Rebalancing into Poverty

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Leesbro63
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Rebalancing into Poverty

Post by Leesbro63 »

I have been discussing this privately with another Boglehead. What happens to us "mature" investors with "mature" portfolios? Meaning we are no longer in the accumulation stage and now have a portfolio worth at least 25 times our annual spending rate (4% withdrawal)? If the market crashes again and loses 50% or more of it's value...do we REALLY rebalance? Yeah, it worked (WHEW!) in 2008, but what if we are Japan going forward, rebalancing for years and years into poverty?

It seems to me that there needs to be some official Boglehead guideline for this scenario. I know it's been discussed before, but I don't think the conundrum of "Pascal's Wager" here has ever reached a concensus solution.
Muchtolearn
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Re: Rebalancing into Poverty

Post by Muchtolearn »

I will be lambasted for this, but here goes. Once out of the accumulation phase, I don't believe in rebalancing. Frankly, I don't even in the accumulation phase. I use the AA for purchases. You cannot afford to keep moving bonds to stocks in a disastrous market because of the possibility of disaster.
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Re: Rebalancing into Poverty

Post by dbr »

I agree that it is perfectly reasonable to not balance into a stock decline but to balance out of a stock gain.

I would think the theory would be that you are limiting risk at a cost of less return on average.

To study this would require running a retirement model with various rebalancing scenarios.

I think, but am not absolutely sure, that Larry Swedroe even mentioned in passing somewhere that he does not rebalance into declining equities.
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Re: Rebalancing into Poverty

Post by livesoft »

raddr's board has a thread on the hypothetical Y2K retiree who is rebalancing into oblivion:
http://raddr-pages.com/forums/viewtopic ... 1db#p45435
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Re: Rebalancing into Poverty

Post by Cut-Throat »

Muchtolearn wrote:I will be lambasted for this, but here goes. Once out of the accumulation phase, I don't believe in rebalancing. Frankly, I don't even in the accumulation phase. I use the AA for purchases. You cannot afford to keep moving bonds to stocks in a disastrous market because of the possibility of disaster.
Let's say that you were retired in 2007 and had your Asset Allocation set to 30% Stocks and 70% Bonds.....When stocks Tanked 50% in 2008, you lost about 15% of your Portfolio. So, if you had $1 Million, you would have ended up with about $850K,......You rebalanced at year end and now have about $255K in stocks and $595K in stocks. Ignoring any withdrawal for spending purposes.

I don't see the disaster in this at all. I see it, as a terrific buying opportunity.

What you are advocating is changing your asset allocation in the direct opposite direction than you should be. A problem may have been too high an allocation into stocks in the first place, not keeping with the same allocation of a lower stock percentage.
Last edited by Cut-Throat on Tue May 29, 2012 2:32 pm, edited 1 time in total.
rwc356
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Re: Rebalancing into Poverty

Post by rwc356 »

Good question ! This idea would seem to lessen the value of the allocation type fund (Wellsley, Target Retirement Income, etc) in a down market - yet we talk glowingly about (and invest) in these funds. My IRA is split 50-50 between these funds. Am I setting myself up for a problem when we hit the next down market?

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Re: Rebalancing into Poverty

Post by 1210sda »

livesoft wrote:raddr's board has a thread on the hypothetical Y2K retiree who is rebalancing into oblivion:
http://raddr-pages.com/forums/viewtopic ... 1db#p45435
Livesoft, do you recall the begining asset allocation for this portfolio ??

The reason I didn't rebalance during this period is that I was slowly reducing my allocation to stocks in my retirement.....except for 2008. In the case of 2008, I just got scared.
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Last edited by 1210sda on Tue May 29, 2012 2:36 pm, edited 1 time in total.
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Re: Rebalancing into Poverty

Post by Cut-Throat »

Also, I think someone that retired in Japan with about 30% stocks and rebalanced yearly, would have been in great shape. There were lots of buying opportunities.

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Re: Rebalancing into Poverty

Post by nisiprius »

I'm of several conflicting minds about this :) There was a long thread about this, Vanguard TR funds sucking spiral of death.

First, it does have to be said that it may not be as big a problem as people think. If your stock allocation isn't too high, it takes a really really really extreme series of stock crashes to produce genuinely serious suckage.

For example, consider 60/40 In the case of 2008-2009. From 11/1/2007 to 2/28/2009, Vanguard Total Stock Market Index lost 49.6% of its value. Vanguard Balanced Index Fund keeps rebalancing to 60% stocks. If it hadn't rebalanced, at the bottom it would have lost 60% of 49.6% = 29.8%. In fact, at the bottom, it lost 31.6%. So the effect of rebalancing was a loss of 31.6% instead of 29.8%.

Now, take a really extreme case. Suppose your stock allocation is 20% or 1/5. And suppose a series of events in which stocks repeatedly drop to half of their previous value and never come back. Let's say this happened three times in a row, which would be similar than 1930 but with no recovery.

Stocks would then have lost 7/8th of their value, with 1/8th of their value remaining.

Without rebalancing, your portfolio would lose 7/8 of 1/5 = 7/40 of its value, or 17.5%

With rebalancing, at each drop, your portfolio would lose 1/10 of its value. You would then rebalance to 20% again, and the next drop would take off another 1/10. You'd have 90% of 90% of 90% = 72.9%. You'd have lost 27.1%.

So in this scenario, the effect of rebalancing suckage would be to lose 27.1% instead of only 17.5%. That's more than annoying, but it doesn't amount to "rebalancing into poverty."

In other words, when I looked at actual numbers--and I have to say what prompted it was looking at my personal actual numbers during 2008-2009!--the effect is there but it's not as big as I thought.

Anyway, I don't think it's terribly heterodox to say "I'm only going to rebalance when my stock allocation is too high." And one might adopt an intermediate stance: "I'm going to rebalance my stocks during a decline, but I'm going to stop if stocks reach half of their previous peak."
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VennData
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Re: Rebalancing into Poverty

Post by VennData »

Rebalancing is a critical component of Buy, Hold, Rebalance. It is holding your risk profile constant.

If you are worried, than you have too much in equities.
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Re: Rebalancing into Poverty

Post by Leesbro63 »

VennData wrote:Rebalancing is a critical component of Buy, Hold, Rebalance. It is holding your risk profile constant.

If you are worried, than you have too much in equities.
But you "HAVE" to have at least 40% in equity to get even a conservative 3-4% SWR.
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Re: Rebalancing into Poverty

Post by Leesbro63 »

nisiprius wrote:I'm of several conflicting minds about this :) There was a long thread about this, Vanguard TR funds sucking spiral of death.

First, it does have to be said that it may not be as big a problem as people think. If your stock allocation isn't too high, it takes a really really really extreme series of stock crashes to produce genuinely serious suckage.

For example, consider 60/40 In the case of 2008-2009. From 11/1/2007 to 2/28/2009, Vanguard Total Stock Market Index lost 49.6% of its value. Vanguard Balanced Index Fund keeps rebalancing to 60% stocks. If it hadn't rebalanced, at the bottom it would have lost 60% of 49.6% = 29.8%. In fact, at the bottom, it lost 31.6%. So the effect of rebalancing was a loss of 31.6% instead of 29.8%.

Now, take a really extreme case. Suppose your stock allocation is 20% or 1/5. And suppose a series of events in which stocks repeatedly drop to half of their previous value and never come back. Let's say this happened three times in a row, which would be similar than 1930 but with no recovery.

Stocks would then have lost 7/8th of their value, with 1/8th of their value remaining.

Without rebalancing, your portfolio would lose 7/8 of 1/5 = 7/40 of its value, or 17.5%

With rebalancing, at each drop, your portfolio would lose 1/10 of its value. You would then rebalance to 20% again, and the next drop would take off another 1/10. You'd have 90% of 90% of 90% = 72.9%. You'd have lost 27.1%.

So in this scenario, the effect of rebalancing suckage would be to lose 27.1% instead of only 17.5%. That's more than annoying, but it doesn't amount to "rebalancing into poverty."

In other words, when I looked at actual numbers--and I have to say what prompted it was looking at my personal actual numbers during 2008-2009!--the effect is there but it's not as big as I thought.

Anyway, I don't think it's terribly heterodox to say "I'm only going to rebalance when my stock allocation is too high." And one might adopt an intermediate stance: "I'm going to rebalance my stocks during a decline, but I'm going to stop if stocks reach half of their previous peak."

I think I missed something Nisiprius. What are you saying would be the effect if one was 50% equity in Japan in 1989, and continually rebalanced to 50%? What about 40%, the minimum "required" to mimic the SWR studies?
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Re: Rebalancing into Poverty

Post by VictoriaF »

My planning for the distribution stage is based on the considerations as follows:

1. Have a low percent of equities during the distribution stage so that even a 50% market decline would not make a substantial difference. For example, 30/70 (stocks/bonds).
2. Rebalance from stocks to bonds, when equity markets greatly increase.
3. Do not rebalance (or rebalance very little) from bonds to stocks when equity markets greatly decrease. In other words, avoid actions that could lead to rebalancing into poverty.
4. A significant market decrease (#3 above) results in a significant loss of wealth of middle class-and-above individuals. Thus it results in a relative increase in wealth (moving up in the wealth percentile) of those with low asset allocation to stocks.
5. Increase in relative wealth (#4 above) may result in the increase in the buying power of those with low asset allocation to stocks.

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Re: Rebalancing into Poverty

Post by Cut-Throat »

Leesbro63 wrote: But you "HAVE" to have at least 40% in equity to get even a conservative 3-4% SWR.
Where did you hear this?.......

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Last edited by Cut-Throat on Tue May 29, 2012 3:06 pm, edited 1 time in total.
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Re: Rebalancing into Poverty

Post by swaption »

Leesbro63 wrote:I have been discussing this privately with another Boglehead. What happens to us "mature" investors with "mature" portfolios? Meaning we are no longer in the accumulation stage and now have a portfolio worth at least 25 times our annual spending rate (4% withdrawal)? If the market crashes again and loses 50% or more of it's value...do we REALLY rebalance? Yeah, it worked (WHEW!) in 2008, but what if we are Japan going forward, rebalancing for years and years into poverty?

It seems to me that there needs to be some official Boglehead guideline for this scenario. I know it's been discussed before, but I don't think the conundrum of "Pascal's Wager" here has ever reached a concensus solution.
This is a great question and this really gets to undertanding appetite for risk. This is the human factor. Irrational thoughts start to creep in. Japan? The Great Depression? Relatives that never had any confidence in you? It's all in play.

My answer is yes, you should probably rebalance. It's not easy. But the real answer is understand yourself enough to have an allocation that will enable you to rebalance. You can't have an assymetric approach to your portfolio, where you happily rebalance when things go well, but sit on your hands in the other direction. Understanding and accepting risk means accepting your ability to act in situations where risk is realized. The biggest takeaway from this thread is that your equity allocation was probably too high. The Warren Buffet quote about being greedy when others are scared doesn't do you very much good if you among those that are scared.

I would be very interested to hear Rick's or other advisor's thoughts on this. Of course this is where real value may be realized from having a third party involved with managing your money.
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Re: Rebalancing into Poverty

Post by gwrvmd »

All of the above hypothetical scenarios assume that bonds/fixed assets will remain stable. Do you really think that if stocks dropped to half their value 3 times in a row without recovery, bonds would remain stable?
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Re: Rebalancing into Poverty

Post by Leesbro63 »

gwrvmd wrote:All of the above hypothetical scenarios assume that bonds/fixed assets will remain stable. Do you really think that if stocks dropped to half their value 3 times in a row without recovery, bonds would remain stable?
Bonds would probably RISE....negating your point even moreso!
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Re: Rebalancing into Poverty

Post by Leesbro63 »

swaption wrote: The Warren Buffet quote about being greedy when others are scared doesn't do you very much good if you among those that are scared.
It also wouldn't have done Warren any good had he been a Japanese investor in 1989.
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Re: Rebalancing into Poverty

Post by Leesbro63 »

Cut-Throat wrote:
Leesbro63 wrote: But you "HAVE" to have at least 40% in equity to get even a conservative 3-4% SWR.
Where did you hear this?.......
I believe it's common knowledge. I agree that it's not "gospel", but all of the SWR studies have been done assuming at least a 40% equity position. Trinity, Bengen and even Kitces studies all assume this. Is there someone here who has references otherwise?

EDIT: Oops...I see your chart now showing that merely 30% equity would get you close to a 4% SWR. Truthfully I have never heard that it would work under 40%. I'd like to see how this discussion plays out before deciding that you are right, however. Perhaps there is more to the story that your chart misses. (But perhaps not...thank you for posting it. Yet another new piece to chew on...oh and here's another...what if you did a SWR using 30/70 in today's 'near zero' interest rate environment for your 70?)
Last edited by Leesbro63 on Tue May 29, 2012 3:11 pm, edited 1 time in total.
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Re: Rebalancing into Poverty

Post by Cut-Throat »

Leesbro63 wrote:
Cut-Throat wrote:
Leesbro63 wrote: But you "HAVE" to have at least 40% in equity to get even a conservative 3-4% SWR.
Where did you hear this?.......
I believe it's common knowledge. I agree that it's not "gospel", but all of the SWR studies have been done assuming at least a 40% equity position. Trinity, Bengen and even Kitces studies all assume this. Is there someone here who has references otherwise?
Here is a link ...

http://www.vanguardblog.com/2010.08.21/ ... ld-up.html
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Re: Rebalancing into Poverty

Post by ourbrooks »

Cut-Throat wrote:
Leesbro63 wrote:
Cut-Throat wrote:
Leesbro63 wrote: But you "HAVE" to have at least 40% in equity to get even a conservative 3-4% SWR.
Where did you hear this?.......
I believe it's common knowledge. I agree that it's not "gospel", but all of the SWR studies have been done assuming at least a 40% equity position. Trinity, Bengen and even Kitces studies all assume this. Is there someone here who has references otherwise?
Here is a link ...

http://www.vanguardblog.com/2010.08.21/ ... ld-up.html
That's only the Vanguard chart. If you go to our very own Wiki, it gives Trinity study results for 100% bonds.
http://www.bogleheads.org/wiki/File:TrinityTable1.jpg
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Re: Rebalancing into Poverty

Post by Leesbro63 »

Cut-Throat wrote:
Leesbro63 wrote:
Cut-Throat wrote:
Leesbro63 wrote: But you "HAVE" to have at least 40% in equity to get even a conservative 3-4% SWR.
Where did you hear this?.......
I believe it's common knowledge. I agree that it's not "gospel", but all of the SWR studies have been done assuming at least a 40% equity position. Trinity, Bengen and even Kitces studies all assume this. Is there someone here who has references otherwise?
Here is a link ...

http://www.vanguardblog.com/2010.08.21/ ... ld-up.html
Off hand it seems to me that being 70% fixed income at today's rates potentially subjects the investor to more long term risk than being only 60% or 50% fixed income. That being said, I asked for a "show me" and you did! So perhaps a 30% equity allocation with a hard "must rebalance" rule would be the way to go. PICK YOUR POISION!
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Re: Rebalancing into Poverty

Post by nisiprius »

Leesbro63 wrote:I think I missed something Nisiprius. What are you saying would be the effect if one was 50% equity in Japan in 1989, and continually rebalanced to 50%?
Well, one would have to do the math and I'm a little too lazy right now to read the numbers off the chart CutThroat posted, type the numbers into a spreadsheet, and do them. But remember, the question isn't about the sequence-of-returns problem and the effect of hitting a bear market just as you start retirement. The question is how much worse rebalancing would have made it. All I know from the math I've personally done is that my personal intuitions about it were not reliable.
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Re: Rebalancing into Poverty

Post by Sidney »

Leesbro63 wrote: EDIT: Oops...I see your chart now showing that merely 30% equity would get you close to a 4% SWR.
The only thing the chart shows is that merely 30% did get you close to 4%. What were the respective real returns for stocks AND bonds during these years?
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Re: Rebalancing into Poverty

Post by smpatel »

This is an excellent question. Mr. Bogle has openly admitted not rebalancing.
I follow absolute stock allocation not percentage and that works out great for me with no downside limit, the limit is on the upside so it goes beyond that I would sell it to the upside limit.
This way if stocks goes down I don't feel compelled with some mechanical system to buy more.

regards,
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Re: Rebalancing into Poverty

Post by swaption »

Leesbro63 wrote:
swaption wrote: The Warren Buffet quote about being greedy when others are scared doesn't do you very much good if you among those that are scared.
It also wouldn't have done Warren any good had he been a Japanese investor in 1989.

Perhaps a Japanese investor would have been just fine with the following assumptions:

(i) a globally diversified portfolio
(ii) rebalanced consistently on the way up prior to 1989

I would guess that the vast majority violated both of the above. But ultimately there is risk. Unfortunately, when markets go down it just so happens that it usually corresponds with an environment where it is that much easier to create a plausible Japan-like scenario. That was certainly the case in 2008. There is no assurance that future scenarios will be like 2008. But perhaps the better question is, why was it ok in to rebalance in 2008 yet you sound like you are questioning it now? If your tolerance for risk changed, then something should ahve happened to your allocation. Unfrotunately, the right time to come to that conclusion is not after a market decline.
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Re: Rebalancing into Poverty

Post by Cut-Throat »

Having read a couple of William Berstein's books, I remember him saying (paraphrasing here) that the key to a successful investing plan is not the asset allocation that you choose, but the willingness and discipline to stick to that asset allocation.

IOW - The Asset Allocation forces you to buy when everyone else is scared and to sell when everyone else is greedy.

The examples given here of Re-balancing into Poverty assume that the Market never recovers after dropping. If that were the case, how would bonds and cash perform?.....Planning for this sort of calamity is not realistic......If this complete market meltdown were to happen, I doubt that any annuity would keep paying either. Japan's stock market went crazy and has not returned to those lofty levels, but it is still worth something and continues to trade.
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Re: Rebalancing into Poverty

Post by Leesbro63 »

swaption wrote:
Leesbro63 wrote:
swaption wrote: The Warren Buffet quote about being greedy when others are scared doesn't do you very much good if you among those that are scared.
It also wouldn't have done Warren any good had he been a Japanese investor in 1989.

Perhaps a Japanese investor would have been just fine with the following assumptions:

(i) a globally diversified portfolio
(ii) rebalanced consistently on the way up prior to 1989

I would guess that the vast majority violated both of the above. But ultimately there is risk. Unfortunately, when markets go down it just so happens that it usually corresponds with an environment where it is that much easier to create a plausible Japan-like scenario. That was certainly the case in 2008. There is no assurance that future scenarios will be like 2008. But perhaps the better question is, why was it ok in to rebalance in 2008 yet you sound like you are questioning it now? If your tolerance for risk changed, then something should ahve happened to your allocation. Unfortunately, the right time to come to that conclusion is not after a market decline.
Excellent points. But even a globally diversified Japanese investor would probably have had a lot of home country bias like we have in often recommending equity portions that are 70% US and 30% international. Still a lamb heading for the rebalance slaughter.
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Re: Rebalancing into Poverty

Post by ourbrooks »

If the U.S. economy follows a Japan like course, it won't be rebalancing which puts you in poverty; you'll end up there eventually even if you hold 100% bonds. Japan also has had very low interest rates; right now, a 10 year Japanese Treasury pays 0.85%, about half of what a U.S. Treasury does.
With or without rebalancing, at a 4% withdrawal rate you'd run out of money long before the 30 year limit.

Surprisingly enough, a Japanese investor who bought an immediate annuity might have done substantially better. The largest portion of an immediate annuity payout is due to mortality credits, money from people who died before collecting enough payments. There's a standard formula for calculating this and, even at 0% interest rates, an immediate annuity for a 65 year old man would pay out around 5.8% (not inflation adjusted and assuming that Japanese mortality rates are roughly like the U.S.). Given average Japanese inflation of 2.85% since 1971, an inflation adjusted annuity probably would have paid out around 2.93. Not 4% to be sure, but still a lot better than running out.
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Re: Rebalancing into Poverty

Post by Leesbro63 »

ourbrooks wrote: With or without rebalancing, at a 4% withdrawal rate you'd run out of money long before the 30 year limit.
Actually, fast 'n dirty math says you'd have run out around year 26 or 27. Which ain't 30, but ain't 15 either.
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Re: Rebalancing into Poverty

Post by Cut-Throat »

Leesbro63 wrote:
ourbrooks wrote: With or without rebalancing, at a 4% withdrawal rate you'd run out of money long before the 30 year limit.
Actually, fast 'n dirty math says you'd have run out around year 26 or 27. Which ain't 30, but ain't 15 either.
And how about a 30% Stock/ 70% Bond Allocation with re-balancing? Probably would have fared even better!
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Re: Rebalancing into Poverty

Post by ourbrooks »

Leesbro63 wrote:
ourbrooks wrote: With or without rebalancing, at a 4% withdrawal rate you'd run out of money long before the 30 year limit.
Actually, fast 'n dirty math says you'd have run out around year 26 or 27. Which ain't 30, but ain't 15 either.
You forgot that the withdrawal amount is inflation adjusted; even at Japan's low 2.85% rate, by year 10, you'd be withdrawing 32% more each year than when you started. My fast 'n dirty says that's closer to 17 years than to 26. There you are, age 82, still able to get around but with no money.

If you really believe there's any kind of substantial chance of the U.S. following a Japan like course, stocks and bonds are probably not a good way to fund your retirement.
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Re: Rebalancing into Poverty

Post by swaption »

Leesbro63 wrote:
swaption wrote:
Leesbro63 wrote:
swaption wrote: The Warren Buffet quote about being greedy when others are scared doesn't do you very much good if you among those that are scared.
It also wouldn't have done Warren any good had he been a Japanese investor in 1989.

Perhaps a Japanese investor would have been just fine with the following assumptions:

(i) a globally diversified portfolio
(ii) rebalanced consistently on the way up prior to 1989

I would guess that the vast majority violated both of the above. But ultimately there is risk. Unfortunately, when markets go down it just so happens that it usually corresponds with an environment where it is that much easier to create a plausible Japan-like scenario. That was certainly the case in 2008. There is no assurance that future scenarios will be like 2008. But perhaps the better question is, why was it ok in to rebalance in 2008 yet you sound like you are questioning it now? If your tolerance for risk changed, then something should ahve happened to your allocation. Unfortunately, the right time to come to that conclusion is not after a market decline.
Excellent points. But even a globally diversified Japanese investor would probably have had a lot of home country bias like we have in often recommending equity portions that are 70% US and 30% international. Still a lamb heading for the rebalance slaughter.
Your comment about home country bias, while on the surface may seem analogous, I think is fundamentally flawed. My personal opinion is that something like NASDAQ 2000 is more anlaogous to Japan 1989. The broader US equities market is far more mature and diversified than was the case for Japan. Why stop at Japan? Let's throw up a chart for tulips while we are at it. If you want to find a way to rationalize your fears, then you will succeed. But that doesn't mean that those rationalizations make any sense. Emotions and fear crowd out clear thinking. It's how we're wired.
Last edited by swaption on Tue May 29, 2012 4:51 pm, edited 1 time in total.
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Re: Rebalancing into Poverty

Post by Cut-Throat »

ourbrooks wrote: If you really believe there's any kind of substantial chance of the U.S. following a Japan like course, stocks and bonds are probably not a good way to fund your retirement.
lemme guess. You have all your money in annuities?
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Re: Rebalancing into Poverty

Post by k-slice »

I don't rebalance anything but I buy what seems to be lacking in my portfolio.
As a rule, I would not be a net big buyer of bonds in a low interest rate/vast global debt de-leveraging environment anyway.
Stocks are it for me damn the torpedos.
AAPL is it for me even, since soon they're going to pay a dividend 90% of Total Bond Mkt Index :shock:
My very rich little old lady neighbor is in her 90s and has stocks. She has held them probably for 50 years or more. She says to me "never sell". Gotta love it.
I was in Japan in 88 when things were booming over there and Americans thought Japan would take over the world.
They do have "high speed rail and high speed internet" but it remains to be seen that they will "win the future".
Last edited by k-slice on Tue May 29, 2012 6:41 pm, edited 1 time in total.
ourbrooks
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Re: Rebalancing into Poverty

Post by ourbrooks »

Cut-Throat wrote:
ourbrooks wrote: If you really believe there's any kind of substantial chance of the U.S. following a Japan like course, stocks and bonds are probably not a good way to fund your retirement.
lemme guess. You have all your money in annuities?
Hey, I'm a modern retirement approaches kind of guy. We have a floor of constant income sources which cover about 90% of our budget.
That floor includes pensions, Social Security and, yes, annuities. The role of our investment portfolio is to provide some inflation adjustment, optional spending, and, possibly, bequests. At my age 70, we expect to be 70% in stocks, but more annuities are an option, depending on how nice our kids are to us and what's left on our bucket list.

I view a Japan-like scenario for the U.S. as being low probability, so it doesn't play much of a role in planning.
Bill Bernstein
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Re: Rebalancing into Poverty

Post by Bill Bernstein »

The OP’s thoughts are well taken, and I don’t disagree with them.

In the accumulation phase, the periodic nature of the investment process, and the overhang of human capital that feeds it, makes for a relatively reliable way to grow assets. (Yes, Virginia, lump summing generally produces higher returns, but at a higher level of risk. I.e., can easily conceive of a 30-year period of zero real stock returns from this point forward, but not a 30-year period of negative DCA returns. And besides, most folks can't fund their retirements with a lump sum early in life.) And, of course, for reasons that every DH well understands, you should pray for lousy returns in accumulation.

In the distribution phase, there’s no human capital left, and thus much less margin for error. Once you’ve “made your number,” you’ve won the game, you have no need to take risk, as Larry would say, and you should stop playing that game with that amount of assets. In effect, you now have two portfolios: your number, or what is commonly referred to as the “liability matching portfolio” (LMP); and a “risk portfolio” (RP), which really doesn’t belong to you (though you might use it for aspirational needs—such un-Boglehead-like things such as business-class travel or a spiffy rig), with which you can take as much risk in as you like. And if you get lucky with the RP, you can dump some of it in the LMP and up your retirement lifestyle.

This is a tad of a departure from my previous writing—I am getting older, after all. In about 2-6 weeks I should have this solidified into a small Amazon single.

Bill
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Cut-Throat
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Re: Rebalancing into Poverty

Post by Cut-Throat »

wbern wrote: This is a tad of a departure from my previous writing—I am getting older, after all. In about 2-6 weeks I should have this solidified into a small Amazon single.

Bill
Very Glad to see you here in this thread!...... So, what do you recommend? Not sticking to your Asset Allocation after Retired?
livesoft
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Re: Rebalancing into Poverty

Post by livesoft »

1210sda wrote:
livesoft wrote:raddr's board has a thread on the hypothetical Y2K retiree who is rebalancing into oblivion:
http://raddr-pages.com/forums/viewtopic ... 1db#p45435
Livesoft, do you recall the begining asset allocation for this portfolio ??
I don't recall, but I would guess that it might be in the first post of that thread.
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Bill Bernstein
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Abandon Asset Allocation

Post by Bill Bernstein »

No, but alter it.

I still believe that in the accumulation phase you have only one policy.

But at some point, good lord willing and the creek don't rise, as you approach your number, you gradually lower your stock allocation. By the time you're retired, you should pretty much be in two-bucket mode, with an LMP consisting of some combination of taking SS at 70, short bonds, I-bond, TIPS, annuities, longevity insurance; and an RP aimed at your heirs, philanthropic designs, and the odd trip in business class.

The transition between the two states is the hard part, and might be as complex and long-lasting as equal-sized LMP and RPs at age 45 or as simple as spending your entire all-bond nest egg to make it to that fat SS check at age 70.

Further details in my booklet!

Bill
Clive
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Re: Rebalancing into Poverty

Post by Clive »

I prefer the 3.3% withdrawal rate approach of setting aside 10 years of income into inflation bonds and investing the rest for a target 4.14% real (after inflation) growth.

$600,000
Put $200,000 into a ten year inflation bond ladder, $20,000 maturing each year (inflation uplifted) for income.
Invest $400,000 into a diverse asset allocation and hope that provides 4.14% real annualised growth so that after ten years = $600,000 in inflation adjusted terms.

Some 10 year cycles will likely see >4.14% annualised real growth rate, others <4.14%. The trick is to top slice some funds out during good times, to add/extend the number of years in the income pot. That might tide you over the bad times.

If after 10 years the growth pot has just paced inflation, such that you only have $400,000 remaining (in real terms), then drop $200,000 into another 10 year inflation bond ladder, $200,000 into growth, and hope that the next 10 years makes up for the 'lost decade'. If again that doesn't and it only paces inflation for another 10 years, then you've $200,000 left to see you through the next 10 years.

So I'd say that rebalancing (in the growth pot, or from growth pot to income pot) is still appropriate during 'retirement' years. But never rebalance out of the income pot into growth.
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Cut-Throat
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Re: Rebalancing into Poverty

Post by Cut-Throat »

Clive wrote:I prefer the 3.3% withdrawal rate approach of setting aside 10 years of income into inflation bonds and investing the rest for a target 4.14% real (after inflation) growth.

$600,000
Put $200,000 into a ten year inflation bond ladder, $20,000 maturing each year (inflation uplifted) for income.
Invest $400,000 into a diverse asset allocation and hope that provides 4.14% real annualised growth so that after ten years = $600,000 in inflation adjusted terms.

Some 10 year cycles will likely see >4.14% annualised real growth rate, others <4.14%. The trick is to top slice some funds out during good times, to add/extend the number of years in the income pot. That might tide you over the bad times.

If after 10 years the growth pot has just paced inflation, such that you only have $400,000 remaining (in real terms), then drop $200,000 into another 10 year inflation bond ladder, $200,000 into growth, and hope that the next 10 years makes up for the 'lost decade'. If again that doesn't and it only paces inflation for another 10 years, then you've $200,000 left to see you through the next 10 years.

So I'd say that rebalancing (in the growth pot, or from growth pot to income pot) is still appropriate during 'retirement' years. But never rebalance out of the income pot into growth.
I read your post about 3 times and each time I came away a little more confused. You may understand it and it may work for you, but it is too complicated for me.
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Re: Rebalancing into Poverty

Post by john94549 »

I'm retired (wife is not, about a year to go). We re-balance each year (in February) to achieve "age-in-bonds". I suspect we will continue to do so for another ten years, i.e., when we reach age 75 and our equities are at 25%, and then we'll probably hold at 25/75 (of course, we might have to re-balance just to keep it at that AA). I know purists dislike "age-in-bonds" as too simplistic, but its simplicity is its appeal (at least to me). Once a year, I tote everything up, multiply and divide, and compare the "is" to the "ought." Then I move a bit from here to there, and it's done. The only wild-card is my "fun money" trading account (about 5% of investable assets). That's my casino money. I count the "core" of that account as part of my AA, but the "non-core" is just my play money.
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VictoriaF
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Re: Abandon Asset Allocation

Post by VictoriaF »

wbern wrote:Further details in my booklet!

Bill
Amazon.com currently does not provide any information about it.

Victoria
Last edited by VictoriaF on Tue May 29, 2012 8:50 pm, edited 1 time in total.
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Johm221122
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Re: Rebalancing into Poverty

Post by Johm221122 »

This is one reason to get SPIA to cover minimum amount of basic spending money.Also consider longevity annuity(a little goes a long way). Then you can have piece of mind!!I thinkevery one without pension should have one(3 legs pension/annuity, SS,investments)
bb
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Re: Rebalancing into Poverty

Post by bb »

I do not agree the definition of risk tolerance mandates rebalancing
from fixed income to equities after a market decline. That is one
definition.
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Re: Abandon Asset Allocation

Post by richard »

wbern wrote: By the time you're retired, you should pretty much be in two-bucket mode, with an LMP consisting of some combination of taking SS at 70, short bonds, I-bond, TIPS, annuities, longevity insurance; and an RP aimed at your heirs, philanthropic designs, and the odd trip in business class.
Sounds like you've been spending time with Zvi Bodie :-)

Cobbling together a safe LMP these days is not trivial these days, given the short bonds are yielding almost nothing (and less than that after inflation), it's hard to buy i-bonds in quantity, TIPS with negative real yields out beyond 10 years, and not much better out to 30 years, plus not being the most tax-efficient for taxable accounts, inflation adjusted annuities being a bit uncommon and subject to credit risk if you go beyond state guarantee limits (plus being ordinary income in taxable) and longevity insurance not being a widely marketed product.

Accumulating miles is a nice way of funding the odd trip in business class.

Amazon in 2-6 weeks? Please post when it's published.
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Re: Rebalancing into Poverty

Post by richard »

livesoft wrote:
1210sda wrote:
livesoft wrote:raddr's board has a thread on the hypothetical Y2K retiree who is rebalancing into oblivion:
http://raddr-pages.com/forums/viewtopic ... 1db#p45435
Livesoft, do you recall the begining asset allocation for this portfolio ??
I don't recall, but I would guess that it might be in the first post of that thread.
Looks like 75/25, if you do a touch of math on each return compared to the blended return
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Leesbro63
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Re: Rebalancing into Poverty

Post by Leesbro63 »

Johm221122 wrote:This is one reason to get SPIA to cover minimum amount of basic spending money.Also consider longevity annuity(a little goes a long way). Then you can have piece of mind!!I thinkevery one without pension should have one(3 legs pension/annuity, SS,investments)
Do longevity annuities adjust for inflation? If not, you need to guesstimate the inflation between the time you buy and the time you hope to collect. And buy enough so that the payout at age 85 will be inflation adjusted. At that age I wouldn't be as worried about inflation adjustments going forward from age 85 to death.
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Re: Rebalancing into Poverty

Post by Johm221122 »

Leesbro63 wrote:
Johm221122 wrote:This is one reason to get SPIA to cover minimum amount of basic spending money.Also consider longevity annuity(a little goes a long way). Then you can have piece of mind!!I thinkevery one without pension should have one(3 legs pension/annuity, SS,investments)
Do longevity annuities adjust for inflation? If not, you need to guesstimate the inflation between the time you buy and the time you hope to collect. And buy enough so that the payout at age 85 will be inflation adjusted. At that age I wouldn't be as worried about inflation adjustments going forward from age 85 to death.
No,they don't a just at all and right now if you had tax Deffered money 72 would be probably your pay out year(because of RMD)congress was talking about making change for longevity annuities and RMD.I not thinking about inflation adjusted annuities at this point. Just combination of SPIA and longevity annuity
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