Rebalancing into Poverty...Part 2

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Rebalancing into Poverty...Part 2

Post by Cut-Throat »

I find it Strange that there are a lot of postings this week, that seem to be willing to throw out almost everything a sound financial plan is built on.

No longer "Staying the Course", but if the Market declines, Change your asset allocation to reduce stocks, rather than re-balance and take advantage of cheaper Prices. Yes, Bonds are paying record low prices, but stocks have been more expensive than they are now.

A few Questions....

1.) Do the folks that advocate this, think that we are in a worse time in U.S. History for Investing? Worse than Sept of 1929? After all that is where the 4% withdrawal comes from. It survived then, so you think it won't now? And if it is worse, your Plan B probably won't make it either. A 4% SWR is almost laughable here lately, so the consensus seems to be that we are most assuredly in an investment climate worse off than the 90% stock market decline of 1929-1932.

2.) Did you really think that you could assemble an investment portfolio that had zero risk? .....LOL!

3.) Money under the mattress (Almost), seems to be what a lot of you are proposing, which is certain failure. CDs at 1.35% (Now there is a gutsy financial move, locking up your money for a guaranteed loss due to inflation)...Oh yes, you'll move it to a better paying investment at the proper time. No one believed you could time the market before here, but suddenly a lot of folks believe in "market Timing". Are you smarter than everyone else?
User avatar
NoRoboGuy
Posts: 736
Joined: Fri Apr 01, 2011 11:07 pm
Location: Just west of Austin TX

Re: Rebalancing into Poverty...Part 2

Post by NoRoboGuy »

Maybe they do not have a plan at all. The underlying tone of the messages seems to exude the expectation that by indexing, rebalancing, selecting low expense funds, etc., that this should guarantee a positive real return. It can be hard for people to face there are no guarantees of real returns in the financial markets...even for so-called risk-free investments. Bogleheads should accept what the market is generous enough - or stingy enough - to provide, and to stick to their plan, in all market conditions. If the plan did not take risk into account, then it was not a proper plan to begin with.
There is no free lunch.
555
Posts: 4955
Joined: Thu Dec 24, 2009 7:21 am

Re: Rebalancing into Poverty...Part 2

Post by 555 »

Why should someone in retirement necessarily have an asset allocation based on percentages? There are all kinds of strategies they could pursue and they are not limited to a percentage based allocation.
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: Rebalancing into Poverty...Part 2

Post by john94549 »

I am retired (my wife is about a year from same). I have no idea why folks would get all nervous and jerky right now. Stuff goes up, stuff goes down, stuff goes round and round. Age-in-Bonds has suited us quite well. Age 65. We'll re-balance all the way to 25/75 (10 years from now), at which point we'll dial back and just re-balance to keep it at 25/75. When you are 65% (or, 75%, or something in between) in fixed-income, Mr Market can do many crazy things, but it has less impact. Which is the point. Purists hate "age-in-bonds", but it sure has worked for us.
User avatar
Topic Author
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Re: Rebalancing into Poverty...Part 2

Post by Cut-Throat »

555 wrote:Why should someone in retirement necessarily have an asset allocation based on percentages? There are all kinds of strategies they could pursue and they are not limited to a percentage based allocation.
I guess it doesn't have to, but this thread was for those that decided on an Asset Allocation (based on Percentages) and are now having second thoughts. Feel free to start another thread.
sport
Posts: 9993
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Rebalancing into Poverty...Part 2

Post by sport »

Keep in mind that sometimes there are unusual conditions that warrant unusual actions. In 2008, we were experiencing a possible collapse of our financial system. Large, supposedly solid, investment banks, insurance companies, and brokerages were going broke and a major catastrophe was possible and perhaps immanent. Under these conditions, it is not unreasonable for a retiree who already has "enough" to decide that signing up for additonal risk is not a good idea. This was certainly not a run-of-the-mill market decline. It is true that all significant market declines are accompanied or caused by some unhappy financial conditions. Nevertheless, the big 2008 decline was not normal by any measure and certainly could have been a whole lot worse. Someone who is young and accumulating investments can afford to take additional risk, and hope that it turns out favorably. Someone who is retired, with no significant additional money to invest, cannot afford to take that risk, especially if they do not need to. So, if a retiree is confident that they have enough to fund their retirement, the idea of rebalancing into equities, when no one knows what is going to happen, is not particularly attractive.

Jeff
User avatar
Topic Author
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Re: Rebalancing into Poverty...Part 2

Post by Cut-Throat »

jsl11 wrote:Keep in mind that sometimes there are unusual conditions that warrant unusual actions. In 2008, we were experiencing a possible collapse of our financial system. Large, supposedly solid, investment banks, insurance companies, and brokerages were going broke and a major catastrophe was possible and perhaps immanent. Under these conditions, it is not unreasonable for a retiree who already has "enough" to decide that signing up for additonal risk is not a good idea. This was certainly not a run-of-the-mill market decline. It is true that all significant market declines are accompanied or caused by some unhappy financial conditions. Nevertheless, the big 2008 decline was not normal by any measure and certainly could have been a whole lot worse. Someone who is young and accumulating investments can afford to take additional risk, and hope that it turns out favorably. Someone who is retired, with no significant additional money to invest, cannot afford to take that risk, especially if they do not need to. So, if a retiree is confident that they have enough to fund their retirement, the idea of rebalancing into equities, when no one knows what is going to happen, is not particularly attractive.

Jeff
It sounds like your retiree had an asset allocation that was too heavily invested in stocks before the collapse. After the collapse, they had already 'taken the hit'. And if they would have stayed the course and re-balanced, they would have made out very nicely by now.

So, I completely disagree. No one "knows what is going to happen".
bb
Posts: 326
Joined: Wed Apr 25, 2007 10:04 pm

Re: Rebalancing into Poverty...Part 2

Post by bb »

Scenario A:
--------------
50/50 Stocks/Bonds. Stocks decline 50%. Don't rebalance

Scenario B:
-----------------
25/75 Stocks/Bonds. Stocks decline 50%. Rebalance

Don't see why B is automatically superior. (A) was comfortable with a 50% loss so chose
allocation accordingly. After experiencing the loss is not comfortable with increasing
exposure to stocks (in terms of dollars).

Everyone always deals with % and ignores investor sentiment, emotion, and human
psychology.

Brian
dolio
Posts: 34
Joined: Wed May 09, 2012 10:16 am

Re: Rebalancing into Poverty...Part 2

Post by dolio »

Cut-Throat wrote:3.) Money under the mattress (Almost), seems to be what a lot of you are proposing, which is certain failure. CDs at 1.35% (Now there is a gutsy financial move, locking up your money for a guaranteed loss due to inflation)...Oh yes, you'll move it to a better paying investment at the proper time. No one believed you could time the market before here, but suddenly a lot of folks believe in "market Timing". Are you smarter than everyone else?
1) There are banks/credit unions currently offering 5 year CDs at 2% or more, and 7 year CDs at 2.5% or so. Not 1.35%.

2) Comparable term treasuries are also locking you into a guaranteed loss due to inflation (5 year notes at 0.7% yield, 7 year at 1.2%, 10 year at 1.8%, even 10 year TIPS have negative real rates). Unless you're putting your entire bond allocation into I bonds (0% real) or something long term (~3% nominal for 30 year bonds, or 3.5% for EE bonds if you hold them 20 years), you're going to lose to (expected) inflation at current yields.

3) What is the definition of "market timing"? Because it seems often to be merely a slur used to dismiss a strategy without any analysis.

Were I asked to define, "market timing," I'd say it's making an investment decision based on predicted future market movements. If you sell all your bonds because you think interest rates are going to skyrocket soon, that is market timing.

But the argument (currently) for CDs doesn't involve any prediction of market movements at all. It is just based on the notion that the purpose of bonds is to provide a stable, (largely) pre-determined return on the investment made in them. Right now (some) CDs are actually offering better yields than comparable treasuries, and they are about as safe from default (under the FDIC limit, presumably). This isn't particularly different than selecting between two comparable funds by choosing the one with the lower expense ratio.

If interest rates do happen to go up, and the banks honor the early withdrawal option, then you are still not relying on your ability to predict interest rates. You are only reacting to changes that have happened, by switching from a CD that pays 2% to one that pays 5%, say (or switching to treasuries; who knows). This also happens when people rebalance. If stocks tank, and bonds go up, and you rebalance, you're selling the bonds high(er) and buying the stocks low(er). Or vice versa in the opposite situation. But you are not performing the actions based on market forecasts, you are performing them due to a preset plan that reacts to events that have already happened, though the result may well be the same.

The only element of prediction in the CD plan is that the banks will actually allow you to withdraw your money early. That may or may not be true. But, if one can count on that, then the plan is no more 'timing' than planning to rebalance your portfolio in response to varying growth rates of the segments, and choosing funds with better expenses.
sport
Posts: 9993
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Rebalancing into Poverty...Part 2

Post by sport »

Cut-Throat wrote:
jsl11 wrote:Keep in mind that sometimes there are unusual conditions that warrant unusual actions. In 2008, we were experiencing a possible collapse of our financial system. Large, supposedly solid, investment banks, insurance companies, and brokerages were going broke and a major catastrophe was possible and perhaps immanent. Under these conditions, it is not unreasonable for a retiree who already has "enough" to decide that signing up for additonal risk is not a good idea. This was certainly not a run-of-the-mill market decline. It is true that all significant market declines are accompanied or caused by some unhappy financial conditions. Nevertheless, the big 2008 decline was not normal by any measure and certainly could have been a whole lot worse. Someone who is young and accumulating investments can afford to take additional risk, and hope that it turns out favorably. Someone who is retired, with no significant additional money to invest, cannot afford to take that risk, especially if they do not need to. So, if a retiree is confident that they have enough to fund their retirement, the idea of rebalancing into equities, when no one knows what is going to happen, is not particularly attractive.

Jeff
It sounds like your retiree had an asset allocation that was too heavily invested in stocks before the collapse. After the collapse, they had already 'taken the hit'. And if they would have stayed the course and re-balanced, they would have made out very nicely by now.

So, I completely disagree. No one "knows what is going to happen".
As you say, after the collapse, they had already taken the hit. Their allocation was correct and they can live with the hit. However, they are not concerned with "making out nicely". They are concerned about the collapse getting worse, much worse. It would be bad enough if this happened. They have no need to "throw good money after bad". When a retiree has enough to fund their retirement, the focus changes from maximizing return to preserving what they already have. It is completely reasonable for them to not take a risk they do not need to take. Increasing equities in the face of possible economic collapse would be quite a risk indeed.

Jeff
k-slice
Posts: 152
Joined: Sun May 27, 2012 3:13 pm

Re: Rebalancing into Poverty...Part 2

Post by k-slice »

I don't know what others do, but when stocks went down in 2008 I went all in, but I was almost already all in previously, so I had little cash to throw into my funds. I am invested in stock mutual funds over 80% of my financial net worth. I also own one stock which has gone up so much it's now over 10% of my financial assets. Can you guess the stock?
I don't follow the principle of rebalancing anything, except according to my own life stage.
This is, when I am unable to make money elsewhere, and I must live from my investments, I will seek more income from them.I will transition from capital appreciation to income.
The only thing happening today that I pay attention to is that there is so much debt and it is growing so fast, that "safe" bond funds are laughable investments. I had Total bond Mkt. Index a few years ago as a parking place for some money, but I am only holding some in it for emergencies. For me, Total Bond Mkt. Index is a nice piggy bank, but not a way to appreciate capital.
People here consider one kind of risk, the risk to their capital. I consider other risks. Investments growing too slowly, my life being too short to see them grow large enough, not having enough money because my investments did not grow are also risks I consider.
k-slice
Posts: 152
Joined: Sun May 27, 2012 3:13 pm

Re: Rebalancing into Poverty...Part 2

Post by k-slice »

Re: stocks worldwide risk.
I have different perspective than many here. I have lived in a developing country and have visited it over three decades. I have also seen what is going on in China.
The developing world is growing and consuming. They do not have huge mortgage or credit card debt in some of these countries, and they consume. The growth of GDP is still over 5% in come countries.
So, some companies will continue to profit. BMW , Nestle, LVMH, (louis vuitton bags, etc), Apple, Caterpillar, Deere, etc. will continue to profit.
User avatar
Topic Author
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Re: Rebalancing into Poverty...Part 2

Post by Cut-Throat »

bb wrote: Everyone always deals with % and ignores investor sentiment, emotion, and human
psychology.

Brian
That is why "B" is superior. It DOES NOT deal with investor sentiment, emotion and human psychology.
Which are usually wrong, and cause you to do things that are stupid. It makes you stick to a plan!
Last edited by Cut-Throat on Thu May 31, 2012 8:16 am, edited 1 time in total.
Leesbro63
Posts: 6964
Joined: Mon Nov 08, 2010 4:36 pm

Re: Rebalancing into Poverty...Part 2

Post by Leesbro63 »

After 2008, and with the world level of debt, it's not imprudent to ask "maybe it really is different this time". Warren Buffett agrees it is, but believes equity will come thru better than debt. That the truly safe money is equity. That's what kept me sane in 2008. But those on here who smugly taunt that if you can't rebalance, you have too much equity to begin with might be wrong too. It's more complicated than that. Does a 60 year old married couple go to all bonds just because they can't see risking retirement by rebalancing, after a crash, a formerly 40/60 portfolio...that becomes a 20/80 portfolio? On the other hand, wouldnt they also be risking retirement by avoiding that possiblity in the first place by being 20/80 to begin with? The risk is gradual, but inflation over their 35 year joint life expectancy can be just as deadly as a current crash.

This is complicated folks. Smug replies should be rethought.
bb
Posts: 326
Joined: Wed Apr 25, 2007 10:04 pm

Re: Rebalancing into Poverty...Part 2

Post by bb »

Cut-Throat wrote:
bb wrote: Everyone always deals with % and ignores investor sentiment, emotion, and human
psychology.

Brian
That is why "A" is superior. It DOES NOT deal with investor sentiment, emotion and human psychology.
Which are usually wrong, and cause you to do things that are stupid. It makes you stick to a plan!
I assume you meant to say (B) is superior. By superior I meant show me B always is going to yield
a better investment result, ie. if in order to always be willing to hold a fixed allocations to equities
means someone needs to lower their initial allocation to equities it is not clear to me that is
always going to result in a larger final balance. Does someone know if that is clearly the case?

Brian
azanon
Posts: 2996
Joined: Mon Nov 07, 2011 10:34 am

Re: Rebalancing into Poverty...Part 2

Post by azanon »

Leesbro63 wrote:After 2008, and with the world level of debt, it's not imprudent to ask "maybe it really is different this time". Warren Buffett agrees it is, but believes equity will come thru better than debt. That the truly safe money is equity. That's what kept me sane in 2008. But those on here who smugly taunt that if you can't rebalance, you have too much equity to begin with might be wrong too. It's more complicated than that. Does a 60 year old married couple go to all bonds just because they can't see risking retirement by rebalancing, after a crash, a formerly 40/60 portfolio...that becomes a 20/80 portfolio? On the other hand, wouldnt they also be risking retirement by avoiding that possiblity in the first place by being 20/80 to begin with? The risk is gradual, but inflation over their 35 year joint life expectancy can be just as deadly as a current crash.

This is complicated folks. Smug replies should be rethought.
You combined a "False Dilemma" with a "straw man" argument. Who suggested that anyone should own an "all-bond portfolio"? You've swung from worrying about 50% equity, to suggesting a 0% equity allocation then attacking that position as if to suggest anyone here would recommend that.

I'll just be truthful here. If a person, or a couple, can't reasonably be expected to survive on a portfolio amount with a predefined equity allocation that will be rebalanced periodically according to the IPS, then they have a much bigger problem; the solution for which is NOT to hold more stock than they have the ability, need, or risk tolerance for.

I'm not saying your hypothetical couple, or you, doesn't have a problem. But what I am saying smugly or however you say it is, is that the solution is not to hold a stock percentage you don't have the risk tolerance for. I'd start out by suggesting that if this couple, or you, is medically able to, I'd try to find some employment and keep saving, because you're not financially independent yet if the percentage of equity you have the risk tolerance for isn't going to sustain you for the rest of your life.

If you're medically able to work, then lets end the discussion because I'd suggest you seek employment and keep saving. If you're not, or this couple is not able to work, then it's time to cut expenses, not hold more stock than you can sustain.

If you want suggestions for where one can live for next to nothing, I could provide you with a list of at least 200 cities here in the state of AR that i live in where you can live for "per capita" of 15K a year. Demographics don't lie. The town I grew up in has, I kid you not, a household per capita of 16.9K/year.
User avatar
Topic Author
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Re: Rebalancing into Poverty...Part 2

Post by Cut-Throat »

bb wrote: I assume you meant to say (B) is superior. By superior I meant show me B always is going to yield
a better investment result, ie. if in order to always be willing to hold a fixed allocations to equities
means someone needs to lower their initial allocation to equities it is not clear to me that is
always going to result in a larger final balance. Does someone know if that is clearly the case?

Brian
Yes, I meant "B'...Thanks........By Superior, I mean that it will be less volatile, and with no 're-thinking' of strategy based on emotion, to provide an SWR.
It may or may not provide a larger final balance, which is not relevant.
User avatar
wbond
Posts: 1076
Joined: Wed Dec 10, 2008 6:55 pm

Re: Rebalancing into Poverty...Part 2

Post by wbond »

Now is objectively the best time to buy equities relative to bonds since the market bottom of March 2009.

If anything one should "over-rebalance."

Justifying not following one's plan, not rebalancing, is a classic "behavioral finance" error.

What is interesting to me is how soon the lesson of 3.5 years ago passes.
richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Rebalancing into Poverty...Part 2

Post by richard »

Consider two reasons for not sticking to a plan

1) Nerves. The world seems a riskier place, the news is awful, etc.

2) Economics. You no longer have a large enough portfolio to support necessary spending, you no longer have a job, etc.

Claiming that people in both cases should follow the same path in both cases 1 and 2 seems silly, at least to me.

EDIT: to clarify that 1 and 2 should not necessarily lead to the same conclusion, in light of interchange with swaption, below.
Last edited by richard on Thu May 31, 2012 10:33 am, edited 1 time in total.
User avatar
Topic Author
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Re: Rebalancing into Poverty...Part 2

Post by Cut-Throat »

richard wrote: 2) Economics. You no longer have a large enough portfolio to support necessary spending, you no longer have a job, etc.
If this is the case, Your 'Plan' has already failed.
richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Rebalancing into Poverty...Part 2

Post by richard »

Cut-Throat wrote:
richard wrote: 2) Economics. You no longer have a large enough portfolio to support necessary spending, you no longer have a job, etc.
If this is the case, Your 'Plan' has already failed.
Why put plan in quotes? Losing a job, for example, doesn't mean you didn't have a good plan. I'd bet there aren't many plans, no matter how carefully thought out, that could survive long-term unemployment.

Would you agree that in case 2, not sticking to plan might be the right thing to do?

If it's just nerves, suck it up or revise your plan, but beware you are probably (but far from certainly) giving up return. If it's economics, time to rethink things.
User avatar
Topic Author
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Re: Rebalancing into Poverty...Part 2

Post by Cut-Throat »

richard wrote: Why put plan in quotes? Losing a job, for example, doesn't mean you didn't have a good plan. I'd bet there aren't many plans, no matter how carefully thought out, that could survive long-term unemployment.

Would you agree that in case 2, not sticking to plan might be the right thing to do?

If it's just nerves, suck it up or revise your plan, but beware you are probably (but far from certainly) giving up return. If it's economics, time to rethink things.

I was addressing the "If your portfolio cannot support necessary spending' statement. If you are spending your portfolio for necessities, you are retired and don't have a job.
richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Rebalancing into Poverty...Part 2

Post by richard »

Cut-Throat wrote:
richard wrote: Why put plan in quotes? Losing a job, for example, doesn't mean you didn't have a good plan. I'd bet there aren't many plans, no matter how carefully thought out, that could survive long-term unemployment.

Would you agree that in case 2, not sticking to plan might be the right thing to do?

If it's just nerves, suck it up or revise your plan, but beware you are probably (but far from certainly) giving up return. If it's economics, time to rethink things.
I was addressing the "If your portfolio cannot support necessary spending' statement. If you are spending your portfolio for necessities, you are retired and don't have a job.
How about near retirement? Or spending from both employment and portfolio?
azanon
Posts: 2996
Joined: Mon Nov 07, 2011 10:34 am

Re: Rebalancing into Poverty...Part 2

Post by azanon »

richard wrote:Consider two reasons for not sticking to a plan

1) Nerves. The world seems a riskier place, the news is awful, etc.

2) Economics. You no longer have a large enough portfolio to support necessary spending, you no longer have a job, etc.

Claiming that people in both cases should follow the same path seems silly, at least to me.
Some people should take this "consideration" for either reason, but it will not change the fact that they had the wrong allocation in the first place. A proper allocation takes full consideration into worst-case nerves and Economics from the get-go. We have over 100 years of history to estimate worst-case scenarios. Anything more extreme than that is true paranoia and demands a very low equity allocation.

If one made a mistake, then by all means correct it. But don't forget that you did make a mistake.
swaption
Posts: 1208
Joined: Tue Jul 29, 2008 11:48 am

Re: Rebalancing into Poverty...Part 2

Post by swaption »

richard wrote:Consider two reasons for not sticking to a plan

1) Nerves. The world seems a riskier place, the news is awful, etc.

2) Economics. You no longer have a large enough portfolio to support necessary spending, you no longer have a job, etc.

Claiming that people in both cases should follow the same path seems silly, at least to me.
I think putting forth (1) as a viable reason is in some way engineering for failure. The fact of the matter is that markets don't move in some abstract way completely unconnected to what is going on in the real world. On the short list of things that I know I know, is that severe market declines almost always come with extreme pessimism of some sort. It is indeed always darkest before the dawn. By allowing for (1), this implicitly enables investors to do exactly what is most destructive in the long run. It's just rationalizing failure.

This is risk. It's the kind of things that can't really be captured well by surveys to determine the proper risk appetite and allocation. But this of course is the remedy to avoid the adverse behavior. If we support passive investing, then we can't at the same time support an investor's ability to determine when in fact the world is more or less risky. The truth of the matter of course, is that the world in many ways was most risky in 2000 and 2007, precisely at the time when very few investors would have come to this conslusion.

As far as (2), agree that if personal circumstances change, then you need to do what is necessary.
Harold
Posts: 3154
Joined: Sat Mar 03, 2007 7:50 pm
Location: San Francisco

Re: Rebalancing into Poverty...Part 2

Post by Harold »

azanon wrote:We have over 100 years of history to estimate worst-case scenarios. Anything more extreme than that is true paranoia
Yikes, this is one dangerous perspective.

Quite unreasonable to expect, let alone be confident, that all possible scenarios have occurred in the US since 1926 (which is what most people base their projections on). Quite reasonable to look at capital market fundamentals, and analytically prepare a strategy based on how much risk one is willing to take, and how much one can tolerate losing. (And based on both market pricing and fundamentals, there is no time period where an individual can be certain of not losing capital put at risk.) If such a strategy is well-thought out, one should stick with it despite emotions, which I suppose is the point of this thread.
richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Rebalancing into Poverty...Part 2

Post by richard »

swaption wrote:
richard wrote:Consider two reasons for not sticking to a plan

1) Nerves. The world seems a riskier place, the news is awful, etc.

2) Economics. You no longer have a large enough portfolio to support necessary spending, you no longer have a job, etc.

Claiming that people in both cases should follow the same path seems silly, at least to me.
I think putting forth (1) as a viable reason is in some way engineering for failure. The fact of the matter is that markets don't move in some abstract way completely unconnected to what is going on in the real world. On the short list of things that I know I know, is that severe market declines almost always come with extreme pessimism of some sort. It is indeed always darkest before the dawn. By allowing for (1), this implicitly enables investors to do exactly what is most destructive in the long run. It's just rationalizing failure.

This is risk. It's the kind of things that can't really be captured well by surveys to determine the proper risk appetite and allocation. But this of course is the remedy to avoid the adverse behavior. If we support passive investing, then we can't at the same time support an investor's ability to determine when in fact the world is more or less risky. The truth of the matter of course, is that the world in many ways was most risky in 2000 and 2007, precisely at the time when very few investors would have come to this conslusion.

As far as (2), agree that if personal circumstances change, then you need to do what is necessary.
Is there anyone who's putting forth (1) as a good reason?
azanon
Posts: 2996
Joined: Mon Nov 07, 2011 10:34 am

Re: Rebalancing into Poverty...Part 2

Post by azanon »

Harold wrote:
azanon wrote:We have over 100 years of history to estimate worst-case scenarios. Anything more extreme than that is true paranoia
Yikes, this is one dangerous perspective.

Quite unreasonable to expect, let alone be confident, that all possible scenarios have occurred in the US since 1926 (which is what most people base their projections on). Quite reasonable to look at capital market fundamentals, and analytically prepare a strategy based on how much risk one is willing to take, and how much one can tolerate losing. (And based on both market pricing and fundamentals, there is no time period where an individual can be certain of not losing capital put at risk.) If such a strategy is well-thought out, one should stick with it despite emotions, which I suppose is the point of this thread.
I actually view that clarification as mild, and I accept it. I think it has a heavy semantics component though, and we'll both arrive at the same conclusion in the end. I certainly agree with your summary.

If you will allow, I hope I am right though. I will be .... lets call it unhappy .... if we top the 30s in my lifetime.
swaption
Posts: 1208
Joined: Tue Jul 29, 2008 11:48 am

Re: Rebalancing into Poverty...Part 2

Post by swaption »

richard wrote:
swaption wrote:
richard wrote:Consider two reasons for not sticking to a plan

1) Nerves. The world seems a riskier place, the news is awful, etc.

2) Economics. You no longer have a large enough portfolio to support necessary spending, you no longer have a job, etc.

Claiming that people in both cases should follow the same path seems silly, at least to me.
I think putting forth (1) as a viable reason is in some way engineering for failure. The fact of the matter is that markets don't move in some abstract way completely unconnected to what is going on in the real world. On the short list of things that I know I know, is that severe market declines almost always come with extreme pessimism of some sort. It is indeed always darkest before the dawn. By allowing for (1), this implicitly enables investors to do exactly what is most destructive in the long run. It's just rationalizing failure.

This is risk. It's the kind of things that can't really be captured well by surveys to determine the proper risk appetite and allocation. But this of course is the remedy to avoid the adverse behavior. If we support passive investing, then we can't at the same time support an investor's ability to determine when in fact the world is more or less risky. The truth of the matter of course, is that the world in many ways was most risky in 2000 and 2007, precisely at the time when very few investors would have come to this conslusion.

As far as (2), agree that if personal circumstances change, then you need to do what is necessary.
Is there anyone who's putting forth (1) as a good reason?
Sorry Richard, perhaps I misread your post. My interpretation of Claiming that people in both cases should follow the same path seems silly, at least to me was that you were implying that it was silly to follow the same as your original path in those scenarios. Perhaps you meant silly to follow the same path in both scenarios.
richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Rebalancing into Poverty...Part 2

Post by richard »

swaption wrote:Sorry Richard, perhaps I misread your post. My interpretation of Claiming that people in both cases should follow the same path seems silly, at least to me was that you were implying that it was silly to follow the same as your original path in those scenarios. Perhaps you meant silly to follow the same path in both scenarios.
I meant it's silly to follow the same path in both scenarios. There are many here who are saying one must stay the course no matter what and I was trying to point out that there are times staying the course doesn't make sense due to objective changes, rather than mere nerves.
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 10:36 am

Re: Rebalancing into Poverty...Part 2

Post by Bongleur »

I would like to see a "capital preservation" sub-forum. Beyond FDIC insured CDs...
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
garlandwhizzer
Posts: 3139
Joined: Fri Aug 06, 2010 3:42 pm

Re: Rebalancing into Poverty...Part 2

Post by garlandwhizzer »

I tend to agree with Cut-Throat and k-slice and act accordingly with my finances. I have been retired for 15 years, only got SS 3 years ago and have lived solely off of investments other than that. I have never accepted the "glide path concept" and have never during that time had more than 40% bonds. Currently at age 65, I have a little more than 30% bonds and certainly have no plans to increase that anytime soon. I made considerable money in the crash of 2008 simply by doing the opposite of what it seemed that everyone else was doing. I sold high quality bonds (rebalancing close to the bottom) and bought VWEHX and VTSMX at a point when investor sentiment hit a new low. Fortunately I rode both back up in the rally which in stock gains exceeded 100%, rebalancing along the way into lower risk positions in alignment with my long term asset allocation. The concept of rebalancing into less risky assets after your risky assets have already been decimated seems to me the opposite of what you should do if your goal is to optimize your long term results.

I am not an expert or a genius but I have learned a few basic lessons. The first rule of retirement is to lower your living expenses and get rid of all debt including mortgages. At the time I retired I was living in a 1 mil+ home in Santa Barbara with an expensive lifestyle and I sold it, paid off all debt, bought a new home with cash, and invested the rest. Currently, without kids and with no mortgage and no debt, my annual financial needs and wants are not overwhelming. Therefore, I can take risk and over the years I have profited greatly from doing so, buying risk assets when the market is massively fleeing them and holding them for a year, two, or three until they bounce back, at which time I do the opposite. In order to be able to do this aggressive rebalancing strategy it is important to keep in ones PERSONAL, not IRA, account sufficient cash plus tax exempt municipal bonds (VWITX) to pay all expenses comfortably for at least 2 or 3 years without selling anything else and without paying any taxes. In the 2008 crash for example, that was highly profitable. It's always scary at the bottom but "this, too, shall pass," as it has always done.

The idea that many seem to have that high quality bonds in the current interest rate environment do not have risk strikes me as bizarre. They do not have massive risk like stocks, an acute 50% drop, but I believe their returns in real dollars over the next decade will be either zero or negative for Treasuries and a very modest real return from corporates. I believe that stocks will do much better than that, although the road is likely to be bumpy. Still, if you're in a position to wait out the bad times, I firmly believe you will be rewarded, which is why I currently have about 70% in stocks. A zero return over a decade in my view is a huge risk, outweighing the current risk is stocks.

We are at the end of the greatest bull market in bonds in history (30 years) and we are also 12 years into the worst secular bear market in stocks since the Great Depression. This past history has slanted many into risk averse positions. History teaches us an infallible lesson, return to the mean can be vicious when the tide turns in huge secular bear or bull markets. No one knows when the wind will change, but I am betting big time that it will not take a decade and that those who put their trust in the "safety" of Treasuries while they won't lose massively (bonds never do) will nevertheless significantly underperform "risky" stocks especially if, as many expect, inflation rears its ugly head at some point. I may be wrong but I'm putting my money where my mouth is.

Garland Whizzer
ge1
Posts: 576
Joined: Sat Apr 28, 2012 8:15 pm

Re: Rebalancing into Poverty...Part 2

Post by ge1 »

Whizzer
I agree with most of what you are saying. Stocks will significantly outperform bonds over the coming decade and many will probably look back and wish they had dialed back on bonds after the insane returns in 2011 and 2012.

On the other hand, I fully expect the stock market to decline significantly over the next 1-2 years, as the next secular bull market wont start until we see truly cheap valuations, which we have not seen yet. So I'm only holding 40% in stocks and wait for cheaper prices in stocks.
pkcrafter
Posts: 14683
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Rebalancing into Poverty...Part 2

Post by pkcrafter »

Did something happen?

Is something going to happen?

Have posters here entered an alternate universe?

Get a grip.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
555
Posts: 4955
Joined: Thu Dec 24, 2009 7:21 am

Re: Rebalancing into Poverty...Part 2

Post by 555 »

garlandwhizzer wrote:"... The concept of rebalancing into less risky assets after your risky assets have already been decimated seems to me the opposite of what you should do..."
What??? This makes no sense. Do you understand what rebalancing is?
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 10:36 am

Re: Rebalancing into Poverty...Part 2

Post by Bongleur »

PIMCO today pointed out that what has become the standard way of making money is coming to an end: Buying the short end and selling the long end of the bond curve.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
Johm221122
Posts: 5264
Joined: Fri May 13, 2011 6:27 pm

Re: Rebalancing into Poverty...Part 2

Post by Johm221122 »

pkcrafter wrote:Did something happen?

Is something going to happen?

Have posters here entered an alternate universe?

Get a grip.


Paul
I think the attack on site may have worked :D
Post Reply