Balanced Funds and Sequence of Return Risk

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1210sda
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Balanced Funds and Sequence of Return Risk

Post by 1210sda » Mon Jul 16, 2018 10:14 am

If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.

I suppose you could have some portion of your portfolio in cash to help reduce the impact.

This would seem to make balanced funds less attractive at the beginning of retirement. In mid to late retirement, SoR has less of an impact. (according to Kitces)

1210
Last edited by 1210sda on Mon Jul 16, 2018 10:24 am, edited 1 time in total.

KlangFool
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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 10:23 am

1210sda wrote:
Mon Jul 16, 2018 10:14 am
If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.

I suppose you could have some portion of your portfolio in cash to help reduce the impact.

1210
1210sda,

1) How is that relevant if the portfolio is 50 times annual expense?

2) The Asset Allocation needs to be good enough as per the annual expense. If AA cannot take a 50% drop in stock and survive the withdrawal, it won't matter whether it is a 3FP or one fund.

<<With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.>>

3) With 3FP, you are supposed to rebalance when the stock is down. Aka, sell the bond to buy stock. If you rebalance, then, there is no difference between the 3FP and the balanced fund.

This is the fundamental problem with 3FP. It is supposed to be a buy, hold, and rebalance strategy. Many folks cannot handle the rebalance part.

KlangFool

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1210sda
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Re: Balanced Funds and Sequence of Return Risk

Post by 1210sda » Mon Jul 16, 2018 10:33 am

KlangFool wrote:
Mon Jul 16, 2018 10:23 am
If you rebalance, then, there is no difference between the 3FP and the balanced fund.

KlangFool
With the 3FP, if stocks are down, you can w/d bonds. With the Balanced Index fund,for example, every w/d is 60% equities and 40% fixed income. You can't choose which asset class to withdraw from.

1210

MotoTrojan
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Re: Balanced Funds and Sequence of Return Risk

Post by MotoTrojan » Mon Jul 16, 2018 10:36 am

1210sda wrote:
Mon Jul 16, 2018 10:33 am
KlangFool wrote:
Mon Jul 16, 2018 10:23 am
If you rebalance, then, there is no difference between the 3FP and the balanced fund.

KlangFool
With the 3FP, if stocks are down, you can w/d bonds. With the Balanced Index fund,for example, every w/d is 60% equities and 40% fixed income. You can't choose which asset class to withdraw from.

1210
The net effect is equal, no? After the downturn, withdrawal, and most importantly a rebalance in the 3-fund case, you are left with the same AA. Unless your IPS says not to rebalance into a downturn there shouldn’t be gross differences. You are struggling with mental accounting.

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willthrill81
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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Mon Jul 16, 2018 10:39 am

1210sda wrote:
Mon Jul 16, 2018 10:14 am
If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.

I suppose you could have some portion of your portfolio in cash to help reduce the impact.

This would seem to make balanced funds less attractive at the beginning of retirement. In mid to late retirement, SoR has less of an impact. (according to Kitces)

1210
It's not an issue at all if you're trying to maintain a relatively fixed AA and rebalancing along the way. When stocks are down and bonds are not, a balanced fund will be selling bonds to buy stocks anyway. That's just how it works. There's no need to do this on your own. Kitces did an analysis showing this.

Assuming that a particular balanced fund has your desired AA (or else a mix of two achieve it) and is invested in the asset classes you want exposure to, then a balanced fund is a great choice for those in the withdrawal phase.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

rgs92
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Re: Balanced Funds and Sequence of Return Risk

Post by rgs92 » Mon Jul 16, 2018 10:40 am

How do you know if stocks are down (or up)? This is the same as saying "stocks are low (or high)." It's very hard to tell.
(This is based on the idea in the comment that
With the 3FP, if stocks are down, you can withdraw from your bond fund
in the original post.)

This is the problem with the original idea. That is why I feel it is better to just withdraw in line with your existing asset allocation.
Last edited by rgs92 on Mon Jul 16, 2018 10:52 am, edited 5 times in total.

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1210sda
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Re: Balanced Funds and Sequence of Return Risk

Post by 1210sda » Mon Jul 16, 2018 10:42 am

MotoTrojan wrote:
Mon Jul 16, 2018 10:36 am
1210sda wrote:
Mon Jul 16, 2018 10:33 am
KlangFool wrote:
Mon Jul 16, 2018 10:23 am
If you rebalance, then, there is no difference between the 3FP and the balanced fund.

KlangFool
With the 3FP, if stocks are down, you can w/d bonds. With the Balanced Index fund,for example, every w/d is 60% equities and 40% fixed income. You can't choose which asset class to withdraw from.

1210
The net effect is equal, no? After the downturn, withdrawal, and most importantly a rebalance in the 3-fund case, you are left with the same AA. Unless your IPS says not to rebalance into a downturn there shouldn’t be gross differences. You are struggling with mental accounting.
With the 3FP, you withdraw first (from bonds in my example)and then rebalance. With the Bal Index fund, they are continuously rebalancing, and then you withdraw.

1210

KlangFool
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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 10:57 am

1210sda wrote:
Mon Jul 16, 2018 10:42 am
MotoTrojan wrote:
Mon Jul 16, 2018 10:36 am
1210sda wrote:
Mon Jul 16, 2018 10:33 am
KlangFool wrote:
Mon Jul 16, 2018 10:23 am
If you rebalance, then, there is no difference between the 3FP and the balanced fund.

KlangFool
With the 3FP, if stocks are down, you can w/d bonds. With the Balanced Index fund,for example, every w/d is 60% equities and 40% fixed income. You can't choose which asset class to withdraw from.

1210
The net effect is equal, no? After the downturn, withdrawal, and most importantly a rebalance in the 3-fund case, you are left with the same AA. Unless your IPS says not to rebalance into a downturn there shouldn’t be gross differences. You are struggling with mental accounting.
With the 3FP, you withdraw first (from bonds in my example)and then rebalance. With the Bal Index fund, they are continuously rebalancing, and then you withdraw.

1210
1210sda,

How is that possible? The market downturn does not have to be at the same time as your withdrawal schedule.

1) If you follow 5/25 band based rebalancing rule, you are supposed to rebalance as soon as it hit the band.

2) If you follow an annual rebalancing scheme, you rebalance annually independent of your withdrawal schedule.

It is very simple. If a person cannot rebalance in the face of a market downturn, the person should not use a 3FP.

KlangFool

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willthrill81
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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Mon Jul 16, 2018 11:07 am

rgs92 wrote:
Mon Jul 16, 2018 10:40 am
How do you know if stocks are down (or up)? This is the same as saying "stocks are low (or high)." It's very hard to tell.
(This is based on the idea in the comment that
With the 3FP, if stocks are down, you can withdraw from your bond fund
in the original post.)

This is the problem with the original idea. That is why I feel it is better to just withdraw in line with your existing asset allocation.
Yep. My biggest criticism for a while now with these kind of bucket strategies is how the buckets will be emptied and filled. Very few thinking about or employing this strategy seem to have clearly specified a priori how they will do so. Without such a plan, they're just winging it and leaving themselves open to all kinds of behavioral problems.

I do think that bucket strategies can work well, if for no other reason than they can make more intuitive sense than a traditional AA approach. But they are certainly more complicated, and many don't seem to understand that this complexity exists.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MotoTrojan
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Re: Balanced Funds and Sequence of Return Risk

Post by MotoTrojan » Mon Jul 16, 2018 11:17 am

1210sda wrote:
Mon Jul 16, 2018 10:42 am
MotoTrojan wrote:
Mon Jul 16, 2018 10:36 am
1210sda wrote:
Mon Jul 16, 2018 10:33 am
KlangFool wrote:
Mon Jul 16, 2018 10:23 am
If you rebalance, then, there is no difference between the 3FP and the balanced fund.

KlangFool
With the 3FP, if stocks are down, you can w/d bonds. With the Balanced Index fund,for example, every w/d is 60% equities and 40% fixed income. You can't choose which asset class to withdraw from.

1210
The net effect is equal, no? After the downturn, withdrawal, and most importantly a rebalance in the 3-fund case, you are left with the same AA. Unless your IPS says not to rebalance into a downturn there shouldn’t be gross differences. You are struggling with mental accounting.
With the 3FP, you withdraw first (from bonds in my example)and then rebalance. With the Bal Index fund, they are continuously rebalancing, and then you withdraw.

1210
In a pure downturn you are correct that the 3FP, due to rebalance lag, will outperform. But there are other instances where that will reverse since the balanced fund could have a higher AA prior to equities rebounding. In the long run the differences are small (and it’s quite easy to model past results) but I disagree with looking at one scenario and saying a balanced fund is always losing.

If you truly want constant risk exposure, a self-balancing fund is a very convinient way to handle things. And if the downturn occurs over a single trading day, there should be literally no difference in outcome after a withdrawal and/or rebalance.

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Sandtrap
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Re: Balanced Funds and Sequence of Return Risk

Post by Sandtrap » Mon Jul 16, 2018 11:21 am

My simple brain reads this as a "beer in a bottle" vs "beer in a can" scenario.
Not sure.
Is that generally the comparison? :shock:
j

KlangFool
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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 11:30 am

willthrill81 wrote:
Mon Jul 16, 2018 11:07 am
rgs92 wrote:
Mon Jul 16, 2018 10:40 am
How do you know if stocks are down (or up)? This is the same as saying "stocks are low (or high)." It's very hard to tell.
(This is based on the idea in the comment that
With the 3FP, if stocks are down, you can withdraw from your bond fund
in the original post.)

This is the problem with the original idea. That is why I feel it is better to just withdraw in line with your existing asset allocation.
Yep. My biggest criticism for a while now with these kind of bucket strategies is how the buckets will be emptied and filled. Very few thinking about or employing this strategy seem to have clearly specified a priori how they will do so. Without such a plan, they're just winging it and leaving themselves open to all kinds of behavioral problems.

I do think that bucket strategies can work well, if for no other reason than they can make more intuitive sense than a traditional AA approach. But they are certainly more complicated, and many don't seem to understand that this complexity exists.
willthrill81,

I believe that traditional AA can work. But, the rebalancing probably has to be limited. For example, I will rebalance until my fixed income portion is down to X years of my annual expense. I will not go below that.

KlangFool

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willthrill81
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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Mon Jul 16, 2018 11:39 am

KlangFool wrote:
Mon Jul 16, 2018 11:30 am
willthrill81 wrote:
Mon Jul 16, 2018 11:07 am
rgs92 wrote:
Mon Jul 16, 2018 10:40 am
How do you know if stocks are down (or up)? This is the same as saying "stocks are low (or high)." It's very hard to tell.
(This is based on the idea in the comment that
With the 3FP, if stocks are down, you can withdraw from your bond fund
in the original post.)

This is the problem with the original idea. That is why I feel it is better to just withdraw in line with your existing asset allocation.
Yep. My biggest criticism for a while now with these kind of bucket strategies is how the buckets will be emptied and filled. Very few thinking about or employing this strategy seem to have clearly specified a priori how they will do so. Without such a plan, they're just winging it and leaving themselves open to all kinds of behavioral problems.

I do think that bucket strategies can work well, if for no other reason than they can make more intuitive sense than a traditional AA approach. But they are certainly more complicated, and many don't seem to understand that this complexity exists.
willthrill81,

I believe that traditional AA can work. But, the rebalancing probably has to be limited. For example, I will rebalance until my fixed income portion is down to X years of my annual expense. I will not go below that.

KlangFool
That sounds perfectly reasonable to me. In the event of a prolonged stock downturn, that can help to keep you from 'rebalancing into oblivion'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Hyperborea
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Re: Balanced Funds and Sequence of Return Risk

Post by Hyperborea » Mon Jul 16, 2018 11:55 am

The time to worry about sequence of return risks is in the early years of your retirement. If you haven't had bad returns during the first 5-10 years then with a "standard" 3.5/4% WR your portfolio will have grown larger. Unless you then up the withdrawal amount you have a large buffer to cover any future downturns. One way to minimize the impact of an early bad sequence is to have a cash/bond buffer (or bucket if you like) that you spend down over the first years and never need to then replenish. So, you would start with a portion of your portfolio in some allocation that you feel happy with and then leave it alone while you spend down the cash/bonds.

That is it described in bucket terms but it's also a rising equity glide path or if the size of your short term buffer is long enough to reach say your pension or SS you get to call it a liability matching portfolio. You do trade off some potential top end gain if the early years of retirement are not bad.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

FactualFran
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Re: Balanced Funds and Sequence of Return Risk

Post by FactualFran » Mon Jul 16, 2018 1:12 pm

1210sda wrote:
Mon Jul 16, 2018 10:42 am
MotoTrojan wrote:
Mon Jul 16, 2018 10:36 am
1210sda wrote:
Mon Jul 16, 2018 10:33 am
KlangFool wrote:
Mon Jul 16, 2018 10:23 am
If you rebalance, then, there is no difference between the 3FP and the balanced fund.

KlangFool
With the 3FP, if stocks are down, you can w/d bonds. With the Balanced Index fund,for example, every w/d is 60% equities and 40% fixed income. You can't choose which asset class to withdraw from.

1210
The net effect is equal, no? After the downturn, withdrawal, and most importantly a rebalance in the 3-fund case, you are left with the same AA. Unless your IPS says not to rebalance into a downturn there shouldn’t be gross differences. You are struggling with mental accounting.
With the 3FP, you withdraw first (from bonds in my example)and then rebalance. With the Bal Index fund, they are continuously rebalancing, and then you withdraw.
Concerning "With the Balanced Index fund,for example, every w/d is 60% equities and 40% fixed income", it is not necessarily the case that every withdrawal is 60% equities and 40% fixed income. The manager of the balanced fund may sell any combination of equities and fixed income to have 1) the cash for a withdrawal from the fund and 2) the holdings of the fund be an appropriate allocation between equity and fixed income. That allocation is not exactly 60% equities and 40% fixed income at all times.

If rebalancing is being done, the bottom line is the same for withdraw then rebalance and rebalance then withdraw. The initial condition is a portfolio with a certain balance. After the withdrawal and rebalance done in either order, the same dollar withdrawal has been made and the remaning balance is the same with both approaches with the portfolio rebalance.

There may be a difference in the dollar balances if rebalancing is not done. That difference may be positive or negative. If equities continue to decline, the difference will be positive: by not rebalancing into equities, the further dollar losses are less than they would have been had rebalancing had been done. If equities recover, the difference is negative: by not rebalacing into equities, the further dollar gains are less than they would have been had rebalancing been done.

randomguy
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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Mon Jul 16, 2018 1:41 pm

Hyperborea wrote:
Mon Jul 16, 2018 11:55 am
The time to worry about sequence of return risks is in the early years of your retirement. If you haven't had bad returns during the first 5-10 years then with a "standard" 3.5/4% WR your portfolio will have grown larger. Unless you then up the withdrawal amount you have a large buffer to cover any future downturns. One way to minimize the impact of an early bad sequence is to have a cash/bond buffer (or bucket if you like) that you spend down over the first years and never need to then replenish. So, you would start with a portion of your portfolio in some allocation that you feel happy with and then leave it alone while you spend down the cash/bonds.

That is it described in bucket terms but it's also a rising equity glide path or if the size of your short term buffer is long enough to reach say your pension or SS you get to call it a liability matching portfolio. You do trade off some potential top end gain if the early years of retirement are not bad.

Every study I have seen suggests it makes pretty much zero difference. The problem is there are 2 risks here
a) Volatility
b) low returns

Holding bonds helps with A but it doesn't help with B. Bonds had roughly the same returns as stocks over the first 15 years for the 1966 retiree so what you held just didn't matter much for normal retirement AA (call it 30/70 to 70/30). And the crashes weren't long enough to really hurt the high equity AA. Now there are other time periods (1929) where holding bonds early helps a bit and you can never discount the sleep well at night factor.

randomguy
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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Mon Jul 16, 2018 1:49 pm

KlangFool wrote:
Mon Jul 16, 2018 11:30 am
willthrill81 wrote:
Mon Jul 16, 2018 11:07 am

I do think that bucket strategies can work well, if for no other reason than they can make more intuitive sense than a traditional AA approach. But they are certainly more complicated, and many don't seem to understand that this complexity exists.
willthrill81,

I believe that traditional AA can work. But, the rebalancing probably has to be limited. For example, I will rebalance until my fixed income portion is down to X years of my annual expense. I will not go below that.

KlangFool
That is basically the same as a bucket strategy. The question is what do you do when you get there.
50/50 4% @ retirement and you want 10 years of FI = 12.5/12.5 stocks to bonds
stocks drop 50%
6.5/12.5
rebalance to
9.0/10.0

Where are you taking your money from to pay the bills? Do you start taking from FI? Are you going to start selling stocks to buy FI to bring you back to 50/50 AA?

All of these bucket strategies approaches are really simple when things go well. It is when things are crappy for extended periods that you end up facing some really tough choices and they are ones that hard to do under stress.

KlangFool
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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 2:19 pm

randomguy wrote:
Mon Jul 16, 2018 1:49 pm
KlangFool wrote:
Mon Jul 16, 2018 11:30 am
willthrill81 wrote:
Mon Jul 16, 2018 11:07 am

I do think that bucket strategies can work well, if for no other reason than they can make more intuitive sense than a traditional AA approach. But they are certainly more complicated, and many don't seem to understand that this complexity exists.
willthrill81,

I believe that traditional AA can work. But, the rebalancing probably has to be limited. For example, I will rebalance until my fixed income portion is down to X years of my annual expense. I will not go below that.

KlangFool
That is basically the same as a bucket strategy. The question is what do you do when you get there.
50/50 4% @ retirement and you want 10 years of FI = 12.5/12.5 stocks to bonds
stocks drop 50%
6.5/12.5
rebalance to
9.0/10.0

Where are you taking your money from to pay the bills? Do you start taking from FI? Are you going to start selling stocks to buy FI to bring you back to 50/50 AA?

All of these bucket strategies approaches are really simple when things go well. It is when things are crappy for extended periods that you end up facing some really tough choices and they are ones that hard to do under stress.
randomguy,

It is only a problem when the portfolio is 25X. If the portfolio is 50X, it is not a problem.

Let's assume the AA is 60/40 and the goal is 10 years of expense in Fixed income. Let's assume the retirement expense is 30K after the social security income of 30K.

The portfolio is 1.5 million. 10 years of fixed income = 300K. Even after the stock drop 50%, the portfolio will lose 30%. The portfolio will be 70% X 1.5 million = 1.05 million. Even after rebalancing to 60/40, the fixed income portion will be 400K. It is much more than 300K.

KlangFool

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willthrill81
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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Mon Jul 16, 2018 2:32 pm

randomguy wrote:
Mon Jul 16, 2018 1:49 pm
KlangFool wrote:
Mon Jul 16, 2018 11:30 am
willthrill81 wrote:
Mon Jul 16, 2018 11:07 am

I do think that bucket strategies can work well, if for no other reason than they can make more intuitive sense than a traditional AA approach. But they are certainly more complicated, and many don't seem to understand that this complexity exists.
willthrill81,

I believe that traditional AA can work. But, the rebalancing probably has to be limited. For example, I will rebalance until my fixed income portion is down to X years of my annual expense. I will not go below that.

KlangFool
That is basically the same as a bucket strategy. The question is what do you do when you get there.
50/50 4% @ retirement and you want 10 years of FI = 12.5/12.5 stocks to bonds
stocks drop 50%
6.5/12.5
rebalance to
9.0/10.0

Where are you taking your money from to pay the bills? Do you start taking from FI? Are you going to start selling stocks to buy FI to bring you back to 50/50 AA?

All of these bucket strategies approaches are really simple when things go well. It is when things are crappy for extended periods that you end up facing some really tough choices and they are ones that hard to do under stress.
That's why I think that people employing bucket strategies need to think long and hard about the specifics of how they want to implement this strategy, then examine how it would have performed in some of the rough years, like 1929, 1966, and 2000 to see whether they are comfortable with that compared to a traditional AA approach.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

randomguy
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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Mon Jul 16, 2018 2:34 pm

KlangFool wrote:
Mon Jul 16, 2018 2:19 pm
randomguy wrote:
Mon Jul 16, 2018 1:49 pm
KlangFool wrote:
Mon Jul 16, 2018 11:30 am
willthrill81 wrote:
Mon Jul 16, 2018 11:07 am

I do think that bucket strategies can work well, if for no other reason than they can make more intuitive sense than a traditional AA approach. But they are certainly more complicated, and many don't seem to understand that this complexity exists.
willthrill81,

I believe that traditional AA can work. But, the rebalancing probably has to be limited. For example, I will rebalance until my fixed income portion is down to X years of my annual expense. I will not go below that.

KlangFool
That is basically the same as a bucket strategy. The question is what do you do when you get there.
50/50 4% @ retirement and you want 10 years of FI = 12.5/12.5 stocks to bonds
stocks drop 50%
6.5/12.5
rebalance to
9.0/10.0

Where are you taking your money from to pay the bills? Do you start taking from FI? Are you going to start selling stocks to buy FI to bring you back to 50/50 AA?

All of these bucket strategies approaches are really simple when things go well. It is when things are crappy for extended periods that you end up facing some really tough choices and they are ones that hard to do under stress.
randomguy,

It is only a problem when the portfolio is 25X. If the portfolio is 50X, it is not a problem.

Let's assume the AA is 60/40 and the goal is 10 years of expense in Fixed income. Let's assume the retirement expense is 30K after the social security income of 30K.

The portfolio is 1.5 million. 10 years of fixed income = 300K. Even after the stock drop 50%, the portfolio will lose 30%. The portfolio will be 70% X 1.5 million = 1.05 million. Even after rebalancing to 60/40, the fixed income portion will be 400K. It is much more than 300K.

KlangFool
Nothing is a problem at 50x. It is like retiring in 1982. No matter what you do, you will win.

PFInterest
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Re: Balanced Funds and Sequence of Return Risk

Post by PFInterest » Mon Jul 16, 2018 2:35 pm

1210sda wrote:
Mon Jul 16, 2018 10:14 am
If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.

I suppose you could have some portion of your portfolio in cash to help reduce the impact.

This would seem to make balanced funds less attractive at the beginning of retirement. In mid to late retirement, SoR has less of an impact. (according to Kitces)

1210
using a balanced fund will have no impact on SORR. if anything will save an investor who cannot manage taking from different portions of their account.

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willthrill81
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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Mon Jul 16, 2018 3:45 pm

randomguy wrote:
Mon Jul 16, 2018 2:34 pm
Nothing is a problem at 50x. It is like retiring in 1982. No matter what you do, you will win.
Except that it might take you a decade or more to go from 25x to 50x. That could be a lot of 'lost time' just to pad what's already been a very conservative approach.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 4:18 pm

willthrill81 wrote:
Mon Jul 16, 2018 3:45 pm
randomguy wrote:
Mon Jul 16, 2018 2:34 pm
Nothing is a problem at 50x. It is like retiring in 1982. No matter what you do, you will win.
Except that it might take you a decade or more to go from 25x to 50x. That could be a lot of 'lost time' just to pad what's already been a very conservative approach.
willthrill81,

<<Except that it might take you a decade or more to go from 25x to 50x. >>

Or far less than a decade.

1) For folks that save 1 year of expense every year. Between the new contribution and growth, it does not take that long. It is in between 6 to 8 years.

Starting Net Worth $1,500,000
Annual Savings $60,000
Years
Annual Return Rate 6 7 8
5.00% $2,418,258 $2,599,171 $2,789,130
6.00% $2,546,298 $2,759,076 $2,984,620
7.00% $2,680,293 $2,927,913 $3,192,867
8.00% $2,820,467 $3,106,105 $3,414,593

2) For some other folks, if they are 50+, it meant getting closer to the retirement age.

KlangFool

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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Mon Jul 16, 2018 4:20 pm

KlangFool wrote:
Mon Jul 16, 2018 4:18 pm
willthrill81 wrote:
Mon Jul 16, 2018 3:45 pm
randomguy wrote:
Mon Jul 16, 2018 2:34 pm
Nothing is a problem at 50x. It is like retiring in 1982. No matter what you do, you will win.
Except that it might take you a decade or more to go from 25x to 50x. That could be a lot of 'lost time' just to pad what's already been a very conservative approach.
willthrill81,

<<Except that it might take you a decade or more to go from 25x to 50x. >>

Or far less than a decade.

1) For folks that save 1 year of expense every year. Between the new contribution and growth, it does not take that long. It is in between 6 to 8 years.

Starting Net Worth $1,500,000
Annual Savings $60,000
Years
Annual Return Rate 6 7 8
5.00% $2,418,258 $2,599,171 $2,789,130
6.00% $2,546,298 $2,759,076 $2,984,620
7.00% $2,680,293 $2,927,913 $3,192,867
8.00% $2,820,467 $3,106,105 $3,414,593

2) For some other folks, if they are 50+, it meant getting closer to the retirement age.

KlangFool
That's true, but it takes a very high savings rate to achieve that. I doubt that even most Bogleheads have a 50% savings rate like you or I do. And even if we could do it in 'just' seven more years, that still seems to me like a lot more guaranteed work just to add more safety to a portfolio that is, at least historically speaking, already quite safe (i.e. 25x). But that's just my take on it, and that's why it's called personal finance.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 4:26 pm

willthrill81 wrote:
Mon Jul 16, 2018 4:20 pm
KlangFool wrote:
Mon Jul 16, 2018 4:18 pm
willthrill81 wrote:
Mon Jul 16, 2018 3:45 pm
randomguy wrote:
Mon Jul 16, 2018 2:34 pm
Nothing is a problem at 50x. It is like retiring in 1982. No matter what you do, you will win.
Except that it might take you a decade or more to go from 25x to 50x. That could be a lot of 'lost time' just to pad what's already been a very conservative approach.
willthrill81,

<<Except that it might take you a decade or more to go from 25x to 50x. >>

Or far less than a decade.

1) For folks that save 1 year of expense every year. Between the new contribution and growth, it does not take that long. It is in between 6 to 8 years.

Starting Net Worth $1,500,000
Annual Savings $60,000
Years
Annual Return Rate 6 7 8
5.00% $2,418,258 $2,599,171 $2,789,130
6.00% $2,546,298 $2,759,076 $2,984,620
7.00% $2,680,293 $2,927,913 $3,192,867
8.00% $2,820,467 $3,106,105 $3,414,593

2) For some other folks, if they are 50+, it meant getting closer to the retirement age.

KlangFool
That's true, but it takes a very high savings rate to achieve that. I doubt that even most Bogleheads have a 50% savings rate like you or I do. And even if we could do it in 'just' seven more years, that still seems to me like a lot more guaranteed work just to add more safety to a portfolio that is, at least historically speaking, already quite safe (i.e. 25x). But that's just my take on it, and that's why it's called personal finance.
willthrill81,

In my case, I am old enough that I do not need 3 million to retire. Something north of 1.5 million is close enough for me to reach 50X since social security will cover about 30K of my expense.

KlangFool

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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Mon Jul 16, 2018 5:29 pm

KlangFool wrote:
Mon Jul 16, 2018 4:18 pm


Or far less than a decade.

1) For folks that save 1 year of expense every year. Between the new contribution and growth, it does not take that long. It is in between 6 to 8 years.

Starting Net Worth $1,500,000
Annual Savings $60,000
Years
Annual Return Rate 6 7 8
5.00% $2,418,258 $2,599,171 $2,789,130
6.00% $2,546,298 $2,759,076 $2,984,620
7.00% $2,680,293 $2,927,913 $3,192,867
8.00% $2,820,467 $3,106,105 $3,414,593

2) For some other folks, if they are 50+, it meant getting closer to the retirement age.

KlangFool
I always like how people use pessimistic SWR and optimistic returns.;) If you are going to be a 2% SWRer, you might as well use the pessimistic numbers. The you are looking at something like 13 years.
https://www.portfoliovisualizer.com/bac ... alBond1=50

So instead of retiring at 50, you retire at 63:). Thats a lot of working for a tiny bit of safety.

If you want to retire at the very,very conservative 30x or so, you do it in about 6 years. I bet that is what most people facing this situation would do. The would hit 50 and say I want a bit more safety. Then the markets collapse and the forgot about it for a year or two. They would hit 56 or so and decide that 30x is enough and they can handle the risk:) I think most people have a hard to understanding how much safer 30x is compared to 25x as 20% doesn't seem like much. But it is a lot when we are talking about edge cases. It is a lot easier to just double a number.

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 6:46 pm

randomguy wrote:
Mon Jul 16, 2018 5:29 pm
KlangFool wrote:
Mon Jul 16, 2018 4:18 pm


Or far less than a decade.

1) For folks that save 1 year of expense every year. Between the new contribution and growth, it does not take that long. It is in between 6 to 8 years.

Starting Net Worth $1,500,000
Annual Savings $60,000
Years
Annual Return Rate 6 7 8
5.00% $2,418,258 $2,599,171 $2,789,130
6.00% $2,546,298 $2,759,076 $2,984,620
7.00% $2,680,293 $2,927,913 $3,192,867
8.00% $2,820,467 $3,106,105 $3,414,593

2) For some other folks, if they are 50+, it meant getting closer to the retirement age.

KlangFool
I always like how people use pessimistic SWR and optimistic returns.;) If you are going to be a 2% SWRer, you might as well use the pessimistic numbers. The you are looking at something like 13 years.
https://www.portfoliovisualizer.com/bac ... alBond1=50

So instead of retiring at 50, you retire at 63:). Thats a lot of working for a tiny bit of safety.

If you want to retire at the very,very conservative 30x or so, you do it in about 6 years. I bet that is what most people facing this situation would do. The would hit 50 and say I want a bit more safety. Then the markets collapse and the forgot about it for a year or two. They would hit 56 or so and decide that 30x is enough and they can handle the risk:) I think most people have a hard to understanding how much safer 30x is compared to 25x as 20% doesn't seem like much. But it is a lot when we are talking about edge cases. It is a lot easier to just double a number.
randomguy,

<<I always like how people use pessimistic SWR and optimistic returns.;) >>

Now, I am confused. Do you consider 5% to 7% nominal return as an optimistic return for a 60/40 portfolio?

KlangFool

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Re: Balanced Funds and Sequence of Return Risk

Post by rixer » Mon Jul 16, 2018 7:10 pm

Doesn't Mr. Bogel say "stay the course, stay the course, stay the course"? I have a Lifestrategy fund and 3 yrs expenses (minus SS) in necessary expenses tucked away in a cd ladder in case of a downturn. When things go south, emotional decisions are made with regards to rebalancing. I'm guilty of that, it cost me money in the past so I feel better served with the balanced fund.

As a last resort, a person can still sell the balanced fund in the retirement account, put it 3 funds and draw from bonds if that's what you want to do. You aren't stuck forever if for some reason you need to bail. I really don't see an issue.

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Re: Balanced Funds and Sequence of Return Risk

Post by grabiner » Mon Jul 16, 2018 8:18 pm

1210sda wrote:
Mon Jul 16, 2018 10:14 am
If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.
It doesn't matter whether you have a portfolio of individual funds and rebalance them yourself, or have a balanced fund and let the fund manager rebalance. If you have a portfolio which is 40% stock, and the stock market loses 25% of its value, you have lost 10% of your total portfolio.

Suppose, for example, that you had $400K in stock and $600K in bonds. This became $300K in stock and $600K in bonds. You need to withdraw $50K, but since that isn't enough to get back to the desired allocation, you sell $50K of bonds and move $40K from bonds to stock. Your portfolio the next year is $340K in stock and $510K in bonds.

Now suppose that you have a balanced fund. It loses the same 10%, becoming $360K in stock and $540K in bonds. You withdraw $50K, which is taken proportionally, leaving an $850K fund which holds $340K in stock and $510K in bonds. You are in the same situation either way.

Thus, either way, you are subject to sequence of returns risk. The sequence of returns risk is the risk that your portfolio will have a large percentage loss when it is large, and make this up with a gain when it is smaller. That is what happened in this example; you lost $100K, and if you have a bull market several years later and gain 10% but have already spent half the portfolio, you will recover only $50K. You will thus be worse off than if the bull market came first (gain $100K) and the bear market later (probably losing $100K because the first-year bull market gave the portfolio more growth potential).
Wiki David Grabiner

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Re: Balanced Funds and Sequence of Return Risk

Post by fortyofforty » Mon Jul 16, 2018 8:49 pm

I think I'm paying the managers of my Balanced Index Fund to use market swings, additions, and withdrawals to maintain an approximate asset allocation. If the inflows and outflows can't handle the rebalancing, then sell the winners and buy the losers in my stead to maintain the desired asset allocation.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Mon Jul 16, 2018 8:56 pm

KlangFool wrote:
Mon Jul 16, 2018 6:46 pm

randomguy,

<<I always like how people use pessimistic SWR and optimistic returns.;) >>

Now, I am confused. Do you consider 5% to 7% nominal return as an optimistic return for a 60/40 portfolio?

KlangFool
Optimistic savings rate.:) Is 5-7% optimistic over 7 years? For a 2% SWR person it sure is. They should be using something like -3% real to have the same level of pessimism.:) The spread of going from 25x-50x is going to be about 3 to 15 years for people saving about .5x (that is about 30% savings rate for most people of gross income. approximate you situation may differ slightly based on taxes and future tax expectations) with a big cluster in the 5-7 year range. It is pretty easy for 40-50 year old to go lets work another 5 years and get to be really safe. It is another for that person to hit year 7 with 30x and decide, I am going to spend another 5+ years working to get up to 50x. At some point you have to start valuing your time more than safety. And heaven forbid we are talking about a 60 year old:)

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Mon Jul 16, 2018 10:02 pm

randomguy wrote:
Mon Jul 16, 2018 8:56 pm
KlangFool wrote:
Mon Jul 16, 2018 6:46 pm

randomguy,

<<I always like how people use pessimistic SWR and optimistic returns.;) >>

Now, I am confused. Do you consider 5% to 7% nominal return as an optimistic return for a 60/40 portfolio?

KlangFool
Optimistic savings rate.:) Is 5-7% optimistic over 7 years? For a 2% SWR person it sure is. They should be using something like -3% real to have the same level of pessimism.:) The spread of going from 25x-50x is going to be about 3 to 15 years for people saving about .5x (that is about 30% savings rate for most people of gross income. approximate you situation may differ slightly based on taxes and future tax expectations) with a big cluster in the 5-7 year range. It is pretty easy for 40-50 year old to go lets work another 5 years and get to be really safe. It is another for that person to hit year 7 with 30x and decide, I am going to spend another 5+ years working to get up to 50x. At some point you have to start valuing your time more than safety. And heaven forbid we are talking about a 60 year old:)
randomguy,

<<Optimistic savings rate.:) >>

That is my saving rate.

<<Is 5-7% optimistic over 7 years? For a 2% SWR person it sure is. They should be using something like -3% real to have the same level of pessimism.:) >>

3% real ~ 6% nominal.

<<The spread of going from 25x-50x is going to be about 3 to 15 years for people saving about .5x>>

I save double of that.

<< It is pretty easy for 40-50 year old to go lets work another 5 years and get to be really safe. It is another for that person to hit year 7 with 30x and decide, I am going to spend another 5+ years working to get up to 50x. At some point you have to start valuing your time more than safety. And heaven forbid we are talking about a 60 year old:)>>

Actually, I am agreeing with you. But, the reason is when a person hit 30X current expense and old enough to collect social security in a few years, the number effectively is 50X.

For example,

1.8 million at 57 years old. The person needs 5 X 60K = 300K to reach 62 years old. Then, at 62 years old, he could collect 30K per year. The 1.8 million - 300K = 1.5 million = 50 X 30K at 62 years old.

KlangFool

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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Mon Jul 16, 2018 11:05 pm

KlangFool wrote:
Mon Jul 16, 2018 10:02 pm
randomguy wrote:
Mon Jul 16, 2018 8:56 pm
KlangFool wrote:
Mon Jul 16, 2018 6:46 pm

randomguy,

<<I always like how people use pessimistic SWR and optimistic returns.;) >>

Now, I am confused. Do you consider 5% to 7% nominal return as an optimistic return for a 60/40 portfolio?

KlangFool
Optimistic savings rate.:) Is 5-7% optimistic over 7 years? For a 2% SWR person it sure is. They should be using something like -3% real to have the same level of pessimism.:) The spread of going from 25x-50x is going to be about 3 to 15 years for people saving about .5x (that is about 30% savings rate for most people of gross income. approximate you situation may differ slightly based on taxes and future tax expectations) with a big cluster in the 5-7 year range. It is pretty easy for 40-50 year old to go lets work another 5 years and get to be really safe. It is another for that person to hit year 7 with 30x and decide, I am going to spend another 5+ years working to get up to 50x. At some point you have to start valuing your time more than safety. And heaven forbid we are talking about a 60 year old:)
randomguy,

<<Optimistic savings rate.:) >>

That is my saving rate.

<<Is 5-7% optimistic over 7 years? For a 2% SWR person it sure is. They should be using something like -3% real to have the same level of pessimism.:) >>

3% real ~ 6% nominal.

<<The spread of going from 25x-50x is going to be about 3 to 15 years for people saving about .5x>>

I save double of that.

<< It is pretty easy for 40-50 year old to go lets work another 5 years and get to be really safe. It is another for that person to hit year 7 with 30x and decide, I am going to spend another 5+ years working to get up to 50x. At some point you have to start valuing your time more than safety. And heaven forbid we are talking about a 60 year old:)>>

Actually, I am agreeing with you. But, the reason is when a person hit 30X current expense and old enough to collect social security in a few years, the number effectively is 50X.

For example,

1.8 million at 57 years old. The person needs 5 X 60K = 300K to reach 62 years old. Then, at 62 years old, he could collect 30K per year. The 1.8 million - 300K = 1.5 million = 50 X 30K at 62 years old.

KlangFool
You misread what I wrote. That is a minus sign not an approximate one. Hyper conservative real returns over 5 years are negative. We are talking 0% nominal not 6%. That is what bottom 10% returns look like.

yep you save double. It doesn't change the math much. Your upper end is like 13 years and your lower end basically doesn't change because that is all about your portfolio almost doubling in size in 3 years.

I sort of agree with your idea. But you are changing your goal from 50x + SS in 5-7 years to retiring with 30x+SS in 5-7 years. The question then comes how does your bucket scheme work with 30x instead of 50x that started this whole discussion
from your post
Let's assume the AA is 60/40 and the goal is 10 years of expense in Fixed income. Let's assume the retirement expense is 30K after the social security income of 30K.


at 50x
The portfolio is 1.5 million. 10 years of fixed income = 300K. Even after the stock drop 50%, the portfolio will lose 30%. The portfolio will be 70% X 1.5 million = 1.05 million. Even after rebalancing to 60/40, the fixed income portion will be 400K. It is much more than 300K.
and I hope I did this math right
at 30x
The portfolio is 900k. 10 years of fixed income = 300K. Even after the stock drop 50%, the portfolio will lose 30%. The portfolio will be 70% X 900k = 630k. Even after rebalancing to 60/40, the fixed income portion will be 252k. It is much less than 300K.

So now what AA do you hold, and what are your selling to generate 30k of cash? You are facing the same question every bucket person has about when to spend the bucket and when to refill it. When you look into it I think you will find whatever scheme you pick helps in certain cases and hurts in others depending on what happens in the following years.

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Tue Jul 17, 2018 7:29 am

randomguy wrote:
Mon Jul 16, 2018 11:05 pm
KlangFool wrote:
Mon Jul 16, 2018 10:02 pm

Let's assume the AA is 60/40 and the goal is 10 years of expense in Fixed income. Let's assume the retirement expense is 30K after the social security income of 30K.


at 50x
The portfolio is 1.5 million. 10 years of fixed income = 300K. Even after the stock drop 50%, the portfolio will lose 30%. The portfolio will be 70% X 1.5 million = 1.05 million. Even after rebalancing to 60/40, the fixed income portion will be 400K. It is much more than 300K.
and I hope I did this math right
at 30x
The portfolio is 900k. 10 years of fixed income = 300K. Even after the stock drop 50%, the portfolio will lose 30%. The portfolio will be 70% X 900k = 630k. Even after rebalancing to 60/40, the fixed income portion will be 252k. It is much less than 300K.

So now what AA do you hold, and what are your selling to generate 30k of cash? You are facing the same question every bucket person has about when to spend the bucket and when to refill it. When you look into it I think you will find whatever scheme you pick helps in certain cases and hurts in others depending on what happens in the following years.
The portfolio is 900K and 60/40. That meant 540K of stock and 360K of the bond. The stock drops 50% and down to 270K. Under this bucket system, the minimum is 300K of the bond. So, the person sells 360K - 300K = 60K of bond to buy stock.

The final AA is 270K+60K = 330K of stock and 300K of the bond.

The AA is no longer 60/40.

KlangFool

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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Tue Jul 17, 2018 8:50 am

KlangFool wrote:
Tue Jul 17, 2018 7:29 am

The portfolio is 900K and 60/40. That meant 540K of stock and 360K of the bond. The stock drops 50% and down to 270K. Under this bucket system, the minimum is 300K of the bond. So, the person sells 360K - 300K = 60K of bond to buy stock.

The final AA is 270K+60K = 330K of stock and 300K of the bond.

The AA is no longer 60/40.

KlangFool
Ok. What are you selling the next year to pay the bills? Imagine you have a 10 year flat market coming up. Do you let the AA go to almost 0/100, do you spend your bucket and go to 100/0 or do you try and maintain something like 50/50?

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Tue Jul 17, 2018 9:07 am

randomguy wrote:
Tue Jul 17, 2018 8:50 am
KlangFool wrote:
Tue Jul 17, 2018 7:29 am

The portfolio is 900K and 60/40. That meant 540K of stock and 360K of the bond. The stock drops 50% and down to 270K. Under this bucket system, the minimum is 300K of the bond. So, the person sells 360K - 300K = 60K of bond to buy stock.

The final AA is 270K+60K = 330K of stock and 300K of the bond.

The AA is no longer 60/40.

KlangFool
Ok. What are you selling the next year to pay the bills? Imagine you have a 10 year flat market coming up. Do you let the AA go to almost 0/100, do you spend your bucket and go to 100/0 or do you try and maintain something like 50/50?
randomguy,

<<do you spend your bucket and go to 100/0>>

Under this system, you will spend your bucket and go down to 100/0.

<<Imagine you have a 10 year flat market coming up. >>

If that happened, in year 5 or earlier than that, the person should drastically lower his/her expense.

KlangFool

P.S.: This is not the system that I use for my own personal finance. I do not trust myself to rebalance in the face of recession.

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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Tue Jul 17, 2018 10:51 am

KlangFool wrote:
Tue Jul 17, 2018 9:07 am

randomguy,

<<do you spend your bucket and go to 100/0>>

Under this system, you will spend your bucket and go down to 100/0.

<<Imagine you have a 10 year flat market coming up. >>

If that happened, in year 5 or earlier than that, the person should drastically lower his/her expense.

KlangFool

P.S.: This is not the system that I use for my own personal finance. I do not trust myself to rebalance in the face of recession.
Do you think anyone would be comfortable hitting year 10 at 100/0? And yes cutting expenses is an option but you could do the same thing with any portfolio. In the real world is hard to figure out when things are going bad The 2000 retiree had 3 bad years, 5 good ones and then a really bad 12 months. Figuring out when to cut wasn't remotely clear. 1966 was even tougher.

Again this all about how complex bucket systems get and the choices you end up having to make.

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Tue Jul 17, 2018 11:10 am

randomguy wrote:
Tue Jul 17, 2018 10:51 am
KlangFool wrote:
Tue Jul 17, 2018 9:07 am

randomguy,

<<do you spend your bucket and go to 100/0>>

Under this system, you will spend your bucket and go down to 100/0.

<<Imagine you have a 10 year flat market coming up. >>

If that happened, in year 5 or earlier than that, the person should drastically lower his/her expense.

KlangFool

P.S.: This is not the system that I use for my own personal finance. I do not trust myself to rebalance in the face of recession.
Do you think anyone would be comfortable hitting year 10 at 100/0? And yes cutting expenses is an option but you could do the same thing with any portfolio. In the real world is hard to figure out when things are going bad The 2000 retiree had 3 bad years, 5 good ones and then a really bad 12 months. Figuring out when to cut wasn't remotely clear. 1966 was even tougher.

Again this all about how complex bucket systems get and the choices you end up having to make.
randomguy,

<<Do you think anyone would be comfortable hitting year 10 at 100/0? >>

1) No. I probably move to some other LCOL area way before that.

2) My planning assumes that 0% return for 5 years is the worst case. I believe that money would be least of the worry if that happened. I kept some physical gold for that scenario.

<<Again this all about how complex bucket systems get and the choices you end up having to make.>>

3) Yes, it is complicated.

4) But, I had plenty of practice since I was unemployed for more than 1 year a few times.

5) At this moment, if the recession hits, the market is down, and I am unemployed, I probably do not have to sell any investment for my living expense for 2 to 3 years. After 2 to 3 years, then, I have to evaluate what to do next.

KlangFool

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Re: Balanced Funds and Sequence of Return Risk

Post by nedsaid » Tue Jul 17, 2018 11:16 am

Sandtrap wrote:
Mon Jul 16, 2018 11:21 am
My simple brain reads this as a "beer in a bottle" vs "beer in a can" scenario.
Not sure.
Is that generally the comparison? :shock:
j
Except that beer in a bottle tastes better. :wink:
A fool and his money are good for business.

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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Tue Jul 17, 2018 6:44 pm

KlangFool wrote:
Tue Jul 17, 2018 11:10 am


2) My planning assumes that 0% return for 5 years is the worst case. I believe that money would be least of the worry if that happened. I kept some physical gold for that scenario.
0% is pretty bad but it isn't end of the world case. 2000-9 was 0% real for 60/40 funds for 10 years (the exact numbers depend on your bond choice if you made a fraction of a percent or lost it). The 70s were even worse. I personally don't think we were int he end of the world case in either one. Gold did do well during both periods. Now if that is just a coincidence or not I will leave up to you:)

For 5 year periods this is the type of return you should expect to see a 2-3 times during your investment career of 60+ years. A rare event but not so rate that you shouldn't have a plan to deal with it. Granted the odds of it occurring right at the start of your retirement are pretty low:)

KlangFool
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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Tue Jul 17, 2018 7:18 pm

randomguy wrote:
Tue Jul 17, 2018 6:44 pm
KlangFool wrote:
Tue Jul 17, 2018 11:10 am


2) My planning assumes that 0% return for 5 years is the worst case. I believe that money would be least of the worry if that happened. I kept some physical gold for that scenario.
0% is pretty bad but it isn't end of the world case. 2000-9 was 0% real for 60/40 funds for 10 years (the exact numbers depend on your bond choice if you made a fraction of a percent or lost it). The 70s were even worse. I personally don't think we were int he end of the world case in either one. Gold did do well during both periods. Now if that is just a coincidence or not I will leave up to you:)

For 5 year periods this is the type of return you should expect to see a 2-3 times during your investment career of 60+ years. A rare event but not so rate that you shouldn't have a plan to deal with it. Granted the odds of it occurring right at the start of your retirement are pretty low:)
randomguy,

I think we are not talking about the same thing.

What I meant was the stock market stayed down for 5 years with a 0% or negative real return every year.

<<0% is pretty bad but it isn't end of the world case. 2000-9 was 0% real for 60/40 funds for 10 years (the exact numbers depend on your bond choice if you made a fraction of a percent or lost it). >>

I think what you meant was over that 10 years, the return was 0% return. But, there was up and down year over that 10 years.

KlangFool

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Re: Balanced Funds and Sequence of Return Risk

Post by randomguy » Tue Jul 17, 2018 11:21 pm

KlangFool wrote:
Tue Jul 17, 2018 7:18 pm


randomguy,

I think we are not talking about the same thing.

What I meant was the stock market stayed down for 5 years with a 0% or negative real return every year.

<<0% is pretty bad but it isn't end of the world case. 2000-9 was 0% real for 60/40 funds for 10 years (the exact numbers depend on your bond choice if you made a fraction of a percent or lost it). >>

I think what you meant was over that 10 years, the return was 0% return. But, there was up and down year over that 10 years.

KlangFool
Sure. But if at the end of 5 years you are off 30% real, does it really matter if you go there by a 50% drop and a rally or by 5 years of paper cuts? You are still hitting year 5 and having to decide what the heck do to with a depleted portfolio. Again for any scheme you come up with it, you should back test against 1929,1966, 1973 (yeah it is a bit of overlap with 66 but starting off with 2 horrid years is a bit different), and 2000 to see what potential choices you are faced with. The tough part is ignoring your knowledge of the future (i.e. hit 1982 or 2009 and everything is peaches) when thinking about what you should do.

This is really off thread but again the overall point is that once you decide to float your AA (spend your bonds before stocks, i.e. buckets), you can get slightly different results than holding a fixed AA but you aren't avoiding sequence of return risks. You are making bets that may or may not pay off and may lead to you having some interesting choices.

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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Wed Jul 18, 2018 12:38 am

randomguy wrote:
Tue Jul 17, 2018 11:21 pm
This is really off thread but again the overall point is that once you decide to float your AA (spend your bonds before stocks, i.e. buckets), you can get slightly different results than holding a fixed AA but you aren't avoiding sequence of return risks. You are making bets that may or may not pay off and may lead to you having some interesting choices.
The only way to eliminate sequence of return risk from your portfolio is to use a percentage-of-portfolio approach to withdrawals. But that 'saves' your portfolio from ruin at the expense of potentially ravaging your portfolio's income.

The next best method is to use the perpetual withdrawal rate (whatever that is precisely but likely around 3%), at least until sequence of returns risk is no longer a major threat.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Balanced Funds and Sequence of Return Risk

Post by andrew99999 » Wed Jul 18, 2018 1:56 am

willthrill81 wrote:
Wed Jul 18, 2018 12:38 am
The next best method is to use the perpetual withdrawal rate (whatever that is precisely but likely around 3%), at least until sequence of returns risk is no longer a major threat.
What defines whether SOR risk is no longer a major threat?

Withdrawal rate -wise, it seems like 3% makes it no longer a threat (?)
Time-wise, if you retire with 50-60 years remaining, then do you think SOR risk only starts to reduce once you enter maybe 3 decades remaining?

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Re: Balanced Funds and Sequence of Return Risk

Post by KlangFool » Wed Jul 18, 2018 6:20 am

randomguy wrote:
Tue Jul 17, 2018 11:21 pm
KlangFool wrote:
Tue Jul 17, 2018 7:18 pm


randomguy,

I think we are not talking about the same thing.

What I meant was the stock market stayed down for 5 years with a 0% or negative real return every year.

<<0% is pretty bad but it isn't end of the world case. 2000-9 was 0% real for 60/40 funds for 10 years (the exact numbers depend on your bond choice if you made a fraction of a percent or lost it). >>

I think what you meant was over that 10 years, the return was 0% return. But, there was up and down year over that 10 years.

KlangFool
Sure. But if at the end of 5 years you are off 30% real, does it really matter if you go there by a 50% drop and a rally or by 5 years of paper cuts? You are still hitting year 5 and having to decide what the heck do to with a depleted portfolio. Again for any scheme you come up with it, you should back test against 1929,1966, 1973 (yeah it is a bit of overlap with 66 but starting off with 2 horrid years is a bit different), and 2000 to see what potential choices you are faced with. The tough part is ignoring your knowledge of the future (i.e. hit 1982 or 2009 and everything is peaches) when thinking about what you should do.

This is really off thread but again the overall point is that once you decide to float your AA (spend your bonds before stocks, i.e. buckets), you can get slightly different results than holding a fixed AA but you aren't avoiding sequence of return risks. You are making bets that may or may not pay off and may lead to you having some interesting choices.
randomguy,

<<Sure. But if at the end of 5 years you are off 30% real, does it really matter if you go there by a 50% drop and a rally or by 5 years of paper cuts? >>

It matters if you need to sell some stock during that 5 or 10 years.

<<Again for any scheme you come up with it, you should back test against 1929,1966, 1973 >>

Why? I just assume the worst. The market drops by 50% at the beginning of the period and no recovery for the next 5 or 10 years.

KlangFool
Last edited by KlangFool on Wed Jul 18, 2018 6:52 am, edited 1 time in total.

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Re: Balanced Funds and Sequence of Return Risk

Post by Grt2bOutdoors » Wed Jul 18, 2018 6:33 am

1210sda wrote:
Mon Jul 16, 2018 10:14 am
If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.

I suppose you could have some portion of your portfolio in cash to help reduce the impact.

This would seem to make balanced funds less attractive at the beginning of retirement. In mid to late retirement, SoR has less of an impact. (according to Kitces)

1210
Has Kitces shown conclusively with actual real life examples where a traditional 60/40 balanced allocation has failed when using IRS mandated RMDs? I’m not talking about withdrawal rates that exceed 4% at age 70. If not, then what is the purpose of writing about it?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Wed Jul 18, 2018 8:58 am

andrew99999 wrote:
Wed Jul 18, 2018 1:56 am
willthrill81 wrote:
Wed Jul 18, 2018 12:38 am
The next best method is to use the perpetual withdrawal rate (whatever that is precisely but likely around 3%), at least until sequence of returns risk is no longer a major threat.
What defines whether SOR risk is no longer a major threat?
Sequence of returns risk is, by definition, not an issue for you when the particular sequence of returns you experience has no impact on whether your withdrawal strategy will succeed or fail.
andrew99999 wrote:
Wed Jul 18, 2018 1:56 am
Withdrawal rate -wise, it seems like 3% makes it no longer a threat (?)
This is the only controversial element to what I stated. Based on the data available to us, it seems that the perpetual withdrawal rate for a global, balanced portfolio has been around 3%. This is 3% is referring to starting the withdrawal phase with a withdrawal of 3% of the portfolio's balance, then subsequently increasing that dollar amount by inflation every year. Whether 3% will continue to be the case going forward is debatable and unknown.
andrew99999 wrote:
Wed Jul 18, 2018 1:56 am
Time-wise, if you retire with 50-60 years remaining, then do you think SOR risk only starts to reduce once you enter maybe 3 decades remaining?
I recently provided a detailed explanation of that in this post.

The very short version is that if at any time your fixed dollar withdrawals drop to 3% (if you accept this as the perpetual withdrawal rate going forward), then sequence of returns risk is no longer an issue. Your portfolio doesn't 'care' whether you've been making withdrawals for 10 or 30 years.

Also, remember that withdrawing a fixed percentage of a portfolio cannot completely deplete a portfolio; it is mathematically impossible.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Balanced Funds and Sequence of Return Risk

Post by willthrill81 » Wed Jul 18, 2018 9:01 am

Grt2bOutdoors wrote:
Wed Jul 18, 2018 6:33 am
1210sda wrote:
Mon Jul 16, 2018 10:14 am
If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.

I suppose you could have some portion of your portfolio in cash to help reduce the impact.

This would seem to make balanced funds less attractive at the beginning of retirement. In mid to late retirement, SoR has less of an impact. (according to Kitces)

1210
Has Kitces shown conclusively with actual real life examples where a traditional 60/40 balanced allocation has failed when using IRS mandated RMDs? I’m not talking about withdrawal rates that exceed 4% at age 70. If not, then what is the purpose of writing about it?
It is mathematically impossible to completely deplete a portfolio using the standard RMD rules because they only specify that a percentage of the portfolio be withdrawn, an increasing one over time as life expectancy declines. So unless you defined "failed" by something other than literally unning out of money, no.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Balanced Funds and Sequence of Return Risk

Post by Grt2bOutdoors » Wed Jul 18, 2018 11:50 am

willthrill81 wrote:
Wed Jul 18, 2018 9:01 am
Grt2bOutdoors wrote:
Wed Jul 18, 2018 6:33 am
1210sda wrote:
Mon Jul 16, 2018 10:14 am
If you are in the withdrawal phase, are Balanced Funds (Balanced Index funds, Lifestrategy funds, target date funds, etc.) affected more by Sequence of Return risk than individual funds such as in the 3 fund portfolio?

With the 3FP, if stocks are down, you can withdraw from your bond fund (also helps with your AA). With the balanced funds, a withdrawal is taken from both stocks and bonds, so you are selling stocks "low" instead of "high". Grabiner has been saying this and I didn't quite appreciate what he was saying. I think I do now.

I suppose you could have some portion of your portfolio in cash to help reduce the impact.

This would seem to make balanced funds less attractive at the beginning of retirement. In mid to late retirement, SoR has less of an impact. (according to Kitces)

1210
Has Kitces shown conclusively with actual real life examples where a traditional 60/40 balanced allocation has failed when using IRS mandated RMDs? I’m not talking about withdrawal rates that exceed 4% at age 70. If not, then what is the purpose of writing about it?
It is mathematically impossible to completely deplete a portfolio using the standard RMD rules because they only specify that a percentage of the portfolio be withdrawn, an increasing one over time as life expectancy declines. So unless you defined "failed" by something other than literally unning out of money, no.
Exactly. My subtle point is that this is basically his attempt to create confusion and nervousness amongst the sheeple who waste time reading his blog and get more customers. Hence, I don't waste my time with it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Balanced Funds and Sequence of Return Risk

Post by FactualFran » Wed Jul 18, 2018 2:28 pm

willthrill81 wrote:
Wed Jul 18, 2018 9:01 am
It is mathematically impossible to completely deplete a portfolio using the standard RMD rules because they only specify that a percentage of the portfolio be withdrawn, an increasing one over time as life expectancy declines. So unless you defined "failed" by something other than literally unning out of money, no.
It is mathematically possible to complete deplete a portfolio using the standard RMD rule. The RMD amount for a year is a percentage of the portfolio balance at the end of the previous year. It is mathematically possible that when the RMD is taken the portfolio balance is less than the RMD amount. It is mathematically possible, but it depends on the portfolio having a very large year-to-date loss as of the date that the RMD is taken.

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