AA based on recent market performance and pre-determined target

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gilgamesh
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AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 10:11 am

I am 10 years away from retirement. I would think many written plans will involve reducing stock exposure as you get closer to retirement...I do.

I also have a pre-determined target nest egg for many of the important years…I assumed an average return of 5%.

So, obviously after the recent market performance I am far ahead of that target.

Can stock exposure (IOW, risk exposure) be adjusted based on how well the current nest egg matches to my year to year target nest egg, or does it just have to be based off of how far away one is from retirement?

Reasoning : Utility of wealth…why keep risk the same when the market has performed well, and now the utility of wealth has reduced the need to take the same risk.

Counter-arguments: For those who want earlier retirement than planned, why not continue with the same risk hoping for an earlier retirement (or if the market tanks a delayed retirement)

Logistical problems: How much higher than the target nest egg should the portfolio go before reducing risk? This will vary by years left for retirement too (if retirement is just a year away, one will reduce risk more…as in get out of stocks to be at par with retirement year)...then once the market cools off, when do you increase risk up to what’s reasonable based on years away from retirement.

Example: An individual 10 years away from retirement currently has 76% in stocks…he plans to reduce stock exposure by 2% each year and be at 56% stocks in retirement. The 2% reduction in stock exposure is the least he will reduce risk each year. But, if the market has done well, and the target nest egg has exceeded a certain point, could the stock exposure be reduced even more? What would be a sound formula to follow?

I don’t think this is market timing, as it’s straight up utility of wealth argument and can be pre-planned…ignoring utility of wealth and sticking to an age based AA doesn’t seem to be the most ideal method to me.
Thank you!
Last edited by gilgamesh on Mon Nov 27, 2017 10:50 am, edited 1 time in total.

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randomizer
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Re: AA based on recent market performance and pre-determined target

Post by randomizer » Mon Nov 27, 2017 10:17 am

How "far" you are from retiring is not just about time but money also. Adjusting your AA as your money goal draws nearer seems totally appropriate.

dbr
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Re: AA based on recent market performance and pre-determined target

Post by dbr » Mon Nov 27, 2017 10:19 am

You could use a probabilistic model to predict how well you will achieve your objectives given present starting point and proposed asset allocations. So, yes, that problem can be run over again after you know the outcome partway through. Whether the result is that you should reduce risk from what it would have been might seem likely but could also be an "it depends." Some people would be cautious about present condition being a result of a market now known to be overvalued, but if you start to change future expected distributions of returns as you work this problem you also start to enter some pretty cloudy territory.

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TheTimeLord
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Re: AA based on recent market performance and pre-determined target

Post by TheTimeLord » Mon Nov 27, 2017 10:27 am

This is a question I am wrestling with. So here is how I have thought about it in regards to risk. My original AA and Target number would meanI had X dollars in stock when I hit my target number and I had determined that was the risk I was willing to bear. The returns I have experienced in equities now mean I have X+Y dollars in equities so the question is do I want the additional risk of having all or part of those Y dollars in equities. There is no right or wrong answer that I know, but in my case I have taken majority of those Y dollars and put them in fixed income thus I now have a more conservative AA than my plan would have originally called for because then returns I have experienced have far exceeded the estimates on which my plan was built. To me I am implementing part of Bernstein's quit playing once you hav won the game strategy. Not knowing your particular situation or risk tolerance I can't make any recommendation, I can only offer you insight in to how I viewed and worked through a similar problem.

I and 2 or 3 years away from retirement so that would color my decision and is different from being 10 years away.
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gilgamesh
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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 10:39 am

dbr wrote:
Mon Nov 27, 2017 10:19 am
You could use a probabilistic model to predict how well you will achieve your objectives given present starting point and proposed asset allocations. So, yes, that problem can be run over again after you know the outcome partway through. Whether the result is that you should reduce risk from what it would have been might seem likely but could also be an "it depends." Some people would be cautious about present condition being a result of a market now known to be overvalued, but if you start to change future expected distributions of returns as you work this problem you also start to enter some pretty cloudy territory.
This is exactly it...everything you've mentioned, culminating with 'cloudy territory' is exactly what I am grappling with...I have not looked into any probabilistic model, but may be something based off of something like what the 'Variable withdrawal method' uses (which I think is based partly off of future expected distribution)...but frankly haven't looked deep into it as I just wanted to run by my conceptual idea first to gather input, before seriously thinking about it...

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Re: AA based on recent market performance and pre-determined target

Post by livesoft » Mon Nov 27, 2017 11:12 am

Allocation based on CAPE10 is discussed:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
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gilgamesh
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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 11:31 am

livesoft wrote:
Mon Nov 27, 2017 11:12 am
Allocation based on CAPE10 is discussed:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Correct me of I am wrong, doesn't CAPE 10 only tries to predict 10 year performances? If true, I am reluctant to use that for 8,7,6...1 years away from retirement.

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Re: AA based on recent market performance and pre-determined target

Post by skierrex » Mon Nov 27, 2017 11:36 am

Once you've won the game it doesn't make sense to keep playing.
I went from 100/0 S/B to 50/50 when I hit my number.
I have to admit, it's killing me to have so much in bonds.
Maybe I should double my number!

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Re: AA based on recent market performance and pre-determined target

Post by livesoft » Mon Nov 27, 2017 11:37 am

So are you going to die on the day you retire? Or are you going to use your portfolio for the next 10, 20, 30 years to fund your expenses?
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gilgamesh
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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 11:47 am

TheTimeLord wrote:
Mon Nov 27, 2017 10:27 am
This is a question I am wrestling with. So here is how I have thought about it in regards to risk. My original AA and Target number would meanI had X dollars in stock when I hit my target number and I had determined that was the risk I was willing to bear. The returns I have experienced in equities now mean I have X+Y dollars in equities so the question is do I want the additional risk of having all or part of those Y dollars in equities. There is no right or wrong answer that I know, but in my case I have taken majority of those Y dollars and put them in fixed income thus I now have a more conservative AA than my plan would have originally called for because then returns I have experienced have far exceeded the estimates on which my plan was built. To me I am implementing part of Bernstein's quit playing once you hav won the game strategy. Not knowing your particular situation or risk tolerance I can't make any recommendation, I can only offer you insight in to how I viewed and worked through a similar problem.

I and 2 or 3 years away from retirement so that would color my decision and is different from being 10 years away.
Thank you...it's your post ( viewtopic.php?f=1&t=232977) that prompted me to finally post it.

I like the idea of investing the excess from target (Y, in your case) in fixed income. I like that starting point very much.

One immediate concern when retirement is say more than 2-3 years away is: The target nest egg is based off of some predetermined return (5% in my case), if I take everything in excess of 'X' into fixed income, then what about the years where it falls below X? the average return assumes lean years and years like this, so why nullify the good years? I need those to work the compound interest to make up for the lean years...I am hoping to find an amount to put in fixed income that is Y-Z, where 'Z' will decline as we get closer to retirement ... may be even Z reaching zero 2-3 years away from retirement, like in your case.

My retirement income is based off of something similar to what Bernstein proposes (A significant TIPS ladder with side portfolio exposed to equities).
Last edited by gilgamesh on Mon Nov 27, 2017 12:06 pm, edited 1 time in total.

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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 11:49 am

skierrex wrote:
Mon Nov 27, 2017 11:36 am
Once you've won the game it doesn't make sense to keep playing.
I went from 100/0 S/B to 50/50 when I hit my number.
I have to admit, it's killing me to have so much in bonds.
Maybe I should double my number!
Haven't won yet...this is pre-retirement targets.

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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 11:57 am

livesoft wrote:
Mon Nov 27, 2017 11:37 am
So are you going to die on the day you retire? Or are you going to use your portfolio for the next 10, 20, 30 years to fund your expenses?
Yes! but that's already factored into my target AA at retirement. At retirement, (as per my hypothetical example 56% in retirement) is set and this AA already factors this 30+ years of funding.

So, it's changing AA prior to reaching that target on retirement day. This is not about changing AA after retirement...although one possibly could consider that.

The reason I have not considered for after retirement is, because my retirement income will mostly come from TIPS ladder and only the side portfolio will be open to equity risks, which I will not de-risk no matter how well it does.
Last edited by gilgamesh on Mon Nov 27, 2017 12:15 pm, edited 1 time in total.

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Re: AA based on recent market performance and pre-determined target

Post by Sandtrap » Mon Nov 27, 2017 12:14 pm

gilgamesh wrote:
Mon Nov 27, 2017 11:57 am
livesoft wrote:
Mon Nov 27, 2017 11:37 am
So are you going to die on the day you retire? Or are you going to use your portfolio for the next 10, 20, 30 years to fund your expenses?
Yes! but that's already factored into my target AA at retirement. At retirement, (as per my example 56% in retirement) is set and this AA already factors this 30+ years of funding.

So, it's changing AA prior to reaching that target on retirement day. This is not about changing AA after retirement...although one possibly could consider that.

The reason I have not considered for after retirement is, because my retirement income will mostly come from TIPS ladder and only the side portfolio will be open to equity risks, which I will not de-risk no matter how well it does.
A have taken a more comprehensive approach, albeit simplistically per many Boglehead suggestions?
My targets were every 5 years from age 60 onward. The larger the portfolio, the more taken "off the table", and less risk taken on. And, the older I get, the more conservative the allocation as well. So, allocation changes both up to and post retirement. This has worked leading up to retirement, and, so far, after retirement. Sleep factor is good.
FWIW I have an older close friend who has been 50/50 for the past 40 years and doesn't intend to change.
j :D

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Re: AA based on recent market performance and pre-determined target

Post by TheTimeLord » Mon Nov 27, 2017 12:25 pm

gilgamesh wrote:
Mon Nov 27, 2017 11:47 am
TheTimeLord wrote:
Mon Nov 27, 2017 10:27 am
This is a question I am wrestling with. So here is how I have thought about it in regards to risk. My original AA and Target number would meanI had X dollars in stock when I hit my target number and I had determined that was the risk I was willing to bear. The returns I have experienced in equities now mean I have X+Y dollars in equities so the question is do I want the additional risk of having all or part of those Y dollars in equities. There is no right or wrong answer that I know, but in my case I have taken majority of those Y dollars and put them in fixed income thus I now have a more conservative AA than my plan would have originally called for because then returns I have experienced have far exceeded the estimates on which my plan was built. To me I am implementing part of Bernstein's quit playing once you hav won the game strategy. Not knowing your particular situation or risk tolerance I can't make any recommendation, I can only offer you insight in to how I viewed and worked through a similar problem.

I and 2 or 3 years away from retirement so that would color my decision and is different from being 10 years away.
Thank you...it's your post ( viewtopic.php?f=1&t=232977) that prompted me to finally post it.

I like the idea of investing the excess from target (Y, in your case) in fixed income. I like that starting point very much.

One immediate concern when retirement is say more than 2-3 years away is: The target nest egg is based off of some predetermined return (5% in my case), if I take everything in excess of 'X' into fixed income, then what about the years where it falls below X? the average return assumes lean years and years like this, so why nullify the good years? I need those to work the compound interest to make up for the lean years...I am hoping to find an amount to put in fixed income that is Y-Z, where 'Z' will decline as we get closer to retirement ... may be even Z reaching zero 2-3 years away from retirement, like in your case.

My retirement income is based off of something similar to what Bernstein proposes (A significant TIPS ladder with side portfolio exposed to equities).
If X falls below target from now to retirement then I guess it would be from underperformance, correction or bear market, personally I would consider that a good time to move some of Y back in. There is a balancing act here because you are going to have more Fixed Income in absolute dollars than you originally targeted too. Essentially, if I am understanding your situation, you are currently in a position where you no longer need to take as much risk as you presently have, but can afford to take more risk than you planned. That's where my mind goes to take some of Y out of risk but be willing to redeploy it into risk later if the need or opportunity arises. It is important you understand what is more important to you, securing your retirement in 10 years or the opportunity to retire say in 7 years realizing the risk that could possibly entail.

Nothing wrong with splitting baby Y either. Always important to remember none of us know the future.
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gilgamesh
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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 2:09 pm

TheTimeLord wrote:
Mon Nov 27, 2017 12:25 pm
gilgamesh wrote:
Mon Nov 27, 2017 11:47 am
TheTimeLord wrote:
Mon Nov 27, 2017 10:27 am
This is a question I am wrestling with. So here is how I have thought about it in regards to risk. My original AA and Target number would meanI had X dollars in stock when I hit my target number and I had determined that was the risk I was willing to bear. The returns I have experienced in equities now mean I have X+Y dollars in equities so the question is do I want the additional risk of having all or part of those Y dollars in equities. There is no right or wrong answer that I know, but in my case I have taken majority of those Y dollars and put them in fixed income thus I now have a more conservative AA than my plan would have originally called for because then returns I have experienced have far exceeded the estimates on which my plan was built. To me I am implementing part of Bernstein's quit playing once you hav won the game strategy. Not knowing your particular situation or risk tolerance I can't make any recommendation, I can only offer you insight in to how I viewed and worked through a similar problem.

I and 2 or 3 years away from retirement so that would color my decision and is different from being 10 years away.
Thank you...it's your post ( viewtopic.php?f=1&t=232977) that prompted me to finally post it.

I like the idea of investing the excess from target (Y, in your case) in fixed income. I like that starting point very much.

One immediate concern when retirement is say more than 2-3 years away is: The target nest egg is based off of some predetermined return (5% in my case), if I take everything in excess of 'X' into fixed income, then what about the years where it falls below X? the average return assumes lean years and years like this, so why nullify the good years? I need those to work the compound interest to make up for the lean years...I am hoping to find an amount to put in fixed income that is Y-Z, where 'Z' will decline as we get closer to retirement ... may be even Z reaching zero 2-3 years away from retirement, like in your case.

My retirement income is based off of something similar to what Bernstein proposes (A significant TIPS ladder with side portfolio exposed to equities).
If X falls below target from now to retirement then I guess it would be from underperformance, correction or bear market, personally I would consider that a good time to move some of Y back in. There is a balancing act here because you are going to have more Fixed Income in absolute dollars than you originally targeted too. Essentially, if I am understanding your situation, you are currently in a position where you no longer need to take as much risk as you presently have, but can afford to take more risk than you planned. That's where my mind goes to take some of Y out of risk but be willing to redeploy it into risk later if the need or opportunity arises. It is important you understand what is more important to you, securing your retirement in 10 years or the opportunity to retire say in 7 years realizing the risk that could possibly entail.

Nothing wrong with splitting baby Y either. Always important to remember none of us know the future.
Yes! in my case if X falls below target then it's due to market factors and not due to my ability to keep with the target savings...that's a reasonable assumption. Therefore, going from bonds to stocks is a fine idea.

However, I don't think I would want to wait till X drops below my original target though...I would think I will increase my risk well before it falls to X or below X.

I'll have to work on my threshold to act (How big should Y get before acting)...first when to de-risk and then when to get back to original risk or getting closer to it....like, say if I am 10 years away from retirement and nest egg is already where I want to be at 7 ('3 year advantage') then de-risk a bit (exactly how much needs to be set), but say after that it goes to a '2 year advantage' then I will gradually increase risk (max risk what I had with my original plan) and reach max risk well before it gets to 'zero year advantage' (back to my previous target).

If I am only 3 years away from retirement and I have a '2 year advantage' the de-risking will be of much higher magnitude than if I was 10 years away and have the same '2 year advantage'.

Just have to put this all together...

It will be even neater, if the whole target is reset each time I consider changing risk...as in change target retirement year, target for each year based off of current data, but keeping the expected return the same as before...so, not de-risk all the way down and keep the target retirement the same, but reduce both...just thinking out loud here.

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Re: AA based on recent market performance and pre-determined target

Post by avalpert » Mon Nov 27, 2017 2:19 pm

gilgamesh wrote:
Mon Nov 27, 2017 10:11 am
I am 10 years away from retirement. I would think many written plans will involve reducing stock exposure as you get closer to retirement...I do.

I also have a pre-determined target nest egg for many of the important years…I assumed an average return of 5%.

So, obviously after the recent market performance I am far ahead of that target.

Can stock exposure (IOW, risk exposure) be adjusted based on how well the current nest egg matches to my year to year target nest egg, or does it just have to be based off of how far away one is from retirement?
Yes it can and should. This is what is meant by considering your 'need for risk' - for many, that need will be lower thanks to the market's performance. This is also where a tool like value averaging can be helpful - you can use the value path to manage target risk exposure at a point in time. You can decide how you spend the 'excess' above target returns you have earned - you can 'spend it' by decreasing your retirement timeline and hoping the risk exposure doesn't take it away, you can 'spend it' by increasing your 'safe' assets assigned to support future consumption in retirement or you can spend it on current expenses you wouldn't otherwise make (whether directly or through decreased savings rate).

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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Mon Nov 27, 2017 2:39 pm

avalpert wrote:
Mon Nov 27, 2017 2:19 pm
gilgamesh wrote:
Mon Nov 27, 2017 10:11 am
I am 10 years away from retirement. I would think many written plans will involve reducing stock exposure as you get closer to retirement...I do.

I also have a pre-determined target nest egg for many of the important years…I assumed an average return of 5%.

So, obviously after the recent market performance I am far ahead of that target.

Can stock exposure (IOW, risk exposure) be adjusted based on how well the current nest egg matches to my year to year target nest egg, or does it just have to be based off of how far away one is from retirement?
Yes it can and should. This is what is meant by considering your 'need for risk' - for many, that need will be lower thanks to the market's performance. This is also where a tool like value averaging can be helpful - you can use the value path to manage target risk exposure at a point in time. You can decide how you spend the 'excess' above target returns you have earned - you can 'spend it' by decreasing your retirement timeline and hoping the risk exposure doesn't take it away, you can 'spend it' by increasing your 'safe' assets assigned to support future consumption in retirement or you can spend it on current expenses you wouldn't otherwise make (whether directly or through decreased savings rate).
My quick response to your post...I'll think about it more and may elaborate more.

Yes! value path idea was one of the things that crossed my mind. Here the value path was determined by me - the 5% return...I don't think I will change that. So, the 5% will remain the same after an extended bull or bear market. Given the new nest egg, if I were to set a new value path, it will be different, but not because I am willing to change the 5%.

If I am 'spending' by increasing my safe assets, should the 5% change too?
Can I do some of that spending and also 'spend' on decreasing retirement time frame?...no reason, not to.
How much and when? I guess as 5% was arbitrary (an educated, purposefully conservative estimate based on past history...so not entirely arbitrary), these (when and where) will have to be educated guesses too.

P.S: This 5% is the return I assumed when I set the targets.

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Re: AA based on recent market performance and pre-determined target

Post by avalpert » Mon Nov 27, 2017 3:00 pm

gilgamesh wrote:
Mon Nov 27, 2017 2:39 pm
avalpert wrote:
Mon Nov 27, 2017 2:19 pm
gilgamesh wrote:
Mon Nov 27, 2017 10:11 am
I am 10 years away from retirement. I would think many written plans will involve reducing stock exposure as you get closer to retirement...I do.

I also have a pre-determined target nest egg for many of the important years…I assumed an average return of 5%.

So, obviously after the recent market performance I am far ahead of that target.

Can stock exposure (IOW, risk exposure) be adjusted based on how well the current nest egg matches to my year to year target nest egg, or does it just have to be based off of how far away one is from retirement?
Yes it can and should. This is what is meant by considering your 'need for risk' - for many, that need will be lower thanks to the market's performance. This is also where a tool like value averaging can be helpful - you can use the value path to manage target risk exposure at a point in time. You can decide how you spend the 'excess' above target returns you have earned - you can 'spend it' by decreasing your retirement timeline and hoping the risk exposure doesn't take it away, you can 'spend it' by increasing your 'safe' assets assigned to support future consumption in retirement or you can spend it on current expenses you wouldn't otherwise make (whether directly or through decreased savings rate).
My quick response to your post...I'll think about it more and may elaborate more.

Yes! value path idea was one of the things that crossed my mind. Here the value path was determined by me - the 5% return...I don't think I will change that. So, the 5% will remain the same after an extended bull or bear market. Given the new nest egg, if I were to set a new value path, it will be different, but not because I am willing to change the 5%.

If I am 'spending' by increasing my safe assets, should the 5% change too?
No, the expected return on the assets invested on the risk side stays the same - you just decrease the money exposed to 'risky' assets.
Can I do some of that spending and also 'spend' on decreasing retirement time frame?...no reason, not to.
You can, for example over time as I've pulled ahead of my value path (due both to increased returns and increased contributions) I have jumped my timeline, essentially my target is now one year ahead of where it was on the same value path, I have also felt less guilt increasing some expenditures (took a couple more sabbaticals than originally planned which I may have done anyway) and reduced my equity exposure as a percent of total portfolio.
How much and when? I guess as 5% was arbitrary (an educated, purposefully conservative estimate based on past history...so not entirely arbitrary), these (when and where) will have to be educated guesses too.
You are right, it is all subjective at the end of the day and based on feel (not necessarily arbitrary but the idea that there can be precise objective triggers is misguided).

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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Tue Nov 28, 2017 12:29 pm

Yes, changing AA based on a value path involves a bit of educated guessing. Just wanted to make sure I at least had all the variables to consider.

I like the idea of spending the excess on reducing retirement horizon and reducing risk. I will set some trigger points to change AA. The amount of AA change will depend on my current portfolio amount as compared to my target, how far away I am from retirement. I am reluctant to use current market condition and modify future returns, but rather just leave it at 5%.

If the target retirement date is changed, then I will set a new 'value path' and base future decision to this new 'value path'

I assume this seems reasonable....thank you for all the replies.

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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Fri Dec 01, 2017 9:04 am

How about something like this...If 10 years away from retirement, any gain over the target nest egg is divided 50:50 to reduce risk and reduce retirement horizon.

This 50:50, each year will go up by 5% increments in favor of safer assets...so, year 9 55% of the gain to safe assets, year 8 60% of the gain to safer assets and so on...

So, if I am 10 years away from retirement with a target nest egg of say $1,000,000 and target AA of 80% stocks. A bull market has increased the nest egg to $1,200,000. If it met my target of $1M, then $800k would be stocks. With $1.2M it will be $960k in stocks, if I did not change my original AA. But I change the AA such that $880k is invested in stocks and rest in bonds (So, it's not really 50% of the gain, but rather 50% of where the stock allocation should be with my previously set AA). So, some of the gain is 'spent' on reducing risk and some to hopefully reduce retirement horizon.

Repeat for each year.

After a market crash, go up to a maximum of the originally set AA for each year. I will sell bonds to get more stocks.

Is this a good plan?

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Re: AA based on recent market performance and pre-determined target

Post by The Wizard » Sat Dec 02, 2017 4:52 am

gilgamesh wrote:
Fri Dec 01, 2017 9:04 am

...Is this a good plan?
It seems like a good plan.
You probably want to start thinking about income streams in retirement as well.
I'm retired close to five years now and did not have a firm Accumulation Number that I targeted back in 2012. But I wanted about the same net income in retirement as I had when employed.

Because I planned to annuitize a portion of my tax deferred accumulation, each additional year of work not only increased the accumulation but also increased the Payout Rate slightly.
I'm now 27 months from starting SS at age 70 and have been letting my AA drift upwards from my previous 50/50 target.
I'm thinking 60/40 will be my upper limit in retirement.
But in my case, the need for portfolio withdrawals to support spending after age 70 will be minimal...
Attempted new signature...

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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Sat Dec 02, 2017 8:00 am

The Wizard wrote:
Sat Dec 02, 2017 4:52 am
gilgamesh wrote:
Fri Dec 01, 2017 9:04 am

...Is this a good plan?
It seems like a good plan.
You probably want to start thinking about income streams in retirement as well.
I'm retired close to five years now and did not have a firm Accumulation Number that I targeted back in 2012. But I wanted about the same net income in retirement as I had when employed.

Because I planned to annuitize a portion of my tax deferred accumulation, each additional year of work not only increased the accumulation but also increased the Payout Rate slightly.
I'm now 27 months from starting SS at age 70 and have been letting my AA drift upwards from my previous 50/50 target.
I'm thinking 60/40 will be my upper limit in retirement.
But in my case, the need for portfolio withdrawals to support spending after age 70 will be minimal...
I already have planned an income stream in retirement - most of my income will come from TIPS/CD ladder for the first 20 years followed by nominal SPIA ladder.

I am surprised there's not much interest in this topic. To me, this is one of the significant concept, of a very few, that will shape my investement phase and retirement phase. The concept of 'spending' recent market gains to lower risk, shorten working years is rarely discussed, and not much interest is given to this thread either. I think it's a pivotal part - may be not as much as reducing ER, but at least in par with concepts like TLH...I wish there's more robust discussion on this.

The Wizard
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Re: AA based on recent market performance and pre-determined target

Post by The Wizard » Sat Dec 02, 2017 9:10 am

gilgamesh wrote:
Sat Dec 02, 2017 8:00 am

...I am surprised there's not much interest in this topic. To me, this is one of the significant concept, of a very few, that will shape my investement phase and retirement phase. The concept of 'spending' recent market gains to lower risk, shorten working years is rarely discussed, and not much interest is given to this thread either. I think it's a pivotal part - may be not as much as reducing ER, but at least in par with concepts like TLH...I wish there's more robust discussion on this.
Well I think your concept in fairly central to the usual ideas of having a target number and reducing your stocks exposure as one gets older and closer to retirement.
The issue of being impacted by a serious market decline is still there with any significant stock exposure. The usual way to deal with this is to have 20-30% more than your base number.
Good luck...
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gilgamesh
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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Sat Dec 02, 2017 11:08 am

The Wizard wrote:
Sat Dec 02, 2017 9:10 am
gilgamesh wrote:
Sat Dec 02, 2017 8:00 am

...I am surprised there's not much interest in this topic. To me, this is one of the significant concept, of a very few, that will shape my investement phase and retirement phase. The concept of 'spending' recent market gains to lower risk, shorten working years is rarely discussed, and not much interest is given to this thread either. I think it's a pivotal part - may be not as much as reducing ER, but at least in par with concepts like TLH...I wish there's more robust discussion on this.
Well I think your concept in fairly central to the usual ideas of having a target number and reducing your stocks exposure as one gets older and closer to retirement.
The issue of being impacted by a serious market decline is still there with any significant stock exposure. The usual way to deal with this is to have 20-30% more than your base number.
Good luck...
Yes! But this is not sticking to that pre-planned AA that gets more conservative as one gets closer to retirement. The whole concept is the ability to reduce risk even lower than that pre-planned AA which also reduces risk as one gets closer to retirement, if markets perform better than your target projections...very different. So, it allows one to reduce risk even more...

It's modified 'value averaging' concept of investing, without the negative of having to hold cash.

I'm excited about this...but, I've been excited about other things that'd ended up not making much practical difference ...so, just want to run this through the rigors as well.

P.S: I like 'value average' investing except for holding cash...Instead of holding cash, I proposed just switching from paying extra towards loans to directing those extra funds to investing to bring the value path back inline (may be only after a market crash) instead of holding cash on the sidelines, but that was struck down here as it made no difference.

The Wizard
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Re: AA based on recent market performance and pre-determined target

Post by The Wizard » Sat Dec 02, 2017 11:51 am

gilgamesh wrote:
Sat Dec 02, 2017 11:08 am

...Yes! But this is not sticking to that pre-planned AA that gets more conservative as one gets closer to retirement. The whole concept is the ability to reduce risk even lower than that pre-planned AA which also reduces risk as one gets closer to retirement, if markets perform better than your target projections...very different. So, it allows one to reduce risk even more...

It's modified 'value averaging' concept of investing, without the negative of having to hold cash.

I'm excited about this...but, I've been excited about other things that'd ended up not making much practical difference ...so, just want to run this through the rigors as well.

P.S: I like 'value average' investing except for holding cash...Instead of holding cash, I proposed just switching from paying extra towards loans to directing those extra funds to investing to bring the value path back inline (may be only after a market crash) instead of holding cash on the sidelines, but that was struck down here as it made no difference.
I googled Value Averaging to firm my knowledge of it and I don't care for the concept. One reference seemed to assume your portfolio was all stocks since one's AA wasn't mentioned.
I'm basically a lump sum/AA/rebalancing investor.

Now I did reduce my AA stocks percentage from around 70% in 2010 (when I joined BH) to around 50% when I retired in 2013, so that reduced volatility a bit.
And the years from around 2008 to 2013 had my highest savings percentages and amounts.

I think my feelings on further Risk Reduction, beyond holding a 50/50 portfolio and managing it properly through retirement have two basic options. If your 50/50 AA puts a 4% withdrawal rate at too high a risk level for you, then:
1) save more, work longer and get down closer to a 3% WR,

and/or
2) find a way to increase your non-portfolio income (pensions, annuities, SS) so that you are less at the mercy of Mr Market having a bad year...
Attempted new signature...

KlangFool
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Re: AA based on recent market performance and pre-determined target

Post by KlangFool » Sat Dec 02, 2017 12:05 pm

OP,

1) Adjust AA based on age does not work well in a bull market.

2) You should adjust your AA based on portfolio size. For example, if your final AA is 60/40 and your targeted portfolio size is 25 times your annual expense. You could

A) Final AA = 60/40 -> Portfolio size = 25 times annual expense.

B) AA = 65/35 when portfolio size = 20 times annual expense.

So on.

KlangFool

gilgamesh
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Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Sun Dec 03, 2017 10:38 am

The Wizard wrote:
Sat Dec 02, 2017 11:51 am
gilgamesh wrote:
Sat Dec 02, 2017 11:08 am

...Yes! But this is not sticking to that pre-planned AA that gets more conservative as one gets closer to retirement. The whole concept is the ability to reduce risk even lower than that pre-planned AA which also reduces risk as one gets closer to retirement, if markets perform better than your target projections...very different. So, it allows one to reduce risk even more...

It's modified 'value averaging' concept of investing, without the negative of having to hold cash.

I'm excited about this...but, I've been excited about other things that'd ended up not making much practical difference ...so, just want to run this through the rigors as well.

P.S: I like 'value average' investing except for holding cash...Instead of holding cash, I proposed just switching from paying extra towards loans to directing those extra funds to investing to bring the value path back inline (may be only after a market crash) instead of holding cash on the sidelines, but that was struck down here as it made no difference.
I googled Value Averaging to firm my knowledge of it and I don't care for the concept. One reference seemed to assume your portfolio was all stocks since one's AA wasn't mentioned.
I'm basically a lump sum/AA/rebalancing investor.

Now I did reduce my AA stocks percentage from around 70% in 2010 (when I joined BH) to around 50% when I retired in 2013, so that reduced volatility a bit.
And the years from around 2008 to 2013 had my highest savings percentages and amounts.

I think my feelings on further Risk Reduction, beyond holding a 50/50 portfolio and managing it properly through retirement have two basic options. If your 50/50 AA puts a 4% withdrawal rate at too high a risk level for you, then:
1) save more, work longer and get down closer to a 3% WR,

and/or
2) find a way to increase your non-portfolio income (pensions, annuities, SS) so that you are less at the mercy of Mr Market having a bad year...
I dont like Value Averaging either, but it has concepts that's great to think about and apply in other situations....it doesn't necessarily call for 100% stocks. The boglehead reference is good https://www.bogleheads.org/wiki/Value_averaging

gilgamesh
Posts: 980
Joined: Sun Jan 10, 2016 9:29 am

Re: AA based on recent market performance and pre-determined target

Post by gilgamesh » Sun Dec 03, 2017 10:39 am

KlangFool wrote:
Sat Dec 02, 2017 12:05 pm
OP,

1) Adjust AA based on age does not work well in a bull market.

2) You should adjust your AA based on portfolio size. For example, if your final AA is 60/40 and your targeted portfolio size is 25 times your annual expense. You could

A) Final AA = 60/40 -> Portfolio size = 25 times annual expense.

B) AA = 65/35 when portfolio size = 20 times annual expense.

So on.

KlangFool
This is good...forget about evaluating each year, just in terms of final goal...I like it!....thanks!

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jhfenton
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Re: AA based on recent market performance and pre-determined target

Post by jhfenton » Sun Dec 03, 2017 10:54 am

gilgamesh wrote:
Sun Dec 03, 2017 10:39 am
This is good...forget about evaluating each year, just in terms of final goal...I like it!....thanks!
+1 I follow KlangFool's strategy too. I have a formula that adjusts my target asset allocation based on the value of our portfolio in relation to my portfolio target.

Random Walker
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Re: AA based on recent market performance and pre-determined target

Post by Random Walker » Sun Dec 03, 2017 11:36 am

Totally appropriate to adjust AA based on where one is relative to goals rather than blindly by age. We can’t control what the markets give us, but we can control how we respond. Recent large gains have gotten people closer to retirement than they may have expected. But high past returns have resulted in generous valuations, lower future expected returns, more modest potential future good outcomes, and worse potential future bad outcomes. If one is within sight of retirement, only makes sense to act. It would be disasterous to see someone 5 years from retirement today, but 10 years away from retirement 5 years from now because they didn’t take risk off the table. I strongly recommend William Bernstein’s ebook on lifecycle investing. He considers this period of time close to retirement critical, and for this reason he saves discussing it until the end.

Dave

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