Bill Bernstein: "Take risk off the table"

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
nisiprius
Advisory Board
Posts: 42862
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bill Bernstein: "Take risk off the table"

Post by nisiprius »

I've been doing a very slow double-take. He says:
If the market goes up 50 percent, maybe I want to reduce my stock allocation by 4 percent. So there’s a 12.5 ratio between those two numbers.... Pick your number, pick your ratio.
He obviously consider 12.5 to be a decent choice. Very well, suppose it is 1993 and you are at 50/50 stocks/bond and the Dow is at 2,500. The Dow is now at 16,000, which is over a 640% increase, so you would have decreased your stock allocation by 640% / 12.5 = 51.3%. That is, to zero. (Or would you be shorting them?) In other words, following this rule will inevitably (one hopes inevitably, because one hopes the stock market inevitable rises) reduce your stock allocation to zero, and a good deal faster age-related "glide slopes" would.

So, he hasn't really stated the rule operationally. There are some implicit assumptions about what it means for the stock market to "go up." Just going up over twenty years doesn't count.

Which isn't surprising because he doesn't give any backtested results to show how his valuation-adjusted allocation compares with staying the course at a high stock allocation, or staying the course at a low stock allocation. I think he's saying that following his method will give you about the same results but make you feel better; or give you about the same results but avoid exceeding your risk tolerance. Or, maybe even, effectively give you a higher risk tolerance by letting you have a higher stock allocation.

It is definitely a form of market timing, but I don't necessarily have a knee-jerk reaction to that. It is definitely not staying the course, but increasingly I am thinking that staying the course is somewhat misleading--nobody does it, nobody can do it, the people who advocate staying the course constantly change the course they advocate staying; staying the course means "make only slow gradual changes, and take 5 years to make them," even though it's justified by pointing to what-if-you'd-stayed-the-course-since-1926.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Re: Bill Bernstein: "Take risk off the table"

Post by LH »

Just another indication that passive indexors don't have to worry about everyone becoming passive : )

Timing is human nature.

You may feel wise, but you won't be tracked.

I will eagerly await the arrival of a mutual fund that puts these simple timing methods to the test of tracking.

Which of course, will never happen.

If it did, it would not work. Deep down, all the passive indexors who are simultneously proponents of timing, even timing at the margins, know this.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Bill Bernstein: "Take risk off the table"

Post by YDNAL »

nisiprius wrote:I've been doing a very slow double-take. He says:
If the market goes up 50 percent, maybe I want to reduce my stock allocation by 4 percent. So there’s a 12.5 ratio between those two numbers.... Pick your number, pick your ratio.
He obviously consider 12.5 to be a decent choice. Very well, suppose it is 1993 and you are at 50/50 stocks/bond and the Dow is at 2,500. The Dow is now at 16,000, which is over a 640% increase, so you would have decreased your stock allocation by 640% / 12.5 = 51.3%. That is, to zero.
You know better than that, 50% doesn't go to 0%. It says 4% per 50% market increase.

Code: Select all

	      2,500.00 	50%
+50%	  3,750.00 	46%
+50%	  5,625.00 	42%
+50%	  8,437.50 	38%
+50%	 12,656.25 	34%
+25%	 15,820.31 	32%
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
User avatar
nisiprius
Advisory Board
Posts: 42862
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bill Bernstein: "Take risk off the table"

Post by nisiprius »

YDNAL wrote:
nisiprius wrote:I've been doing a very slow double-take. He says:
If the market goes up 50 percent, maybe I want to reduce my stock allocation by 4 percent. So there’s a 12.5 ratio between those two numbers.... Pick your number, pick your ratio.
He obviously consider 12.5 to be a decent choice. Very well, suppose it is 1993 and you are at 50/50 stocks/bond and the Dow is at 2,500. The Dow is now at 16,000, which is over a 640% increase, so you would have decreased your stock allocation by 640% / 12.5 = 51.3%. That is, to zero.
You know better than that, 50% doesn't go to 0%. It says 4% per 50% market increase.

Code: Select all

	      2,500.00 	50%
+50%	  3,750.00 	46%
+50%	  5,625.00 	42%
+50%	  8,437.50 	38%
+50%	 12,656.25 	34%
+25%	 15,820.31 	32%
:oops: Thanks.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
Aptenodytes
Posts: 3768
Joined: Tue Feb 08, 2011 8:39 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Aptenodytes »

I agree with Nisi that Bernstein's advice is underspecified and would lead to bizarre results if applied literally. But there's a germ of truth there that, if spelled out more completely, is I think completely obvious.

When you initially set your AA and its glide path, you have in mind an idea of how much you are going to save over time, what the market might do, and what your need and ability to take risk are. The first two judgments are made under uncertainty.

If you find yourself in a position, several years after you set up your AA and glide path, having come through an extended period of very high savings and very high market returns, you could easily find yourself in a position where your need to take risk is far lower than you anticipated when you first made your plan. Although in theory an IPS could anticipate all such contingencies and have branching points for all of them, let's be realistic about this and assume that most of us, even the very diligent, don't spell all that out in advance.

All Bernstein is saying, I think, is that if you find yourself in such a position you should acknowledge that your need for risk has changed and adjust your AA accordingly. It would be the functional equivalent of getting an unexpected windfall, which I think all of us would agree ought to trigger a fresh look at your need to take risk.

So it isn't the case that each 50% rise in the stock market triggers a ratcheting down of your equity percentage; someone early in their savings career would not have anything to gain from that and much to lose. What matters is the size of your portfolio relative to your needs. If that ratio bumps up far ahead of expectations, take a fresh look at your need to take risk and adjust accordingly.

In my case, three years ago I had about 80% of my rough target to make up, but now I'm at more like 50%. That's a big jump in a few years, far ahead of the path I thought likely back then. Moreover, that jump has pushed me to a situation where I'll make my initial target just with anticipated savings and 1% returns. So I find myself taking Bernstein's advice very seriously.
User avatar
nisiprius
Advisory Board
Posts: 42862
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bill Bernstein: "Take risk off the table"

Post by nisiprius »

Choice a: Pick a high stock allocation and hold it.
Choice b: Pick a low stock allocation and hold it.
Choice c: Do some gentle, gradual, valuation based market timing of the sort suggested by Dr. Bernstein, so that your stock allocation is lower after a longish period of rapid growth, and higher after a longish period of rapid decline.

A serious statement, not a rhetorical question. What, exactly, are the tradeoffs between these three strategies supposed to be?

Is choice C "same theoretical backtested results as A, but higher probability of actually sticking to plan?"
Is choice C "same chance of sticking to the plan as B, but higher theoretical backtested results?"
Is it "Results of A, B, and C are virtually indistinguishable assuming prudent, tolerable, non-extreme values for low and high stock allocations, but C allows better sleep?"

What is being claimed?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Leesbro63
Posts: 6946
Joined: Mon Nov 08, 2010 4:36 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Leesbro63 »

All of this talk assumes no taxes due when making these portfolio changes. What about for taxable investors in high brackets with big gains?
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Bill Bernstein: "Take risk off the table"

Post by Rodc »

Although in theory an IPS could anticipate all such contingencies and have branching points for all of them, let's be realistic about this and assume that most of us, even the very diligent, don't spell all that out in advance.
The way to spell that out is simple. Every 5 years you will do a complete from scratch analysis of where you want to be given all currently available data and how best to get there. You don't have to spell out the entire tree of possibilities. There are other similar options.

I also do a minor analysis every Jan 1st as sometimes my 401K has new/better options. For example my best option for international small value is currently Swab's, and in the US Vanguard's. If they added DFA funds in that space I'd take a hard look at changing funds.

I don't think a "4%" rule that spells out what income I will withdraw 20 years from now makes sense. I don't think a rule that spells out precisely what else I might do including stock/bond allocation 20 years from now makes sense either.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Bill Bernstein: "Take risk off the table"

Post by umfundi »

Déjà Vu is not a prediction
User avatar
Rick Ferri
Posts: 9279
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: Bill Bernstein: "Take risk off the table"

Post by Rick Ferri »

18x earnings is not overvalued when GDP is rising at >2%, inflation is <2% and interest rates on 10-year bonds are 2.7%.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Topic Author
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Browser »

I also do a minor analysis every Jan 1st as sometimes my 401K has new/better options. For example my best option for international small value is currently Swab's,
What Swabs? I didn't know you could even get ISV anywhere.
We don't know where we are, or where we're going -- but we're making good time.
Bmac
Posts: 353
Joined: Sun Mar 03, 2013 8:58 am
Location: Seattle

Re: Bill Bernstein: "Take risk off the table"

Post by Bmac »

Leesbro63 wrote:All of this talk assumes no taxes due when making these portfolio changes. What about for taxable investors in high brackets with big gains?
+1

Still in accumulation phase in high tax bracket. We have essentially 100% of tax-deferred investments in fixed income (various bond funds) and fully fund one 401k, one 403b, one TIRA, one back door Roth IRA and one family HSA annually into fixed income, but this represents roughly 30% of overall portfolio with the balance predominately in equity index funds in taxable accounts that, due to the last few years, all have sizeable unrealized taxable gains. I realize this is a good problem to have, but beyond putting dividends and new cash into fixed income, how do I materially decrease portfolio risk without taking a substantial tax hit (at least while still in a high tax bracket)?
Leesbro63
Posts: 6946
Joined: Mon Nov 08, 2010 4:36 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Leesbro63 »

Bmac wrote:
Leesbro63 wrote:All of this talk assumes no taxes due when making these portfolio changes. What about for taxable investors in high brackets with big gains?
+1

Still in accumulation phase in high tax bracket. We have essentially 100% of tax-deferred investments in fixed income (various bond funds) and fully fund one 401k, one 403b, one TIRA, one back door Roth IRA and one family HSA annually into fixed income, but this represents roughly 30% of overall portfolio with the balance predominately in equity index funds in taxable accounts that, due to the last few years, all have sizeable unrealized taxable gains. I realize this is a good problem to have, but beyond putting dividends and new cash into fixed income, how do I materially decrease portfolio risk without taking a substantial tax hit (at least while still in a high tax bracket)?
Yup. Pretty much my own situation. There have been a few threads lately about this (one started by me) and the consensus seems to be that living with higher-than-wanted equity risk is better than absorbing the permanent decrease in portfolio due to a big tax hit of rebalancing.
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: Bill Bernstein: "Take risk off the table"

Post by baw703916 »

nisiprius wrote:Choice a: Pick a high stock allocation and hold it.
Choice b: Pick a low stock allocation and hold it.
Choice c: Do some gentle, gradual, valuation based market timing of the sort suggested by Dr. Bernstein, so that your stock allocation is lower after a longish period of rapid growth, and higher after a longish period of rapid decline.

A serious statement, not a rhetorical question. What, exactly, are the tradeoffs between these three strategies supposed to be?

Is choice C "same theoretical backtested results as A, but higher probability of actually sticking to plan?"
Is choice C "same chance of sticking to the plan as B, but higher theoretical backtested results?"
Is it "Results of A, B, and C are virtually indistinguishable assuming prudent, tolerable, non-extreme values for low and high stock allocations, but C allows better sleep?"

What is being claimed?

Nisi, with all due respect, this is the kind of thing that I find frustrating about Bogleheads at times. What I claim is the following:

1. If your probability of sticking to your plan (whether A, B, or C) isn't close to 100%, you aren't as much of a Boglehead as you should be.
2. If you are truly a Boglehead, sleep shouldn't be an issue. Or maybe you need to change your AA. But that's entirely a personal thing, which may be completely different for you than for me. There are many things that cause me to lose sleep, but none of them have anything to do with investing.
3. If the coming 15 years is like the 1980s-90s, then literally any strategy will work, provided you save, invest, and diversify. It's only for periods like the 1970s or the past 13 years with lots of fluctuations but little long term uptrend that rebalancing strategies matter.
Why are you phrasing your second possibility in terms of "theoretical backtested results" (meaning you don't believe a word of it), while putting the third possibility in the present tense (meaning it is true and will continue to be going forward)?
Most of my posts assume no behavioral errors.
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: Bill Bernstein: "Take risk off the table"

Post by letsgobobby »

Leesbro63 wrote:
Bmac wrote:
Leesbro63 wrote:All of this talk assumes no taxes due when making these portfolio changes. What about for taxable investors in high brackets with big gains?
+1

Still in accumulation phase in high tax bracket. We have essentially 100% of tax-deferred investments in fixed income (various bond funds) and fully fund one 401k, one 403b, one TIRA, one back door Roth IRA and one family HSA annually into fixed income, but this represents roughly 30% of overall portfolio with the balance predominately in equity index funds in taxable accounts that, due to the last few years, all have sizeable unrealized taxable gains. I realize this is a good problem to have, but beyond putting dividends and new cash into fixed income, how do I materially decrease portfolio risk without taking a substantial tax hit (at least while still in a high tax bracket)?
Yup. Pretty much my own situation. There have been a few threads lately about this (one started by me) and the consensus seems to be that living with higher-than-wanted equity risk is better than absorbing the permanent decrease in portfolio due to a big tax hit of rebalancing.
What I do is buy muni bonds in taxable, I bonds in taxable, etc. I'm not so far out of balance as to need to sell and incur taxes. But I've turned off automatic reinvestments and bought mostly bonds in taxable. I always buy only bonds in tax-advantaged to keep things on par. This year's 30% gains have trumped even that.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: Bill Bernstein: "Take risk off the table"

Post by steve_14 »

I've been able to comfortably reach my financial goals by saving sufficiently, sticking to my asset allocation, and rebalancing as needed.

If you've drifted into a world of market timing, over-balancing, and trying to guess where the bubbles are, you are probably over-thinking it.
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: Bill Bernstein: "Take risk off the table"

Post by letsgobobby »

baw703916 wrote:
nisiprius wrote:Choice a: Pick a high stock allocation and hold it.
Choice b: Pick a low stock allocation and hold it.
Choice c: Do some gentle, gradual, valuation based market timing of the sort suggested by Dr. Bernstein, so that your stock allocation is lower after a longish period of rapid growth, and higher after a longish period of rapid decline.

A serious statement, not a rhetorical question. What, exactly, are the tradeoffs between these three strategies supposed to be?

Is choice C "same theoretical backtested results as A, but higher probability of actually sticking to plan?"
Is choice C "same chance of sticking to the plan as B, but higher theoretical backtested results?"
Is it "Results of A, B, and C are virtually indistinguishable assuming prudent, tolerable, non-extreme values for low and high stock allocations, but C allows better sleep?"

What is being claimed?

Nisi, with all due respect, this is the kind of thing that I find frustrating about Bogleheads at times. What I claim is the following:

1. If your probability of sticking to your plan (whether A, B, or C) isn't close to 100%, you aren't as much of a Boglehead as you should be.
2. If you are truly a Boglehead, sleep shouldn't be an issue. Or maybe you need to change your AA. But that's entirely a personal thing, which may be completely different for you than for me. There are many things that cause me to lose sleep, but none of them have anything to do with investing.
3. If the coming 15 years is like the 1980s-90s, then literally any strategy will work, provided you save, invest, and diversify. It's only for periods like the 1970s or the past 13 years with lots of fluctuations but little long term uptrend that rebalancing strategies matter.
Why are you phrasing your second possibility in terms of "theoretical backtested results" (meaning you don't believe a word of it), while putting the third possibility in the present tense (meaning it is true and will continue to be going forward)?
one little nitpick, rebalancing during the 80s-90s is just as important because rebalancing manages risk. Without rebalancing most investors found themselves overexposed in 2000 when the inevitable decline arrived.
Bmac
Posts: 353
Joined: Sun Mar 03, 2013 8:58 am
Location: Seattle

Re: Bill Bernstein: "Take risk off the table"

Post by Bmac »

letsgobobby wrote:
Leesbro63 wrote:
Bmac wrote:
Leesbro63 wrote:All of this talk assumes no taxes due when making these portfolio changes. What about for taxable investors in high brackets with big gains?
+1

Still in accumulation phase in high tax bracket. We have essentially 100% of tax-deferred investments in fixed income (various bond funds) and fully fund one 401k, one 403b, one TIRA, one back door Roth IRA and one family HSA annually into fixed income, but this represents roughly 30% of overall portfolio with the balance predominately in equity index funds in taxable accounts that, due to the last few years, all have sizeable unrealized taxable gains. I realize this is a good problem to have, but beyond putting dividends and new cash into fixed income, how do I materially decrease portfolio risk without taking a substantial tax hit (at least while still in a high tax bracket)?
Yup. Pretty much my own situation. There have been a few threads lately about this (one started by me) and the consensus seems to be that living with higher-than-wanted equity risk is better than absorbing the permanent decrease in portfolio due to a big tax hit of rebalancing.

What I do is buy muni bonds in taxable, I bonds in taxable, etc. I'm not so far out of balance as to need to sell and incur taxes. But I've turned off automatic reinvestments and bought mostly bonds in taxable. I always buy only bonds in tax-advantaged to keep things on par. This year's 30% gains have trumped even that.
I agree and do the same, but mostly am pointing out that in some (fortunate) scenarios, such as the recent equity runup, making substantive rebalancing can be prohibitive due to capital gain taxation.
an_asker
Posts: 3141
Joined: Thu Jun 27, 2013 2:15 pm

Re: Bill Bernstein: "Take risk off the table"

Post by an_asker »

abuss368 wrote:I am not sure. With all due respect, it feels like a little bit of market timing?

Jack Bogle always tells us to "stay the course". If we start trying to market time we could be right or we could be wrong.
As long as Dr Bernstein or Jack Bogle tells us to alter our asset allocations, it is OK. If we were to do so on our own, that is market timing. :oops:
User avatar
VictoriaF
Posts: 19549
Joined: Tue Feb 27, 2007 7:27 am
Location: Black Swan Lake

Re: Bill Bernstein: "Take risk off the table"

Post by VictoriaF »

an_asker wrote:
abuss368 wrote:I am not sure. With all due respect, it feels like a little bit of market timing?

Jack Bogle always tells us to "stay the course". If we start trying to market time we could be right or we could be wrong.
As long as Dr Bernstein or Jack Bogle tells us to alter our asset allocations, it is OK. If we were to do so on our own, that is market timing. :oops:
Bill takes it from a Greek physician Hippocrates, desperate times call for desperate measures.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
scone
Posts: 1457
Joined: Wed Jul 11, 2012 4:46 pm

Re: Bill Bernstein: "Take risk off the table"

Post by scone »

If you find yourself in a position, several years after you set up your AA and glide path, having come through an extended period of very high savings and very high market returns, you could easily find yourself in a position where your need to take risk is far lower than you anticipated when you first made your plan.

^This. I'm so much further along than I expected to be, particularly after the crash. I assumed, at the time, that we would be in a severe depression for a decade. I thought the market might stay down for many years. Putting money back into stocks was one of the most difficult things I've ever done. But things could easily have turned out very badly, so it feels more like sheer dumb luck than any skill on my part. Since I don't expect such a spectacular run of luck to continue, I'd rather bank my windfall than lose it in a mean-reverting crash.

My "need" to take risk has definitely changed. At this point, I could take my equity portion down from 30% to 25%, and still do fine, as long as inflation doesn't kick up too high. For the next few years, I can lock down all my gains in Stable Value, for that "liability matching portfolio" Dr. Bernstein suggests. Plus some money to pay the taxman, of course. That way I won't have to worry about events like the taper crashing the bond and stock markets at the same time, just as we are going into retirement.

I think I'd be stupid not to take an opportunity to lower my risk as much as I can. If someone calls it market timing, why should I care? Random posters on the internet don't pay my bills, they won't bail me out if I lose a lot of money, and they probably won't even offer a shoulder to cry on! All they will offer is hollow congratulations on my iron will and ability to remain ideologically pure-- to "stay the course" no matter what. Sorry, I don't care about being a perfect Boglehead, I'm here to gain financial security. If Dr. Bernstein's non-conformist ideas can help me get there, I'm all ears.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
User avatar
HomerJ
Posts: 15996
Joined: Fri Jun 06, 2008 12:50 pm

Re: Bill Bernstein: "Take risk off the table"

Post by HomerJ »

nisiprius wrote:It is definitely a form of market timing, but I don't necessarily have a knee-jerk reaction to that. It is definitely not staying the course, but increasingly I am thinking that staying the course is somewhat misleading--nobody does it, nobody can do it, the people who advocate staying the course constantly change the course they advocate staying; staying the course means "make only slow gradual changes, and take 5 years to make them," even though it's justified by pointing to what-if-you'd-stayed-the-course-since-1926.
This is very true.
dad2000
Posts: 649
Joined: Fri Feb 03, 2012 7:04 pm

Re: Bill Bernstein: "Take risk off the table"

Post by dad2000 »

Most of us are plotting a course to get to a target. Unfortunately in practice, the course is filled with random detours created by speculators, politicians, central bankers, acts of God, etc. Sometimes, we have to adapt.

Let's say that I have 1 hour to drive to a destination that is 60 miles away. I anticipate that there is usually a lot of traffic, so I decide to drive 75 mph to start, risking getting a speeding ticket since the limit is 55mph. After 30 minutes, I realize that I hit very little traffic, and am only 25 miles from my destination. Should I stay the course (75mph), or take less risk and drive slower?. Personally, I'd slow down to the speed limit.
Leesbro63
Posts: 6946
Joined: Mon Nov 08, 2010 4:36 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Leesbro63 »

HomerJ wrote:
nisiprius wrote:It is definitely a form of market timing, but I don't necessarily have a knee-jerk reaction to that. It is definitely not staying the course, but increasingly I am thinking that staying the course is somewhat misleading--nobody does it, nobody can do it, the people who advocate staying the course constantly change the course they advocate staying; staying the course means "make only slow gradual changes, and take 5 years to make them," even though it's justified by pointing to what-if-you'd-stayed-the-course-since-1926.
This is very true.
To be fair, the art and (dismal) science of financial planning is still very new. Much of it due to the ability to easily run numbers on computers...an ability that didn't exist a generation ago. So "the course" is still being studied, plotted and understood.
countdown
Posts: 114
Joined: Thu Jun 27, 2013 2:13 pm

Re: Bill Bernstein: "Take risk off the table"

Post by countdown »

+1000 scone. (4 posts above)
Thanks for posting here wbern
User avatar
BlueEars
Posts: 3855
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: Bill Bernstein: "Take risk off the table"

Post by BlueEars »

wbern wrote:...(snip)...
There's another dimension to this, which is that high recent returns mean that many savers have, at this point, won the retirement game--that is, they now have, for the first time, an adequate liability matching portfolio. Once you've won the game, you should stop playing it, or at least stop playing it so aggressively.

Bill
How to determine if one has won the game? Especially if one does not feel a liability matching portfolio is possible at today's TIPS rates?

For myself I've used FIRECalc to look at various allocations to determine how much to cut back. I ran simulations from 1925 forwards looking at allowed spending levels for our personal situation. The simulations have to give 100% success rate with a decent size nest egg at all times i.e. the portfolio will not go below about 50% of today's value. These are, of course, only historical results not future results. Here is my graph (no spending $'s shown but you get the picture I hope):

Image

So I'm thinking of cutting back from 65% equities to 50% now. I could go all the way to 40% but I'm not prepared to go that far yet.

The details of how to do this sort of thing are pretty easy to discuss. But this thread is not the right place.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Bill Bernstein: "Take risk off the table"

Post by YDNAL »

scone wrote:My "need" to take risk has definitely changed. At this point, I could take my equity portion down from 30% to 25%, and still do fine, as long as inflation doesn't kick up too high. For the next few years, I can lock down all my gains in Stable Value, for that "liability matching portfolio" Dr. Bernstein suggests. Plus some money to pay the taxman, of course. That way I won't have to worry about events like the taper crashing the bond and stock markets at the same time, just as we are going into retirement.

I think I'd be stupid not to take an opportunity to lower my risk as much as I can. If someone calls it market timing, why should I care? Random posters on the internet don't pay my bills, they won't bail me out if I lose a lot of money, and they probably won't even offer a shoulder to cry on! All they will offer is hollow congratulations on my iron will and ability to remain ideologically pure-- to "stay the course" no matter what. Sorry, I don't care about being a perfect Boglehead, I'm here to gain financial security. If Dr. Bernstein's non-conformist ideas can help me get there, I'm all ears.
Amen, brother!
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
dkturner
Posts: 1636
Joined: Sun Feb 25, 2007 7:58 pm

Re: Bill Bernstein: "Take risk off the table"

Post by dkturner »

nisiprius wrote:Choice a: Pick a high stock allocation and hold it.
Choice b: Pick a low stock allocation and hold it.
Choice c: Do some gentle, gradual, valuation based market timing of the sort suggested by Dr. Bernstein, so that your stock allocation is lower after a longish period of rapid growth, and higher after a longish period of rapid decline.

A serious statement, not a rhetorical question. What, exactly, are the tradeoffs between these three strategies supposed to be?

Is choice C "same theoretical backtested results as A, but higher probability of actually sticking to plan?"
Is choice C "same chance of sticking to the plan as B, but higher theoretical backtested results?"
Is it "Results of A, B, and C are virtually indistinguishable assuming prudent, tolerable, non-extreme values for low and high stock allocations, but C allows better sleep?"

What is being claimed?
I don't know what Dr. B is up to but I suspect he probably has a hard time sitting on his hands.
User avatar
BlueEars
Posts: 3855
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: Bill Bernstein: "Take risk off the table"

Post by BlueEars »

scone wrote:...(snip)...
I think I'd be stupid not to take an opportunity to lower my risk as much as I can. If someone calls it market timing, why should I care? Random posters on the internet don't pay my bills, they won't bail me out if I lose a lot of money, and they probably won't even offer a shoulder to cry on! All they will offer is hollow congratulations on my iron will and ability to remain ideologically pure-- to "stay the course" no matter what. Sorry, I don't care about being a perfect Boglehead, I'm here to gain financial security. If Dr. Bernstein's non-conformist ideas can help me get there, I'm all ears.
I'm glad I'm not the only one who feels this way. :thumbsup
User avatar
tetractys
Posts: 4836
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Re: Bill Bernstein: "Take risk off the table"

Post by tetractys »

Implementing WB's valuation tactics have always been a little over wrought for my idea of taking investing easy. And I appreciate that he has always (I think) considered those tactics as an option of a few. Simple rebalancing or rebalancing with bands is good enough IMHO, and maybe even good enough to take care of that valuation mania, especially considering all the unknowns that consistently pop up. -- Tet
Leesbro63
Posts: 6946
Joined: Mon Nov 08, 2010 4:36 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Leesbro63 »

Also, what is risk? Is someone with a 30-40 year investing horizon reducing risk by moving from stocks to longer term bonds? Or to shorter term (near) zero-interest bonds?
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Bill Bernstein: "Take risk off the table"

Post by Rodc »

BlueEars wrote:
wbern wrote:...(snip)...
There's another dimension to this, which is that high recent returns mean that many savers have, at this point, won the retirement game--that is, they now have, for the first time, an adequate liability matching portfolio. Once you've won the game, you should stop playing it, or at least stop playing it so aggressively.

Bill
How to determine if one has won the game? Especially if one does not feel a liability matching portfolio is possible at today's TIPS rates?

For myself I've used FIRECalc to look at various allocations to determine how much to cut back. I ran simulations from 1925 forwards looking at allowed spending levels for our personal situation. The simulations have to give 100% success rate with a decent size nest egg at all times i.e. the portfolio will not go below about 50% of today's value. These are, of course, only historical results not future results. Here is my graph (no spending $'s shown but you get the picture I hope):

Image

So I'm thinking of cutting back from 65% equities to 50% now. I could go all the way to 40% but I'm not prepared to go that far yet.

The details of how to do this sort of thing are pretty easy to discuss. But this thread is not the right place.
Unless the origin is (0,0) this graph is not at all useful without actual values on the y-axis. And I don't think the origin is (0,0) because no way does 40% give nearly 3 times the income of 65%.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
User avatar
BlueEars
Posts: 3855
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: Bill Bernstein: "Take risk off the table"

Post by BlueEars »

Rodc wrote:....

Unless the origin is (0,0) this graph is not at all useful without actual values on the y-axis. And I don't think the origin is (0,0) because no way does 40% give nearly 3 times the income of 65%.
Hi Rod, the origin is not zero. I snipped off the spending axis because it was too personal to post. The spending for us was $6k/year higher with 40% equity then 65% equity. So not a big slope for us. Trust me, we will have plenty of absolute spending in retirement. :happy

I just wanted to show that for our personal situation and with the way I employed FIRECalc, the better spending levels were at a lower equity allocation then we have right now. Higher equity will give a larger average spending level over the years of retirement in general, but for a more (historically) guaranteed minimum spending level the lower equity was better for us. Who wants to hit another depression and find out they have to cut back a whole lot?

I cannot emphasize enough that it is a personal situation thing. One has to run the numbers for oneself. If others want me to, I'll post on running this sort of analysis. Hint: in FIRECalc, on the investigate tab select "Given a success rate, determine spending level for a set portfolio...". Also select a number for "Leave some money in the portfolio for my estate". Run the analysis for different equity percentages.
User avatar
cfs
Posts: 4154
Joined: Fri Feb 23, 2007 1:22 am
Location: ~ Mi Propio Camino ~

Re: Bill Bernstein: "Take risk off the table"

Post by cfs »

I see no issues with Doctor Bernstein taking a few dollars off the table. Some of us (in my case) no longer have the willingness, ability, or need for the extra risk. Full disclosure, I have made some course corrections to my portfolio this month, and plan to make other corrections next month as part of my tax harvesting plan. Plus, I will update my IPS accordingly (thanks Larry for all your recommendations, the IPS should not be a static document). I will try my best to keep my investments simple (thanks Rick for your recommendations). And here is a Sea Story for you, as a retired Navy Sailor (and former commercial fisherman, and former merchant seaman), I know what staying the course is all about, but we must make course corrections from time to time to prevent shipping--running aground and collisions at sea are not pretty. Thanks for reading. //fig//
~ Member of the Active Retired Force since 2014 ~
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Bill Bernstein: "Take risk off the table"

Post by Rodc »

BlueEars wrote:
Rodc wrote:....

Unless the origin is (0,0) this graph is not at all useful without actual values on the y-axis. And I don't think the origin is (0,0) because no way does 40% give nearly 3 times the income of 65%.
Hi Rod, the origin is not zero. I snipped off the spending axis because it was too personal to post. The spending for us was $6k/year higher with 40% equity then 65% equity. So not a big slope for us. Trust me, we will have plenty of absolute spending in retirement. :happy

I just wanted to show that for our personal situation and with the way I employed FIRECalc, the better spending levels were at a lower equity allocation then we have right now. Higher equity will give a larger average spending level over the years of retirement in general, but for a more (historically) guaranteed minimum spending level the lower equity was better for us. Who wants to hit another depression and find out they have to cut back a whole lot?

I cannot emphasize enough that it is a personal situation thing. One has to run the numbers for oneself. If others want me to, I'll post on running this sort of analysis. Hint: in FIRECalc, on the investigate tab select "Given a success rate, determine spending level for a set portfolio...". Also select a number for "Leave some money in the portfolio for my estate". Run the analysis for different equity percentages.
Hi BlueEars,

If I might make a suggestion and along the way note that this sort of thing is a pet peeve of mine, you could run with a generic value so not personal. The problem, and this comes up a lot (see my comments about the wiki graph on US vs intentional allocation that gets posted endlessly) is that the difference between the SWR for 40% and 65% is actually rather small as a percentage. Both give close to the same SWR rate. But if I post the results zooming in I can make the difference look large. Like in your graph it looks like you can generate almost three times as much from one allocation as from the other and that is very misleading. It is even misleading if you label the graph since the visual does not match up with the actual.

There is a wonderful little book from I think the 1950s called how to lie with statistics that covers this and other things that people (generally marketing types trying to sell you something) do to be misleading. Sometimes these things are done very much on purpose and sometimes just by accident.

I can take these data and zoom in on the y-axis to make the differences look huge and make a "sale" that allocation is overwhelmingly important. Or I can zoom out and make a flat graph and make a "sale" that the difference is minor (the latter is closer to the truth).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
IlliniDave
Posts: 2358
Joined: Fri May 17, 2013 7:09 am

Re: Bill Bernstein: "Take risk off the table"

Post by IlliniDave »

ourbrooks wrote:I have been searching for the William Bernstein article, written in 2009, in which he suggests tactically increasing one's stock allocation, because valuations were so favorable.
Can't seem to find it. wbern, care to give a pointer?

As is often pointed out about market timing in general, there are two decisions to be made. When to get out, is often the easier decisions; portfolios are up and everyone feels they can afford to relax a little and take less risk. It's the getting back in decision that's really hard. Stocks are way down and look like they'll never come back. Why not wait until the market's up a bit? Between losing 25% of the gain when stocks are rising by getting out a bit too soon and 25% of the gain when stocks are bottoming by getting in too late, the return advantage of stocks are pretty much cancelled out.

The end result of tactical asset allocations could well be that you'd have been better off with an all-bond portfolio in the first place.
I don't think valuations were all that favorable in 2009, just average if you go by PE10 and they spiked quite high if you go by PE1. He published a book that year, I believe.
Don't do something. Just stand there!
User avatar
Bustoff
Posts: 1980
Joined: Sat Mar 03, 2012 6:45 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Bustoff »

YDNAL wrote:
scone wrote:My "need" to take risk has definitely changed. At this point, I could take my equity portion down from 30% to 25%, and still do fine, as long as inflation doesn't kick up too high. For the next few years, I can lock down all my gains in Stable Value, for that "liability matching portfolio" Dr. Bernstein suggests. Plus some money to pay the taxman, of course. That way I won't have to worry about events like the taper crashing the bond and stock markets at the same time, just as we are going into retirement.

I think I'd be stupid not to take an opportunity to lower my risk as much as I can. If someone calls it market timing, why should I care? Random posters on the internet don't pay my bills, they won't bail me out if I lose a lot of money, and they probably won't even offer a shoulder to cry on! All they will offer is hollow congratulations on my iron will and ability to remain ideologically pure-- to "stay the course" no matter what. Sorry, I don't care about being a perfect Boglehead, I'm here to gain financial security. If Dr. Bernstein's non-conformist ideas can help me get there, I'm all ears.
Amen, brother!
+1
User avatar
Bustoff
Posts: 1980
Joined: Sat Mar 03, 2012 6:45 pm

Re: Bill Bernstein: "Take risk off the table"

Post by Bustoff »

BlueEars wrote:
Rodc wrote:....

Unless the origin is (0,0) this graph is not at all useful without actual values on the y-axis. And I don't think the origin is (0,0) because no way does 40% give nearly 3 times the income of 65%.
Hi Rod, the origin is not zero. I snipped off the spending axis because it was too personal to post. The spending for us was $6k/year higher with 40% equity then 65% equity. So not a big slope for us. Trust me, we will have plenty of absolute spending in retirement. :happy

I just wanted to show that for our personal situation and with the way I employed FIRECalc, the better spending levels were at a lower equity allocation then we have right now. Higher equity will give a larger average spending level over the years of retirement in general, but for a more (historically) guaranteed minimum spending level the lower equity was better for us. Who wants to hit another depression and find out they have to cut back a whole lot?

I cannot emphasize enough that it is a personal situation thing. One has to run the numbers for oneself. If others want me to, I'll post on running this sort of analysis. Hint: in FIRECalc, on the investigate tab select "Given a success rate, determine spending level for a set portfolio...". Also select a number for "Leave some money in the portfolio for my estate". Run the analysis for different equity percentages.
Thanks BlueEars. Which option did you choose in FireCalc for fixed income?
User avatar
BlueEars
Posts: 3855
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: Bill Bernstein: "Take risk off the table"

Post by BlueEars »

Bustoff wrote:...

Thanks BlueEars. Which option did you choose in FireCalc for fixed income?
I used 5 year Treasury and for stocks just Total Stock Market. It would be great to have other good options but I guess FIRECalc was limited by data availability when going far back.

BTW, I think one has to use "Constant Spending Power" for the Spending Models tab. It didn't seem to work with my options and the spend model of "Percentage of Remaining Portfolio" choice which is more conservative.
IlliniDave
Posts: 2358
Joined: Fri May 17, 2013 7:09 am

Re: Bill Bernstein: "Take risk off the table"

Post by IlliniDave »

an_asker wrote:
abuss368 wrote:I am not sure. With all due respect, it feels like a little bit of market timing?

Jack Bogle always tells us to "stay the course". If we start trying to market time we could be right or we could be wrong.
As long as Dr Bernstein or Jack Bogle tells us to alter our asset allocations, it is OK. If we were to do so on our own, that is market timing. :oops:
It really depends on how you define "market timing". In the derogatory sense I would define it as someone who would sell all their equities at a given time to wait on the sidelines intending at some point in the relatively near future to pile all the way back in for the sake of short-term profits.

The idea that any small or even moderate adjustment in one's asset allocation due to situational changes (internal or external) is, (cover the children's ears) market timing, is akin to a guy that has one glass of wine everyday at dinner being accused of debauchery when he has two one evening because he finds an especially nice bottle or because it's New Year's Eve.
Don't do something. Just stand there!
tibbitts
Posts: 12835
Joined: Tue Feb 27, 2007 6:50 pm

Re: Bill Bernstein: "Take risk off the table"

Post by tibbitts »

IlliniDave wrote:
an_asker wrote:
abuss368 wrote:I am not sure. With all due respect, it feels like a little bit of market timing?

Jack Bogle always tells us to "stay the course". If we start trying to market time we could be right or we could be wrong.
As long as Dr Bernstein or Jack Bogle tells us to alter our asset allocations, it is OK. If we were to do so on our own, that is market timing. :oops:
It really depends on how you define "market timing". In the derogatory sense I would define it as someone who would sell all their equities at a given time to wait on the sidelines intending at some point in the relatively near future to pile all the way back in for the sake of short-term profits.

The idea that any small or even moderate adjustment in one's asset allocation due to situational changes (internal or external) is, (cover the children's ears) market timing, is akin to a guy that has one glass of wine everyday at dinner being accused of debauchery when he has two one evening because he finds an especially nice bottle or because it's New Year's Eve.
It's the "or even moderate" part that people are having trouble with. As in your example, one glass of wine turns into two. And a few beers, and a shot or two or three of whiskey. I think you can make a case, although not an obvious one, that rebalancing isn't market timing. I don't think you can make a case that a "small or even moderate adjustment in one's asset allocation due to situational changes" isn't market timing. It seems to me that that's the definition of market timing; a 100% change in one direction or another has never been required to qualify.
User avatar
nedsaid
Posts: 14377
Joined: Fri Nov 23, 2012 12:33 pm

Re: Bill Bernstein: "Take risk off the table"

Post by nedsaid »

My gosh, isn't this a variation of "buy low" "sell high?" Or another way of thinking of this is reverse performance chasing. Or opportunistic rebalancing based on asset valuations? Or taking asset valuations into account when determining asset allocation? Or good old fashioned contrarian thinking.

I don't think this is radical stuff.

As both Larry Swedroe and Dr. Bernstein have said that with higher valuations come lower projected future returns. It just makes sense to me.

In many posts, I have advocated a strategy similar suggested by Dr. Bernstein. Don't market time other than to at the margins take advantage of extremes in valuation and investor sentiment. If all I accomplish from this is the avoidance of performance chasing then I will have accomplished a lot. This isn't rocket science.
A fool and his money are good for business.
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Bill Bernstein: "Take risk off the table"

Post by Rodc »

tibbitts wrote:
IlliniDave wrote:
an_asker wrote:
abuss368 wrote:I am not sure. With all due respect, it feels like a little bit of market timing?

Jack Bogle always tells us to "stay the course". If we start trying to market time we could be right or we could be wrong.
As long as Dr Bernstein or Jack Bogle tells us to alter our asset allocations, it is OK. If we were to do so on our own, that is market timing. :oops:
It really depends on how you define "market timing". In the derogatory sense I would define it as someone who would sell all their equities at a given time to wait on the sidelines intending at some point in the relatively near future to pile all the way back in for the sake of short-term profits.

The idea that any small or even moderate adjustment in one's asset allocation due to situational changes (internal or external) is, (cover the children's ears) market timing, is akin to a guy that has one glass of wine everyday at dinner being accused of debauchery when he has two one evening because he finds an especially nice bottle or because it's New Year's Eve.
It's the "or even moderate" part that people are having trouble with. As in your example, one glass of wine turns into two. And a few beers, and a shot or two or three of whiskey. I think you can make a case, although not an obvious one, that rebalancing isn't market timing. I don't think you can make a case that a "small or even moderate adjustment in one's asset allocation due to situational changes" isn't market timing. It seems to me that that's the definition of market timing; a 100% change in one direction or another has never been required to qualify.
Like drinking, market timing covers an entire range from very modest to extreme. While I don't think it is very useful at the very modest end, or harmful because it is so close to buy and hold, it is the more extreme end that is the problem. Like active management. If you want to hold Windsor or Wellington, fine no harm no foul. Just stay away from the expensive funds with high turnover.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
tibbitts
Posts: 12835
Joined: Tue Feb 27, 2007 6:50 pm

Re: Bill Bernstein: "Take risk off the table"

Post by tibbitts »

nedsaid wrote: As both Larry Swedroe and Dr. Bernstein have said that with higher valuations come lower projected future returns. It just makes sense to me.
Correct: equities and all other available investments are currently projected to provide lower future returns. So the problem is that you have to hope that returns don't just remain consistently low for many years/decades, otherwise all you've accomplished is shifting from a low-return investment to an even lower-return investment.
Don't market time other than to at the margins take advantage of extremes in valuation and investor sentiment. If all I accomplish from this is the avoidance of performance chasing then I will have accomplished a lot. This isn't rocket science.
Identifying the margins is the problem. If it wasn't rocket science, everybody would be able to do it.
User avatar
stevewolfe
Posts: 1537
Joined: Fri Oct 10, 2008 7:07 pm

Re: Bill Bernstein: "Take risk off the table"

Post by stevewolfe »

I agree with what nedsaid stated above. Looking at Vanguard's own Asset Allocation Models moving on a 10% boundary from say 40% stock to 30% stock changes the best year performance by 0.5% and worst year performance by 4.2% over the period 1926-2012. Your average return adjusts down by 0.5%.

This, to me, is pretty darn low on the "OMG you made a major financial mistake!" list. I increased my allocation to stocks from 30% to 40% in 2009 by directing all my new monies (pre and post tax) to stocks. It took a while to get there. Now I've reduced it back to 35% stock this week. We hear folks on here all the time saying things like 45% in stock vs. 50% in stock doesn't really matter over time - asset allocation isn't an exact science - until you put that same change in this context, now it's a big deal some how. :oops:
MnD
Posts: 4645
Joined: Mon Jan 14, 2008 12:41 pm

Re: Bill Bernstein: "Take risk off the table"

Post by MnD »

Leesbro63 wrote:Also, what is risk? Is someone with a 30-40 year investing horizon reducing risk by moving from stocks to longer term bonds? Or to shorter term (near) zero-interest bonds?
Bingo. We've been investing for almost 28 years and haven't found the stock market to be a risky place at all on that time frame. My wife had ultra-longevity in her family so she could be looking at another 50 years, and hopefully 35-40 for moi.

So lets pile into 2.18% bonds or money-losing cash because we've had a few good post-crash recovery years? Then what's the plan going forward?
We already rebalance, have a glide path, have other "safe' revenue streams and an AA (although not sedate) at a level we are comfortable with. What's the specific signals to "prune"? The sirens songs of "prune, take profits, don't get greedy, take some money/risk off the table" sound like all the other wall street "ism's". Head nod worthy but not specific or actionable.

One thing I really hate is selling (in retrospect) early. When I bought and sold a lot of individual stocks I was great buyer and an OK but flawed seller.
Routinely bought low and sold higher, but almost always early - the shares would invariably double and sometimes double again after I sold. :(
The nice thing about buy and hold with adequate safeguards is that when the market keeps going up and up, even beyond your expectations (like it did in the 80's and 90's) is that you will participate, despite your misgivings. :happy
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
User avatar
nisiprius
Advisory Board
Posts: 42862
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bill Bernstein: "Take risk off the table"

Post by nisiprius »

Well, I think we need some kind of definition of what "staying the course" is really supposed to mean. That's a perfectly serious point. I'm not lambasting Dr. Bernstein for suggesting a price-driven change in asset allocation.

However, if we are not really going to stay the course for many decades, then it's silly wasting time on exercises comparing glide slopes that decline to glide slopes that bottom at 65 and then ascend, and stuff like that.

If what we are really going to do is stay the course more or less for periods of 2, 3, 5 years, with constant gentle slow gradual changes suggested by intuition, valuation, advice from writers like Dr. Bernstein, availability of new products like Vanguard Total International Bond, etc., discoveries of new Fama-French-like factors, etc.--that we should say that's what we are doing.

If Vanguard can change their target-date funds significantly three times in ten years, it's dumb to suppose that individual investors are going to be way more faithful to their plans.

But we should quit pretending that backtested statistics based on assumptions of staying the course since 1926 are relevant to what we are doing.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
adv-rider
Posts: 16
Joined: Mon Jan 07, 2013 2:49 pm

Re: Bill Bernstein: "Take risk off the table"

Post by adv-rider »

I'm confused, wondering if this conversation applies to me. I've held a 60/40 allocation for the last several years. At age 57 and 3 years away from a hoped for early retirement, the concept of taking some risk off the table resonates with me. I played around with the idea of creating two portfolios, Safe, and Wealth, and sat down to try and determine a minimum safe portfolio, one that would guarantee we won't be eating cat food in our old age. Well, turns out that amount is roughly the 40% fixed income portion I have now, and much of that fixed income is in CD's. I'm left wondering if I should just stick with what I have, rebalance to 50/50, or even "age in bonds". Will such a tweak really accomplish that much besides make me feel a tad better the next downturn?
learning_head
Posts: 843
Joined: Sat Apr 10, 2010 6:02 pm

Re: Bill Bernstein: "Take risk off the table"

Post by learning_head »

"stay the course" means "stick with a plan"... Now, the plan may allow for many changes or few or none at all, and plan may also allow for future changes to the plan (in which case sticking with the plan may mean sticking with only allowed changes). So I think it all depends on how flexible your *personal* chosen "course" or plan is.

With some plans, "stay the course" means that once you decide on your rebalancing algorithm, glide path, etc., you cannot change it, no matter what. On another extreme, day traders can claim they "stay the course" because their course is to take advantage of what they believe is new information that is valuable to them and reassessing the AA accordingly. Many discussions are around the boundary between the two. Should new discovery of a new factor weighting affect AA? Should stock valuations (and if so, based on history prior to year X or based on rolling periods to include more recent info or based on only last few years / decades to remove "too-old" info or based on your country or world experience?)

Some folks indicate that once you start small-value tilt you MUST stick with that course through thin and thick... but then if new factors become available, maybe you DO need to change allocation after all. Or, it's ok to make changes but only 5%, 10%, X% per year at most. So, I think it depends on what ultimately convinces you of whether information if valuable and "true" or unproven enough yet and everyone has their own personal preference on that.
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Bill Bernstein: "Take risk off the table"

Post by umfundi »

As Dr. Bernstein and others on the panel of experts at BH2013 said, staying with your plan is more important than getting the plan exactly right.

Yes, "staying the course" is not some stupid slogan. It means, stick with your plan. Which is why I am so frustrated with some of the experts now suggesting you should be tinkering and tampering with your plan.

Keith
Déjà Vu is not a prediction
Post Reply