Why Wouldn't Everyone Customize His Own Glidepath?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Random Walker
Posts: 1704
Joined: Fri Feb 23, 2007 8:21 pm

Why Wouldn't Everyone Customize His Own Glidepath?

Postby Random Walker » Mon Jun 19, 2017 9:20 am

As we age and accumulate assets, most of us cool off our asset allocations over time. Many people use target date funds or follow their own age based stock/bond ratios. But why wouldn't a person make these changes in a fashion more customized to their individual circumstance and market conditions. I think the individual should.
There is so little we can control in investing. As we age, realistic goals become more clear, and about the only thing we can control in investing is how we respond to markets. Should we arbitrarily decrease our equity exposure just because we reach a certain age, independent of many other factors? Why not incorporate age, clarified goals, past returns, current valuations, future expected returns into our decisions? Does it really make sense to ignore this information? I know this sounds a bit like market timing, but I don't think it is. It's a one way change in asset allocation towards less aggressive as we get closer to retirement, just customized based on much more than age.
Currently we have had a 9 year bull market. That's close to 10% of an individual's lifespan and perhaps 20% of an individual's investing lifespan. Should a 58 year old investor really doggedly stick to his investment policy statement which says don't decrease the equities until he is 60? Or should someone committed to decreasing 1% equities per year really decrease that slowly in the face of personal and market circumstances which have changed much more radically than that? Perhaps it makes much more sense for individual's to look at where they are in their investing lives compared to the markets once every few years, and customize their glidepath towards retirement.
My own personal opinion is that someone within perhaps 5 years of retirement should consider now a great opportunity to take substantial risk off the table, perhaps much more than an arbitrary age based glidepath. And for what it's worth, I think Monte Carlo Simulation is a great tool for making these decisions. Interested what others think.

Dave

dbr
Posts: 22222
Joined: Sun Mar 04, 2007 9:50 am

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby dbr » Mon Jun 19, 2017 9:26 am

The whole idea of using the need/ability/willingness thought scheme is to do what you describe. I would think it would be assumed that as personal circumstances change each of those parameters and the outcome could change as well. Of course the next question will be to ask what rule to follow in how often one should schedule a re-evaluation of n/a/w. :? Also, I don't think it would be a good idea to redo n/a/w as a response to what someone thinks the trend in the market is or some assessment of the impact of current events.

rkhusky
Posts: 3906
Joined: Thu Aug 18, 2011 8:09 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby rkhusky » Mon Jun 19, 2017 9:28 am

It is market timing if you use the current position of the market or predictions of future short term market conditions to make asset allocation decisions. My glide path changes annually specifically so I don't have to worry about making large allocation changes at one particular point in time.

edit: I do use the current state of my portfolio, which is affected by the current state of the market, to make decisions about when I might retire, which in turn affects my current glide path.

Random Walker
Posts: 1704
Joined: Fri Feb 23, 2007 8:21 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby Random Walker » Mon Jun 19, 2017 9:53 am

Rkhusky,
Sounds like you and I are in agreement.

Dave

User avatar
vitaflo
Posts: 760
Joined: Sat Sep 03, 2011 3:02 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby vitaflo » Mon Jun 19, 2017 9:59 am

Random Walker wrote:Should a 58 year old investor really doggedly stick to his investment policy statement which says don't decrease the equities until he is 60? Or should someone committed to decreasing 1% equities per year really decrease that slowly in the face of personal and market circumstances which have changed much more radically than that?


The whole "age in bonds" thing is really just a simplified way of thinking about "percent to completion" as people tend to reach retirement around the same time in life, so it works. But anyone who plans on retiring early or has won the game early because of bull markets, etc, "age in bonds" doesn't really apply.

As such I adjust my AA based on my retirement goal and how close I am to it. It has nothing to do with my age. I wrote about it a bit in this thread: viewtopic.php?f=10&t=220328&p=3393580#p3393580

BogleAlltheWay
Posts: 194
Joined: Mon May 15, 2017 5:25 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby BogleAlltheWay » Mon Jun 19, 2017 10:12 am

I think several people are better off not customizing:
-If you are not knowledgeable about investing
-If you want to set it and forget it for retirement
-If you are tinker too much
-If you overreact to market trends

rkhusky
Posts: 3906
Joined: Thu Aug 18, 2011 8:09 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby rkhusky » Mon Jun 19, 2017 10:19 am

Random Walker wrote:Rkhusky,
Sounds like you and I are in agreement.

Dave

I think we're all in agreement that if one's life circumstances change, then one should reassess and potentially change their financial plans. But I wouldn't change my asset allocation because I thought the market had reached a peak and so I should sell a large share of my stocks.

Random Walker
Posts: 1704
Joined: Fri Feb 23, 2007 8:21 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby Random Walker » Mon Jun 19, 2017 10:26 am

Yes,
It's more about timing ones personal financial circumstance relative to financial goals and less about specifically timing the market. That being said, when valuations are generous, expected returns are modest and the potential for really bad negative returns increases. Ones current financial circumstance does depend on past returns that resulted in current valuations.

Dave

markcoop
Posts: 654
Joined: Fri Mar 02, 2007 8:36 am

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby markcoop » Mon Jun 19, 2017 10:30 am

Random Walker wrote:...when valuations are generous, expected returns are modest and the potential for really bad negative returns increases. Ones current financial circumstance does depend on past returns that resulted in current valuations.


And the opposite is true too when valuations are low.

I've been recently thinking about making a more dynamic AA.
Mark

User avatar
willthrill81
Posts: 1654
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby willthrill81 » Mon Jun 19, 2017 10:37 am

Random, I agree with your premise. I personally think that many of the 'standard' glidepath strategies are unnecessarily conservative from a mathematical risk standpoint, though perhaps not from an individual's risk taking perspective. For instance, I think that a 20 year old has no business owning any bonds whatsoever for their retirement portfolio. Who cares what gyrations equities may make over the next 40 years? Putting 10% of their portfolio into bonds, as many target date funds do, seems worse than pointless to me. The volatility of such funds will be nearly indistinguishable from the individual's perspective, but it will create .4-.5% drag on the portfolio's expected performance every year; Merriman shares this perspective as well.

That's why I'm currently still 100% equities; I'm still around 20 years from retirement. Once I get within 10 years of my target retirement, I'll move into some bonds, but probably not more than 5-10 years of living expenses. My view is that any money beyond 10 years of spending is 'long-term money' and belongs in equities.
“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

itstoomuch
Posts: 4033
Joined: Mon Dec 15, 2014 12:17 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby itstoomuch » Mon Jun 19, 2017 10:40 am

I did this & MC, 2008 @58. It wasn't pretty. Downright bleak.
Who knows, YMMV :oops: :annoyed
GL
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

Fallible
Posts: 5930
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby Fallible » Mon Jun 19, 2017 11:38 am

dbr wrote:The whole idea of using the need/ability/willingness thought scheme is to do what you describe. I would think it would be assumed that as personal circumstances change each of those parameters and the outcome could change as well. Of course the next question will be to ask what rule to follow in how often one should schedule a re-evaluation of n/a/w. :? Also, I don't think it would be a good idea to redo n/a/w as a response to what someone thinks the trend in the market is or some assessment of the impact of current events.


And there you have it. :thumbsup
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

goblue100
Posts: 247
Joined: Sun Dec 01, 2013 10:31 am

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby goblue100 » Mon Jun 19, 2017 11:58 am

Random Walker wrote: As we age and accumulate assets, most of us cool off our asset allocations over time. Many people use target date funds or follow their own age based stock/bond ratios. But why wouldn't a person make these changes in a fashion more customized to their individual circumstance and market conditions. I think the individual should.


I'm certainly reviewing my need and willingness to take risk as I've passed certain milestones. I think certain people would use this as "permission" to (over) react to every little market swing. For most people not approaching retirement age, stay the course is the best action.


Random Walker wrote: Currently we have had a 9 year bull market.

Dave


I see this a lot. Certainly the market has been very good since the March 2009 bottom. But 2011 and 2015 were essentially 0 return years. There has been some retrenching during this time. We have avoided bear markets, but it hasn't been a straight line up. I think people forget that.
Some people are immune to good advice. - Saul Goodman

User avatar
willthrill81
Posts: 1654
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby willthrill81 » Mon Jun 19, 2017 12:29 pm

goblue100 wrote:
Random Walker wrote: Currently we have had a 9 year bull market.

Dave


I see this a lot. Certainly the market has been very good since the March 2009 bottom. But 2011 and 2015 were essentially 0 return years. There has been some retrenching during this time. We have avoided bear markets, but it hasn't been a straight line up. I think people forget that.


I agree. In 2011, we were close to a bear market by around July or so, and a couple of years ago, we were approaching the bottom of a significant correction.

If you limit your analysis to only decades of performance, then most of them look very good. In recent history, only 1999-2009 was really poor.
“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

Random Walker
Posts: 1704
Joined: Fri Feb 23, 2007 8:21 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby Random Walker » Mon Jun 19, 2017 1:42 pm

A great read is William Bernstein's e-book The Ages of the Investor: A Critical Look At Life Cycle Investing. In the last chapter "The Mid Game", he recommends just such an adaptation.

Dave

Dandy
Posts: 4587
Joined: Sun Apr 25, 2010 7:42 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby Dandy » Mon Jun 19, 2017 11:35 pm

I think it is somewhat difficult as you get later into retirement to continue implementing your own glide path. You mental acuity fades and your are likely to make mistakes of action or inaction. So, at some point you might consider some canned glide path or Life strategy solution.
I agree that people 5 years or so from retirement should reconsider their portfolio risk. It is easy to under estimate the difference from earing and investing to not earning and withdrawing.

I wouldn't worry about incurring a market timing label. Better to take some near retirement risk off the table when the market is high then have the market lower your equity allocation without your involvement. Of course that depends on where you stand with your "number". I saw many of my coworkers wreck their retirement plans in 2008 because their equity allocation was too high and too concentrated in company stock.

james22
Posts: 1105
Joined: Tue Aug 21, 2007 2:22 pm

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby james22 » Tue Jun 20, 2017 3:07 am

Another way:

Who Ate Joe’s Retirement Money? Sequence Risk and its Insidious Drag on Retirement Wealth

With the observations that starting valuation can be a useful tool in forecasting future returns and that owning stocks when they are cheaper tends to win in the long term with the additional benefit of suffering less damaging drawdowns, let’s conduct a simple experiment.

Suppose we use starting CAPEs as our simple and sole indicator of future stock market returns. Let’s go back in history as far as we can and pretend that we are managing the glidepath, but this time, we will manage it dynamically – that is, underweighting or overweighting equities and fixed income around the predetermined path, based on one simple valuation metric, which changes through time. Basically, if we believed stocks were expensive, we would underweight them, and if stocks appeared cheap, we would overweight them.

Can we do better than the static (predetermined) glidepath in terms of drawdowns and final wealth?

The answer is apparently yes.


https://www.gmo.com/docs/default-source ... ?sfvrsn=20

Investing for Retirement: The Defined Contribution Challenge

Let us assume we have a worker who turned 55 in 1965, and to that point was on target for retirement savings. The worker, however, had the misfortune of being in peak savings years during a period in which equity valuations were high and real bond yields were low. The period from the mid-1960s through the 1970s represents some of the worst real returns for both stocks and bonds on record.

A static, or inflexible, glide path would ignore these lofty valuations, and ensure the investor had a higher weighting in equities in 1965, when valuations were very high, than in 1974, when valuations were much lower. The fully dynamic stock weight is based on minimizing expected shortfall incorporating time-varying expected returns.

At first glance, the dynamic flight path looks nonsensical. It shows no weight in stocks in 1965, when the participant is 55 years old and has another 10 years until retirement, but by 1974 the stock weight rises to 90%, staying at a very high level until the early 1980s despite the fact that the participant is approaching 70 years old, and losses can be devastating.

But if the goal is minimizing expected shortfall of wealth in retirement, it can make sense to run an aggressive portfolio in retirement if the increase in expected returns is high enough. Furthermore, if the expected return to stocks is actually lower than bonds due to high valuations, such as was the case in 1965, it is hard to see why owning stocks would help at all.

The static strategy leaves the participant out of money by 1992, the cost of not taking into account the changing valuations of the stock and bond markets over time, and consuming a constant real dollar amount equal to 5% of target wealth. The dynamic strategy, by contrast, allows the participant to make up for earlier inadequate returns, and the money lasts for a full 30-year retirement even though consumption is high.


https://www.gmo.com/docs/default-source ... f?sfvrsn=0
Market Timer

SimplicityNow
Posts: 87
Joined: Fri Aug 05, 2016 10:31 am

Re: Why Wouldn't Everyone Customize His Own Glidepath?

Postby SimplicityNow » Tue Jun 20, 2017 6:49 am

Many thread recently with similar topics and points.

I also agree that it can't be generalized based on one of even several factors as there are infinite variables in our own unique situations. Much of which is psychological which defies quantification.


Return to “Investing - Theory, News & General”

Who is online

Users browsing this forum: 3wood, Accrual, AE81, arcticpineapplecorp., BD., Bing [Bot], columbia, dougger5, infotrader, Kualityboy, littlebird, msrumphius, simplesauce, sjwoo, skjoldur, TD2626, Traveller, wrongfunds and 98 guests