holding more bonds might increase shortfall risk for a young retiree.

Allocation % ignores allocation sizes. If at retirement, risk is acceptable with $400,000 in bonds (40%), it might not be acceptable after rebalancing, with $320,000 (40%).
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by Browser »

I often hear people say that a retirement portfolio with a relatively small equity allocation won't work because they can't expect a high enough return from bonds to provide the income they need over the length of their retirement; so one should invest more into equities such as 50% or 60%. The paradoxical nature of this statement is that it proposes that those who may actually be in the worst position to take risk are the ones who should increase the risk of their portfolios by investing more heavily in equities.

But, trying to avoid the risk of going broke or living on dog food in retirement by investing more in risky equities isn't a great solution. I think having a secure floor of income is the best approach. The floor consists of safe income sources such as social security and low-risk investments such as TIPS and I-Bonds. In order to secure an acceptable floor, some folks may need to invest all their retirement portfolio in low-risk investments; other people might have residual funds in their portfolio after funding their floor, which can then be invested in riskier assets with higher expected returns, such as stocks. Jim Otar in his publication "Unveiling the Retirement Myth" has a pretty good discussion of this and a recipe to follow in implementing this approach.
We don't know where we are, or where we're going -- but we're making good time.
itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 11:17 am
Location: midValley OR

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by itstoomuch »

Solved some of the problem by using option instruments, with a favorable bias for growth. :annoyed
:beer
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
RetiredinKaty
Posts: 134
Joined: Mon Sep 09, 2013 6:52 pm

Re: Asymmetric Rebalancing in Withdrawal Phase

Post by RetiredinKaty »

Another great discussion. Thinking about rebalancing issues in retirement certainly lead me to lower my stock exposure.

Also, if in a down market you say you are not going to buy stocks but you are going to sell bonds for income, you are in fact generally doing a substantial partial rebalance. We know historically that in the long run never rabalancing produces about the same results as annual rebalancing. So worrying too much about the difference between an annual partial rebalance and an annual full rebalance is probably not justified.

I withdraw and rebalance annually because I could not come up with simple, consistent rules for doing otherwise.
Post Reply