1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

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JustinR
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1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by JustinR » Wed Jun 13, 2018 3:32 am

It's said one of the worse things investors can do is constantly tinker with their investment strategy. Humans are wired to constantly tweak and optimize things.

To prevent myself from doing this, I imposed this rule:

I'm not allowed to execute a change in asset allocation strategy until one year after formally declaring it. Any new change declared during that time resets the clock.

An example to explain the mechanics of it (not a realistic example):
  • 6/13/18: Declare that you want to increase your REIT allocation from 2% to 10%. Mark the execution date, 6/13/19, on your calendar.
  • 1/1/19: You read something about emerging markets and decide to add some to your portfolio. The execution date is now pushed further to 1/1/20.
  • 2/4/19: You change your mind about emerging markets, but want to increase your international allocation to 45% and REITs to 6% instead of 10% like you originally wanted. The execution date is now pushed even further to 2/4/20.
  • 2/4/20: You execute your plan to increase REIT to 6% and international to 45%.
This way, you're able to formulate a plan, sit on it, make tweaks to it, sit on it...and if you made it a year and are still satisfied with your latest plan then you're good to go. If not, then you never changed anything and that's also a good thing.

What do you think about this? Too strict?

-----
Note: This rule would be mostly for investors who already have a decent investment strategy in place.
Last edited by JustinR on Wed Jun 13, 2018 5:24 am, edited 5 times in total.

ResearchMed
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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by ResearchMed » Wed Jun 13, 2018 4:03 am

JustinR wrote:
Wed Jun 13, 2018 3:32 am
It's said one of the worse things investors can do is constantly tinker with their investment strategy. It's hard to do when you keep reading about value tilts, emerging markets, REITs, US vs International, tax efficiency, etc.

To prevent myself from doing this, I imposed this rule:

I'm not allowed to execute a change in asset allocation strategy until one year after formally declaring it. Any new change declared during that time resets the clock.

For example:
  • 6/13/18: Declare that you want to increase your REIT allocation from 5% to 10%. Mark the execution date, 6/13/19, on your calendar.
  • 1/1/19: You read something about emerging markets and decide to add some to your portfolio. The new execution date will be 1/1/20.
  • 2/4/19: You change your mind about emerging markets, but want to increase your international allocation to 45%. The new execution date will be 2/4/20.
  • 2/4/20: You execute your plan to increase REIT to 10% and international to 45%.
This way, you stuck with your original investment strategy from 6/13/18 to 2/4/20 without making any fleeting changes. Only a year and a half later were you finally "allowed" to make a change, a plan you were satisfied with for a whole year without any changes.

What do you think about this? Too strict?
Er...
... haven't you violated the "not allowed to execute a change in asset allocation strategy until one year after formally declaring it" with changes 2 and 3?

If your rule is "no changes allowed for one year", then that's what you need to do.
Otherwise, how in the world are you deciding "which changes" are okay *early*, and which are not?

RM
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slayed
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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by slayed » Wed Jun 13, 2018 4:12 am

JustinR wrote:
Wed Jun 13, 2018 3:32 am
It's said one of the worse things investors can do is constantly tinker with their investment strategy. It's hard to do when you keep reading about value tilts, emerging markets, REITs, US vs International, tax efficiency, etc.
I would argue it is even worse to stick with an investment strategy that is bad and/or inappropriate. There is nothing wrong with changing strategy if it is done for the right reason(s).

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by JustinR » Wed Jun 13, 2018 4:23 am

ResearchMed wrote:
Wed Jun 13, 2018 4:03 am
Er...
... haven't you violated the "not allowed to execute a change in asset allocation strategy until one year after formally declaring it" with changes 2 and 3?
Execute is the key word. #2 and #3 are just declaring more changes during the first 1 year wait. Not executing anything. In other words, the clock was pushed back twice.

slayed wrote:
Wed Jun 13, 2018 4:12 am
JustinR wrote:
Wed Jun 13, 2018 3:32 am
It's said one of the worse things investors can do is constantly tinker with their investment strategy. It's hard to do when you keep reading about value tilts, emerging markets, REITs, US vs International, tax efficiency, etc.
I would argue it is even worse to stick with an investment strategy that is bad and/or inappropriate. There is nothing wrong with changing strategy if it is done for the right reason(s).
This rule is mostly for Bogleheads who have been investing for a while and have a sound strategy in place already. Not someone who just started out and accidentally put 100% in Tesla stock.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by ResearchMed » Wed Jun 13, 2018 4:40 am

JustinR wrote:
Wed Jun 13, 2018 4:23 am
ResearchMed wrote:
Wed Jun 13, 2018 4:03 am
Er...
... haven't you violated the "not allowed to execute a change in asset allocation strategy until one year after formally declaring it" with changes 2 and 3?
Execute is the key word. #2 and #3 are just declaring more changes during the first 1 year wait. Not executing anything. In other words, the clock was pushed back twice.

slayed wrote:
Wed Jun 13, 2018 4:12 am
JustinR wrote:
Wed Jun 13, 2018 3:32 am
It's said one of the worse things investors can do is constantly tinker with their investment strategy. It's hard to do when you keep reading about value tilts, emerging markets, REITs, US vs International, tax efficiency, etc.
I would argue it is even worse to stick with an investment strategy that is bad and/or inappropriate. There is nothing wrong with changing strategy if it is done for the right reason(s).
This rule is mostly for Bogleheads who have been investing for a while and have a sound strategy in place already. Not someone who just started out and accidentally put 100% in Tesla stock.
Sorry - I was up early and didn't read properly!

However, are you thus allowing yourself to start tinkering very frequently, albeit in delays of 1 yr from "decision"?

I'm not sure that's a good idea either.

I (now) get it that you want to avoid quick moves, but wouldn't somehow grouping and coordinating different ongoing "change rules" be a bit better, less scattershot?

The fact that you are making chance decisions (even if not implementing them) as often as you wish... and then executing them with a given delay... but still "as often as you wish", somehow doesn't feel right.
You could end up going back and forth between the same positions, frequently, but just delayed.

But ANY rule that "works for you" is... your rule.

RM
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JustinR
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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by JustinR » Wed Jun 13, 2018 4:46 am

ResearchMed wrote:
Wed Jun 13, 2018 4:40 am
Sorry - I was up early and didn't read properly!

However, are you thus allowing yourself to start tinkering very frequently, albeit in delays of 1 yr from "decision"?

I'm not sure that's a good idea either.

I (now) get it that you want to avoid quick moves, but wouldn't somehow grouping and coordinating different ongoing "change rules" be a bit better, less scattershot?

The fact that you are making chance decisions (even if not implementing them) as often as you wish... and then executing them with a given delay... but still "as often as you wish", somehow doesn't feel right.
You could end up going back and forth between the same positions, frequently, but just delayed.

But ANY rule that "works for you" is... your rule.

RM
The example in the OP is just to explain how the rule works mechanically.

In reality, you'd likely be making "whole picture" tweaks, NOT "decided to add REITs in March and decided to add emerging markets in June".

The main idea is over time you learn about things. SCV tilts. International pros and cons. Tax efficiency. You incorporate that knowledge into a "whole picture" plan that you like and sit on it for a year (because you might absorb even more knowledge during that year and change your mind).

If you still like it at the end of that year, then it's good to go. If not, then you never changed anything and that's also a good thing.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by JoMoney » Wed Jun 13, 2018 5:00 am

I think it's an indication you haven't resolved what type of investor you are, if you're an active investor it may be to strict. If you're a passive investor and you find yourself trying to tweak things that frequently, you don't have accepting the markets return right either.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

JustinR
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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by JustinR » Wed Jun 13, 2018 5:13 am

JoMoney wrote:
Wed Jun 13, 2018 5:00 am
I think it's an indication you haven't resolved what type of investor you are, if you're an active investor it may be to strict. If you're a passive investor and you find yourself trying to tweak things that frequently, you don't have accepting the markets return right either.
You can be a passive investor and change your mind on something like international allocation from reading any one of those threads for example. (IE: Should I go with Vanguard's recommendation or global market-cap?)

Or you may read some convincing arguments about why REITs are mediocre and unnecessary (an easy argument to make when they're not doing so hot).

Or maybe you started out with a 70/30 portfolio and decided that your retirement horizon is long enough to go 80/20.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by nisiprius » Wed Jun 13, 2018 6:13 am

I think something like this is a good idea.

I've done something similar, although not as complicated and not as strict, myself. In my case, it took two forms. First, I try to wait a month (just a month!) between deciding to do something and actually doing it.

And, second: I have a rule that I make no big sudden changes in asset allocation ever. When I've decided to make changes, I've done them by setting up an automatic exchange in my Vanguard account so that the desired change gets accomplished over a period of one or two years in the form of small monthly exchanges. Setting up the exchange scratches the itch to "do something." It also gives lots of time for second thoughts. It also gets my confirmation bias working in my favor: six months down the line, if short-term results are looking good I can say "well, at least I'm getting a quarter of the benefit" and if they are looking bad I can say "well, at least I've only committed a quarter of the money to that." In general, when I have a slow-moving automatic exchange running, it is pretty easy to decide "Eh, let's just let it run another few months."
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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by g2morrow » Wed Jun 13, 2018 6:31 am

I have a 3 month rule just like this. So far nothing has made it all 3 months.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by David Jay » Wed Jun 13, 2018 7:43 am

My IPS says that my maximum allocation change in a year is 5%. So I can "adjust" a bit if needed but not go "all cash" or "all stocks".
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by B4Xt3r » Wed Jun 13, 2018 7:48 am

slayed wrote:
Wed Jun 13, 2018 4:12 am
JustinR wrote:
Wed Jun 13, 2018 3:32 am
It's said one of the worse things investors can do is constantly tinker with their investment strategy. It's hard to do when you keep reading about value tilts, emerging markets, REITs, US vs International, tax efficiency, etc.
I would argue it is even worse to stick with an investment strategy that is bad and/or inappropriate. There is nothing wrong with changing strategy if it is done for the right reason(s).
^This.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by SimpleGift » Wed Jun 13, 2018 8:00 am

JustinR wrote:
Wed Jun 13, 2018 3:32 am
What do you think about this? Too strict?
The discipline is wonderful idea in my view, but 3-6 months may be a more practical time frame.

When we were first faced with the portfolio allocation decision in the 1990s (we had sold a business and started investing at Vanguard with a substantial lump sum), we were not completely settled on a portfolio plan and an IPS and we did a lot of senseless tinkering. As I recall, we were generally following a model portfolio suggested by William Bernstein for all-taxable investors, and we hadn't developed a sufficient conviction to just stick with it for our lifetimes.

I wish we had adopted a 3-6 month rule before making any portfolio changes in those days, as it would have saved us considerable indecision and needless taxable transactions. The good new is that, after a few years, we "settled" and have pretty much stuck with same the portfolio plan for 20 years now. So in our experience, the urge to tinker doesn't last forever!
Cordially, Todd

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by bertilak » Wed Jun 13, 2018 8:36 am

SimpleGift wrote:
Wed Jun 13, 2018 8:00 am
So in our experience, the urge to tinker doesn't last forever!
In my experience, the urge to tinker comes and goes but it is not always the same tinkering! I have disciplined my self to sit it out. "Don't do something; just sit there."

When the urge gets stronger I tell myself that my middle-of-the-road allocation probably is not the best but by being middle-of-the-road it can't be very far off.
Last edited by bertilak on Wed Jun 13, 2018 8:49 am, edited 4 times in total.
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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by AlohaJoe » Wed Jun 13, 2018 8:41 am

I have something similar but not quite as strict. But forcing yourself to wait several months between bright idea and actually acting on it has a lot of merit.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by cfs » Wed Jun 13, 2018 8:46 am

I have no rules. Well, used to. But I was a notorious rule breaker. Your money, your portfolio, your decision. Gracias por leer / cfs
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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by J295 » Wed Jun 13, 2018 8:51 am

Our IPS cooling off period is 30 days.
Allocations are age based, and since bands are typically not met during the year we re-allocate once a year.
Pretty simple with three investment categories ..... equities, fixed, and cash.
Have never changed the IPS, so the cooling off period is rather moot to date.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by Portfolio7 » Wed Jun 13, 2018 5:32 pm

nisiprius wrote:
Wed Jun 13, 2018 6:13 am
I think something like this is a good idea.

I've done something similar, although not as complicated and not as strict, myself. In my case, it took two forms. First, I try to wait a month (just a month!) between deciding to do something and actually doing it.

And, second: I have a rule that I make no big sudden changes in asset allocation ever. When I've decided to make changes, I've done them by setting up an automatic exchange in my Vanguard account so that the desired change gets accomplished over a period of one or two years in the form of small monthly exchanges. Setting up the exchange scratches the itch to "do something." It also gives lots of time for second thoughts. It also gets my confirmation bias working in my favor: six months down the line, if short-term results are looking good I can say "well, at least I'm getting a quarter of the benefit" and if they are looking bad I can say "well, at least I've only committed a quarter of the money to that." In general, when I have a slow-moving automatic exchange running, it is pretty easy to decide "Eh, let's just let it run another few months."
I have a similar rule, though it's a bit more relaxed in terms of how fast I can implement changes. I do follow it strictly. I am not allowed to change my Asset Allocation more often than once per month. When I do make a change, I'm not allowed to move more than 10% of my portfolio (I relax this rule if I'm switching between similar index funds; e.g. if the goal is simply to reduce fees.) If I have to, I can stretch a change out over 2 or 3 months, but this gives me time to further reflect on the wisdom of my changes. It helps overcome that first rush of knowledge bias... when I first learn something, I absorb a ton of information in a short time and think I know a lot. And I do, but nowhere near as much as I think I do.
An investment in knowledge pays the best interest.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by Pajamas » Wed Jun 13, 2018 5:57 pm

Seems completely arbitrary to me. Why one year and not eleven months or six months or one and a half years? A year is good for getting rid of clothes you haven't worn because of the yearly cycle of seasons, but why does a year apply here? I don't think investing should be arbitrary.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by MotoTrojan » Wed Jun 13, 2018 6:09 pm

Seems too short honestly. Per IPS every 5 years I can name changes. I don’t plan to change much in 3.5 years when that comes up.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by JoMoney » Wed Jun 13, 2018 6:20 pm

JustinR wrote:
Wed Jun 13, 2018 5:13 am
JoMoney wrote:
Wed Jun 13, 2018 5:00 am
I think it's an indication you haven't resolved what type of investor you are, if you're an active investor it may be to strict. If you're a passive investor and you find yourself trying to tweak things that frequently, you don't have accepting the markets return right either.
You can be a passive investor and change your mind on something like international allocation from reading any one of those threads for example. (IE: Should I go with Vanguard's recommendation or global market-cap?)

Or you may read some convincing arguments about why REITs are mediocre and unnecessary (an easy argument to make when they're not doing so hot).

Or maybe you started out with a 70/30 portfolio and decided that your retirement horizon is long enough to go 80/20.
Well, it's less passive then someone who doesn't, but more passive than a day trader I suppose.
Maybe a percentage of portfolio you're allowed to turnover in a year would be more passive, if that is what you're aiming to do.
There are people that criticize market index funds that turnover maybe 5% as not being 'passive'.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by grabiner » Wed Jun 13, 2018 9:55 pm

I have a similar rule, but it has one important exception. From my Investment Policy Statement:

This statement will be reviewed whenever there is a substantial change in my financial situation, and annually when I rebalance. If there is no substantial change in my financial situation, I will wait at least three months between changing the asset allocation in my statement and changing the asset allocation of my investments, and review the change in the statement at that time.

Thus, when I bought a home in 2013 (a substantial change in my financial situation), I changed the statement and allocation at the same time. But when I changed my asset allocation to start a glide towards retirement in my January 2015 annual review, I waited until April to actually make the change.
Wiki David Grabiner

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by stlutz » Wed Jun 13, 2018 11:07 pm

First, I try to wait a month (just a month!) between deciding to do something and actually doing it.
I've done this too. The fact that nisiprius is doing it makes me feel really smart!

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by AlphaLess » Wed Jun 13, 2018 11:15 pm

Why 1 year?

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by JustinR » Wed Jun 13, 2018 11:58 pm

AlphaLess wrote:
Wed Jun 13, 2018 11:15 pm
Why 1 year?
Because it's long and prevents you from reacting to short term performance of your funds, asset classes falling in and out of favor, or some flashy idea you just read about.

For example, reits may be down recently, leading you to reevaluate holding them in the first place. So you may be tempted to stop rebalancing into it as your plan calls for. Well this forces you to stick with your plan for at least another year. You very likely will change your mind in that time. The market may be more favorable at that time or maybe you realized that investing is a long term game and you should stick it through.

Either way, if it's a good change of plan now then it should still be good a year later.

If you have a good asset allocation going you shouldn't be tweaking it that many times in your lifetime. It's crazy that there are still people in their 40s and 50s still tweaking their portfolios. That shouldn't happen really, but like I said humans are wired to constantly optimize and go for perfection even when there's no such thing.

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by danielc » Sat Jun 16, 2018 4:24 am

Pajamas wrote:
Wed Jun 13, 2018 5:57 pm
Seems completely arbitrary to me. Why one year and not eleven months or six months or one and a half years? A year is good for getting rid of clothes you haven't worn because of the yearly cycle of seasons, but why does a year apply here? I don't think investing should be arbitrary.
The goal is to control for human behviour, from chasing the latest fad, to the swings from irrational exuberance to panic. A rule like this has to be harbitrary because a length of time cannot be derived mathematically from first principles. A year was chosen probably because humans measure time in years. Other people have suggested various small integer multiples of 30 days because 30 days is a round number that is close to the length of a month, which is also a popular unit of measure. Simple round numbers like that are good choices because they are simple and because they dis-invite tweaking.

Many people rebalance once a year or after a small integer fraction of a year. Do you also complain that people could just as well rebalance every 11 months?

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by The Wizard » Sat Jun 16, 2018 6:31 am

I ponder things for a while before making a change.
Right now I'm pondering whether to sell a small holding in junk bond fund TIHYX and move the proceeds into TIAA Traditional.
I think I'll probably do this at some point.
This gives me the illusion of being in control...
Attempted new signature...

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Re: 1 Year Rule - Not allowed to execute new investment strategy until 1 year has passed

Post by AlphaLess » Sat Jun 16, 2018 9:29 am

JustinR wrote:
Wed Jun 13, 2018 11:58 pm
AlphaLess wrote:
Wed Jun 13, 2018 11:15 pm
Why 1 year?
Because it's long and prevents you from reacting to short term performance of your funds, asset classes falling in and out of favor, or some flashy idea you just read about.

For example, reits may be down recently, leading you to reevaluate holding them in the first place. So you may be tempted to stop rebalancing into it as your plan calls for. Well this forces you to stick with your plan for at least another year. You very likely will change your mind in that time. The market may be more favorable at that time or maybe you realized that investing is a long term game and you should stick it through.

Either way, if it's a good change of plan now then it should still be good a year later.

If you have a good asset allocation going you shouldn't be tweaking it that many times in your lifetime. It's crazy that there are still people in their 40s and 50s still tweaking their portfolios. That shouldn't happen really, but like I said humans are wired to constantly optimize and go for perfection even when there's no such thing.
But so is 2 year.
And 3 year.

So you are going to simultaneously have a 1-year, 2-year, 3-year, etc rules?

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