Withdrawing from balanced funds when stocks are down

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Happy2BeFree

Withdrawing from balanced funds when stocks are down

Post by Happy2BeFree »

Hello! I'm confused about whether selling balanced funds in a market downturn actually results in selling stocks when they're down.

Christine Benz at Morningstar says she avoids balanced funds in her bucket portfolios because you don't want to sell stocks in a downturn. But then I've read posters here saying you're not really doing that; you're selling the bond portion and then the fund is automatically rebalancing by buying stocks that have declined. Is that the case?

Where there's a market downturn, is there no material difference between a) withdrawing from a balanced fund and b) withdrawing from bonds and immediately rebalancing to your AA? And if that's so, why would Christine have a problem with balanced funds? Because she doesn't think retirees should maintain their AA (rebalance) in a downturn? If that's so, is she right?

I'm contemplating buying Wellesley in an IRA, but I need clarity on this issue before I do. Thanks for any help you can offer me!
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Withdrawing from balanced funds when stocks are down

Post by sawhorse »

What is the specific fund?
Topic Author
Happy2BeFree

Re: Withdrawing from balanced funds when stocks are down

Post by Happy2BeFree »

sawhorse wrote:What is the specific fund?
I don't own any balanced funds right now, but am contemplating Wellesley. I'm wondering about owning and withdrawing from balanced funds in general.
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Withdrawing from balanced funds when stocks are down

Post by sawhorse »

Wellesley is an actively managed fund, and I can't imagine that the fund managers would not take those issues into account when deciding what to sell and buy. Even the passive balanced index funds have someone managing asset allocation.
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: Withdrawing from balanced funds when stocks are down

Post by livesoft »

If you sell shares of Wellesley, then the NAV is calculated from the holdings including the stocks it has. Even if the managers are rebalancing from bonds to stocks in their offices where you cannot see, your price from selling Wellesley will be affected by the NAV which is affected by the prices of the stocks that Wellesley holds.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
Happy2BeFree

Re: Withdrawing from balanced funds when stocks are down

Post by Happy2BeFree »

So does this mean that Christine is right? One should not sell balanced (stock-holding) funds when markets are down, simply because the result is that you are actually selling stocks when they're declining?
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: Withdrawing from balanced funds when stocks are down

Post by livesoft »

I think she is close enough to being right.
Wiki This signature message sponsored by sscritic: Learn to fish.
FactualFran
Posts: 2776
Joined: Sat Feb 21, 2015 1:29 pm

Re: Withdrawing from balanced funds when stocks are down

Post by FactualFran »

Whether selling shares of a balance fund results in a change to your asset allocation depends on what the manager of the fund does as a result of your sale. In many cases, the money to pay you can come from cash the fund has or from money the fund receives from someone else who bought shares on the same day.

In other cases the manager will sell stocks or bonds the fund holds to meet current net fund share redemptions. With a passively managed fund, the manager will likely make sell stocks and bond in proportion to the target allocation of the fund, say 60% stocks and 40% bond. With an actively managed fund, the manager will likely choose to sell the individual holdings considered to have the worst prospects. Those sale will not necessarily in proportion to the target allocation. Active managers likely have more leeway about deviating from an exact asset allocation than passive managers.

A difference between a) withdrawing from a balanced fund and b) withdrawing from bonds and immediately rebalancing to your AA is that in (a) the manager of the balance fund has leeway about deviating from the target allocation, while in (b) you are able to rebalance to your exact AA.
User avatar
Christine_NM
Posts: 2796
Joined: Tue Feb 20, 2007 12:13 am
Location: New Mexico

Re: Withdrawing from balanced funds when stocks are down

Post by Christine_NM »

Let me take a stab at this.

She is right but she is not telling the whole story. In a downturn, a balanced fund's NAV will decline, but (obviously) less severely than a stock fund's NAV. Bond funds may do anything in a stock downturn, go up, down or stay the same, but usually bonds are up or unchanged and so mitigate the "loss" in a balanced fund.

So the question is, bad to withdraw compare to what. Compared to a stock fund, it is better to withdraw from a balanced fund. Compared to a bond fund, it depends on what bonds are doing.

I like to avoid these issues and withdraw only from money market accounts. I would not call it good to sell shares of anything for living expenses -- but I know lots of BHs would disagree with me.

I have Wellesley in an IRA, and I plan to sell everything else (treasuries and etfs) for RMDs first, and leave it to grow for another 7 years. Then for simplicity, in my dotage I can just have the one Wellesley fund and take all RMDs from that. In 7 years it will hopefully have compounded enough to almost make up for all the RMDs taken.
16% cash 49% stock 35% bond. Retired, w/d rate 2.5%
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Withdrawing from balanced funds when stocks are down

Post by dbr »

livesoft wrote:I think she is close enough to being right.
Really? Hasn't the fund already sold bonds and bought stocks or will sell bonds and buy stocks, your bonds and your stocks. The net effect either way is that you end up with the asset allocation you are supposed to have and your holding is diminished by the amount of the withdrawal. You could accomplish that in separate funds by selling stocks, bonds, or both in any order and rebalalancing before, after, or during in any order to produce the same result. Of course, you can end up with a net sale of stocks if the withdrawal is large enough, but that is the fault of how much you withdraw, not of what kind of funds you hold.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Withdrawing from balanced funds when stocks are down

Post by dbr »

Christine_NM wrote:
I like to avoid these issues and withdraw only from money market accounts. I would not call it good to sell shares of anything for living expenses -- but I know lots of BHs would disagree with me.
You are kidding yourself. Setting aside money to spend so that you can pretend you are not withdrawing from your assets is playing mental games.
User avatar
Christine_NM
Posts: 2796
Joined: Tue Feb 20, 2007 12:13 am
Location: New Mexico

Re: Withdrawing from balanced funds when stocks are down

Post by Christine_NM »

dbr wrote:
Christine_NM wrote:
I like to avoid these issues and withdraw only from money market accounts. I would not call it good to sell shares of anything for living expenses -- but I know lots of BHs would disagree with me.
You are kidding yourself. Setting aside money to spend so that you can pretend you are not withdrawing from your assets is playing mental games.
No I am not kidding myself. You have such a way with words. You have no idea how that money gets into the money market funds and therefore no idea whether it represents mental accounting or not.
16% cash 49% stock 35% bond. Retired, w/d rate 2.5%
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Withdrawing from balanced funds when stocks are down

Post by sawhorse »

If it's Vanguard, and probably other places, you have no choice but to go with a balanced fund unless you have a lot of money in the account and can meet the $3000 minimum for each fund. Since I only have around $5400, I can't have a custom portfolio. If you want to do the conservative version of the Core Four portfolio, you need $37500 in order to meet the minimum for each individual fund with the recommended allocation!
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Withdrawing from balanced funds when stocks are down

Post by dbr »

Christine_NM wrote:
dbr wrote:
Christine_NM wrote:
I like to avoid these issues and withdraw only from money market accounts. I would not call it good to sell shares of anything for living expenses -- but I know lots of BHs would disagree with me.
You are kidding yourself. Setting aside money to spend so that you can pretend you are not withdrawing from your assets is playing mental games.
No I am not kidding myself. You have such a way with words. You have no idea how that money gets into the money market funds and therefore no idea whether it represents mental accounting or not.
My apologies. You can disregard the comment.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Withdrawing from balanced funds when stocks are down

Post by ogd »

Happy2BeFree wrote:Where there's a market downturn, is there no material difference between a) withdrawing from a balanced fund and b) withdrawing from bonds and immediately rebalancing to your AA? And if that's so, why would Christine have a problem with balanced funds? Because she doesn't think retirees should maintain their AA (rebalance) in a downturn? If that's so, is she right?
In a tax-advantaged account, there's no material difference -- assuming you want to maintain that balance going forward. The end result is the same, so even if you ended up selling stocks when they're down, the fund bought enough with bonds to offset this.

In a taxable account, it's not so good, because whether contributing or withdrawing you often end up undoing a transaction the fund did, which lowers tax efficiency. Maybe that's what she meant. Separating out stocks and bonds lets you harvest tax losses and take the minimal capital gains that you need.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Withdrawing from balanced funds when stocks are down

Post by The Wizard »

It's completely fine to sell a small portion of stock funds for retirement living expense whether they are up, down, or unchanged.
We're talking usually 3-4% of holdings per YEAR, so monthly withdrawals would be a very small fraction of one's portfolio.

Now if you have a 50/50 balanced fund, then yes a withdrawal would come from half stocks, half bonds.

OTOH, if you have separate stock and bond funds, then you would withdraw the fund with larger balance, to go in the direction of rebalancing to your 50/50 target.

No need to over think this issue...
Attempted new signature...
User avatar
tfb
Posts: 8397
Joined: Mon Feb 19, 2007 4:46 pm

Re: Withdrawing from balanced funds when stocks are down

Post by tfb »

Happy2BeFree wrote:Christine Benz at Morningstar says she avoids balanced funds in her bucket portfolios because you don't want to sell stocks in a downturn. But then I've read posters here saying you're not really doing that; you're selling the bond portion and then the fund is automatically rebalancing by buying stocks that have declined. Is that the case?
It is.
Happy2BeFree wrote:Where there's a market downturn, is there no material difference between a) withdrawing from a balanced fund and b) withdrawing from bonds and immediately rebalancing to your AA?
There isn't.
Happy2BeFree wrote:And if that's so, why would Christine have a problem with balanced funds? Because she doesn't think retirees should maintain their AA (rebalance) in a downturn? If that's so, is she right?
Because she's wrong. Not selling from stocks feels good even though it's the same as selling from a balanced fund.
Harry Sit has left the forums.
Quickfoot
Posts: 1166
Joined: Fri Jan 11, 2013 12:03 pm

Re: Withdrawing from balanced funds when stocks are down

Post by Quickfoot »

This isn't a reason to avoid balanced funds, balanced funds maintain the asset allocation through automatic rebalancing. With a multiple fund portfolio you would do the same thing a balanced fund would do which is sell the asset that you currently have too much of (most likely bonds during a downturn) and once asset allocation is achieved sell all asset classes as needed to meet your withdraw amount AND maintain your asset allocation (yes some equities may be sold).
If you want to do the conservative version of the Core Four portfolio, you need $37500 in order to meet the minimum for each individual fund with the recommended allocation!
This is where ETFs are valuable. You are able to achieve a well diversified portfolio with a much smaller amount and pay Admiral class or less expense ratios.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Withdrawing from balanced funds when stocks are down

Post by JoMoney »

I'm pretty sure there's been threads on here that discuss bucket portfolio's vs constant-mix rebalancing, the effective end result being the same. It's all just mental accounting tricks, so whatever floats your boat.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Topic Author
Happy2BeFree

Re: Withdrawing from balanced funds when stocks are down

Post by Happy2BeFree »

What a fantastic forum this is! Thank you all for your excellent replies. I truly appreciate them. Please keep them coming, because I've researched this issue here and still could not understand what actually happens with the sale of balanced funds. Even in this thread, there doesn't seem to be complete agreement on the particulars.

So what if, in drawdown/retirement and in a down market, you don't want to sell any stocks? You'd then withdraw only from fixed income, but not wholly rebalancing, which means you're not maintaining your AA. Does this ever make sense? Is one-way rebalancing (stock-to-bond) ever a wise choice?
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Withdrawing from balanced funds when stocks are down

Post by The Wizard »

Happy2BeFree wrote:
So what if, in drawdown/retirement and in a down market, you don't want to sell any stocks? You'd then withdraw only from fixed income, but not wholly rebalancing, which means you're not maintaining your AA. Does this ever make sense? Is one-way rebalancing (stock-to-bond) ever a wise choice?
You're hitting a lot of topics all at once.
It's not that you don't WANT to sell stocks in a down market, it's that selling stocks then will move your AA even further away from what presumably is your target allocation...
Attempted new signature...
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Withdrawing from balanced funds when stocks are down

Post by dbr »

Happy2BeFree wrote:What a fantastic forum this is! Thank you all for your excellent replies. I truly appreciate them. Please keep them coming, because I've researched this issue here and still could not understand what actually happens with the sale of balanced funds. Even in this thread, there doesn't seem to be complete agreement on the particulars.

So what if, in drawdown/retirement and in a down market, you don't want to sell any stocks? You'd then withdraw only from fixed income, but not wholly rebalancing, which means you're not maintaining your AA. Does this ever make sense? Is one-way rebalancing (stock-to-bond) ever a wise choice?
In the first place, you either are maintaining your AA or you are not. If stocks are down and you withdraw, you can either see to it that you are rebalanced to target or not. Usually the process would be that you would sell bonds to withdraw and sell more bonds to rebalance to stocks. Only if the withdrawal is very large as a fraction of assets would selling bonds be insufficient to meet the withdrawal, and then you would have to sell some stocks as well, and you would end up balanced to target. The real issue about selling when things are down is that it is a portfolio as a whole that is up or down and that has an expected return and an expected risk. Withdrawing when a portfolio is down is disadvantageous and is what is referred to as the sequence of returns problem. As a consequence of that one can not safely withdraw as much as one might think based on average returns. The problem might be optimized by altering rates of withdrawal according to the ups and downs of the portfolio. The problem might also be optimized by taking money from the portfolio and buying an annuity instead.

No less a luminary than Larry Swedroe has supposedly stated that he would follow a strategy of rebalancing out of stocks when they are up but not into stocks when they are down. I don't know if that story is apocryphal or accurate. However, it is a strategy that can be considered. The effect is similar to holding a lower allocation to stocks in the first place, meaning lower risk and also lower expected return. You would avoid downside/market does not recover risk, though, which is a reason to adopt it. It would seem that the net effect on average would be to become more tilted to bonds as time goes on. That would line up with an age in bonds philosophy as well. Another approach would be the recently popular liability matching portfolio, bond ladder version. In that plan one sets aside a ladder, preferably of TIPS to negate inflation risk, of bonds matched to mature as money is needed in each year and sufficient to meet one's basic needs. On top of that one would hold a balanced fund of stocks and bonds for "discretionary" expenses. It would seem that the effect of this would be to spend down bonds first and to tilt to more in stocks as time goes on. The possibility that such a strategy is beneficial has been suggested before.
columbia
Posts: 3023
Joined: Tue Aug 27, 2013 5:30 am

Re: Withdrawing from balanced funds when stocks are down

Post by columbia »

I've seen this discussion here a number of times (and I believe that I might have even started a thread on the topic). Were someone motivated to do so, it seems like this issue could be cleared up with a retrospective analysis of the two approaches for several major downturns.

I would be interested in reading such a thing.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Withdrawing from balanced funds when stocks are down

Post by JoMoney »

columbia wrote:I've seen this discussion here a number of times (and I believe that I might have even started a thread on the topic). Were someone motivated to do so, it seems like this issue could be cleared up with a retrospective analysis of the two approaches for several major downturns.

I would be interested in reading such a thing.
Here is one look at this by Michael Kitces
https://www.kitces.com/blog/managing-se ... -approach/
...Nonetheless, the point of all this discussion is not to make the case that decision-rules bucketing strategies are inferior. To the contrary, as long as they are implemented along with rebalancing, their results are exactly the same...
...and another
https://www.kitces.com/blog/are-retirem ... on-mirage/
...this isn't meant to suggest that since bucket strategies produce asset allocations that are similar to systematic withdrawal strategies, that they are irrelevant or inferior. In fact, as advocates of the strategy often point out, the bucket approach is arguably superior from the perspective of client psychology; it fits far better into our mental accounting heuristics, and makes the portfolio easier for clients to understand. ...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
columbia
Posts: 3023
Joined: Tue Aug 27, 2013 5:30 am

Re: Withdrawing from balanced funds when stocks are down

Post by columbia »

Thanks for the links. :sharebeer
Topic Author
Happy2BeFree

Re: Withdrawing from balanced funds when stocks are down

Post by Happy2BeFree »

Thanks again for all your responses. Everyone's explanations have helped clear things up, and I think when it's time for withdrawal, I'll have a better idea of how to handle it.

I recently read those reports from Michael Kitces; he did a great job explaining how both bucket and total return/rebalancing strategies are in effect the same. I still had concerns about how to allocate (balanced funds vs. separate S/B) and the pros/cons of one-way rebalancing when in drawdown. I'm still contemplating the latter.
pascalwager
Posts: 2327
Joined: Mon Oct 31, 2011 8:36 pm

Re: Withdrawing from balanced funds when stocks are down

Post by pascalwager »

dbr wrote:
No less a luminary than Larry Swedroe has supposedly stated that he would follow a strategy of rebalancing out of stocks when they are up but not into stocks when they are down.
I recall Bill Bernstein saying the same thing--for retirees.
VT 60% / VFSUX 20% / TIPS 20%
rgs92
Posts: 3436
Joined: Mon Mar 02, 2009 7:00 pm

Re: Withdrawing from balanced funds when stocks are down

Post by rgs92 »

Firecalc I believe assumes that you make withdrawals from your portfolio each month in the same proportion as the current stock/bond ratio in the whole portfolio at the time of withdrawal.
So a regular drawdown from a balanced fund should be doing exactly the same thing.
User avatar
bertilak
Posts: 10725
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Withdrawing from balanced funds when stocks are down

Post by bertilak »

rgs92 wrote:Firecalc I believe assumes that you make withdrawals from your portfolio each month in the same proportion as the current stock/bond ratio in the whole portfolio at the time of withdrawal.
So a regular drawdown from a balanced fund should be doing exactly the same thing.
It could get a little more complicated if you hold more than one fund. Example, $1M total portfolio:

$500K in a 40/60 balanced fund (say, Wellesley)
$500K in a 100/0 fund (say, TSM)

If you sell some Wellesley you would also need to sell some TSM to maintain your overall AA. This is true for a big sales and for ongoing, repeated, smaller sales.

But the general principle is sound -- there is nothing different about selling a balanced fund than selling the same assets if they were in separate funds. AND, doing otherwise is a market-timing or asset-picking (i.e. "active") strategy.

Essentially, I think Christine is saying the disadvantage to putting all your eggs in a balanced basket is a disadvantage to those who do NOT want to "stay the course" (constant AA) but want to manage their AA actively.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

Re: Withdrawing from balanced funds when stocks are down

Post by backpacker »

Happy2BeFree wrote:Hello! I'm confused about whether selling balanced funds in a market downturn actually results in selling stocks when they're down.
It doesn't.* Suppose you have a million dollars in a 60/40 balanced funds. Stocks drop by 50%. The fund rebalances, meaning that it sell $120,000 worth of bonds and uses it to buy stocks. Now you withdraw $40,000 to pay the bills. $24,000 of that comes from stocks, meaning that after the crash, you bought $120,000-$24,000=$96,000 worth of stock and sold $120,000+$16,000=$136,000 in bonds. That doesn't look like "selling stocks" to me.

*The situation chance a bit if you are withdrawing a lot more than 4% or the decline is really small (as in less than 7%). If the decline is really small, who cares? The tendency of stocks to bounce back (i.e. short-term mean reversion) only shows up (if it does at all) after big declines.
User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

Re: Withdrawing from balanced funds when stocks are down

Post by backpacker »

Happy2BeFree wrote: Where there's a market downturn, is there no material difference between a) withdrawing from a balanced fund and b) withdrawing from bonds and immediately rebalancing to your AA? And if that's so, why would Christine have a problem with balanced funds? Because she doesn't think retirees should maintain their AA (rebalance) in a downturn? If that's so, is she right?

The real question is whether stocks have some tendency to "bounce back" after a loss. Can stock returns can be expected to be higher after losses than they are after gains? If you knew for sure that there was mean reversion, you would want to over rebalance into stocks after a downturn. Instead of your normal 60/40, you would want 70/30 or whatever. One way to do that is to (a) rebalance after a downturn and then (b) take all your withdrawals from bonds.

No one really knows whether stocks mean revert. The tendency of stocks to bounce back from mild losses is pretty weak. On the other hand, stocks have had extraordinary gains after the biggest drops in the US and UK. This from the 2013 Credit Suisse Yearbook.
The US and UK stock markets have experienced a few instances of dramatic reversals. In the USA, there was a real capital loss of −67% (1929–32) followed by a gain of +50% (1933). More recently, there was a real capital loss of −39% (2008) followed by a gain of +23% (2009). Similarly, in the UK, there was a real capital loss of −36% (1920) that was followed by a gain of +75% (1921–22). And perhaps most dramatically, there was Britain’s real capital loss of −74% (1973–74) that was followed by a gain of +86% (1975).
When people run fancy statistical tests looking for mean reversion, most of the evidence they find is really coming from these few dramatic events. Unfortunately (fortunately?), there have been too few of them to draw any firm conclusions. Maybe we just got lucky?
Post Reply