Dynamic Asset Allocation Strategy -- Thoughts?

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WoodSpinner
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Dynamic Asset Allocation Strategy -- Thoughts?

Post by WoodSpinner » Tue Apr 30, 2019 5:41 pm

All,

I am still learning about managing my Retirement Portfolio and would like to get some feedback on my current approach for Dynamic Asset Allocation. At this point I am comfortable with my investments and the overall Asset Allocation. I am more focused on the idea of being able to Dynamically adjust our Asset Allocation based on market performance. I think it's a variation of the Bucket Strategy and Liability Matching Portfolio -- at least at the conceptual level.

Currently refining my IPS statement and want to make sure this is clear and complete. Plan will be to review this my wife so she will have a clear understanding just in case she has to take over the management of the finances.

Key Questions
  1. Do you see any major issues with this approach?
  2. Has someone already come up with this?
  3. Any suggestions for making things clearer?
Background:
  • Ages: 59 (me), 58 (wife)
  • Retired: Jan2018
  • Avg Asset Spend: 3% (5% 59-70, 1% 71-90)

    Current Asset Allocation
    Under normal circumstances the goal is a 60/40 allocation (Stocks/Bonds with 25% of the Stocks invested Internationally). During a major downturn in stocks, we may temporarily lower this to no lower than 40/60.

    Note: To reduce Sequence of Returns Risk during the early part of Retirement We have planned to increase the Equities allocation from 52% (at age 58) to 60% (at age 66).

    Image

    Two Parts – One Portfolio:
    1. Liability Matching Portion is designed to fund a rolling 10 years of Expenses throughout Retirement and is invested in very safe assets that are not expected to be significantly impacted by market swings.
    2. Growth Portion will fund unanticipated expenses, protect against inflation and provide an inheritance for our heirs. This is invested in US and International Stocks and has the most risk (or reward).
    Liability Matching Portion
    Image

    Liability Matching Portion -- Re-balance Thresholds
    1. Always fully fund the Cash and Short-Term Bonds allocations (CurrentYear+1 to CurrentYear+3 Expenses).
    2. Intermediate Bonds may be sold to purchase Equities in the Growth Portion to insure a minimum 40/60 portfolio.
    3. Extra funds from the Portfolio may also be invested in Intermediate Bonds to insure a maximum 60/40 portfolio
    Growth Portion
    Image

    Growth Portion – Re-balance Thresholds.
    1. 75% of the Portfolio will be invested in low-cost index funds of US equities (e.g. VTI).
    2. 25% of this Portfolio should be invested in International Equity Funds (e.g. VXUS).
    Dynamic Asset Allocations
    Our Asset Allocations can shift within a band of 40/60 to 60/40 (Stocks/Bonds).
    1. During Bear Markets the preference will be to fund expenses from the Liability Matching Portion and use any excess capacity to buy Stocks.
    2. In a severe and prolonged Bear Market, we may be forced to have less than a 10-year funding to insure Stocks do not fall below 40% of the Portfolio. In this case Intermediate Bonds will be sold to purchase additional stocks.
    3. During Bull Markets, the preference will be to fund expenses from the Growth Portion and use any excess capacity to buy Intermediate Bonds.
    4. In a prolonged Bull Market, we may have more than a 10 year funding in the Liability Matching Portion and sell Stocks to insure they do not rise above 60% of the Portfolio.

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Lancelot
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by Lancelot » Tue Apr 30, 2019 6:07 pm

I like David Zolt's Target Percentage strategy
https://www.targetpercentage.com/
No Where for Very Long...

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WoodSpinner
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by WoodSpinner » Wed May 01, 2019 1:21 pm

Polite bump

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nedsaid
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by nedsaid » Wed May 01, 2019 3:42 pm

There is merit to what you are thinking. Pretty much when stocks are up, fund your retirement withdrawals from stocks. When stocks are down, fund your retirement withdrawals from bonds. The point is, you need to give stocks time to rebound when markets are bad. In most cases, this would be about 3 years. Another thing to consider is to annuitize a portion (maybe 20%) of your portfolio with a Single Premium Immediate Annuity. It would take pressure off the remainder of your portfolio and perhaps you could invest somewhat more aggressively afterwards.
A fool and his money are good for business.

dknightd
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by dknightd » Sun May 05, 2019 9:31 am

looks reasonable

MnD
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by MnD » Sun May 05, 2019 9:50 am

Looks like a dog's dinner to me.
What are you afraid is going to happen with replacing all this with "60/40 AA, periodic/rule based rebalancing".
What evidence do you have that your method would improve outcomes?
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

MikeG62
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by MikeG62 » Sun May 05, 2019 10:09 am

Kitces has written on dynamic asset allocation strategies. See one example here...

https://www.kitces.com/blog/valuation-b ... lidepaths/
Real Knowledge Comes Only From Experience

mighty72
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by mighty72 » Sun May 05, 2019 9:52 pm

[moved to Personal Investments as this is investing related]

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WoodSpinner
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by WoodSpinner » Mon May 06, 2019 10:03 am

MnD wrote:
Sun May 05, 2019 9:50 am
Looks like a dog's dinner to me.
What are you afraid is going to happen with replacing all this with "60/40 AA, periodic/rule based rebalancing".
What evidence do you have that your method would improve outcomes?
I just retired in 2018, at 58, at what was an all time market high and in a turbulent political environment. I plan at least a 30 year retirement for my wife and I and budget greater expenses during the first 12 years of retirement for travel and Roth Conversions. Once SS kicks in at 70, I will have a net positive cash flow for living expenses. The portfolio income will then be gravy and used for more travel, charity and gifts to family.

The impact of a major downturn on my retirement plans during the first twelve years is what I fear most. I am not focused on increasing my wealth— rather being able to spend and enjoy it.

Freely admit, I borrowed concepts from Kitces, Pfau, Bernstein, ERN and others to pull together this approach. Is it better than a straight 60/40? Who knows—ask me in 30 years.

Is it something I understand and can execute — Absolutely!

I would love to Backtest this approach to see how well (or poorly) it might do. I could use some advice and coaching on how to implement this in a MC simulation. Please chime in or PM me if you have any ideas.

My modeling skills in the Flexible Retirement Planner aren’t up to this challenge.

WoodSpinner

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gmaynardkrebs
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by gmaynardkrebs » Mon May 06, 2019 10:17 am

Your inflation protection seems to be stocks primarily, with some short bonds. Stocks are not good inflation protection short term, which I understand is your concern until SS starts. Neither are short bonds right now, as real rates are being suppressed by the Fed as a policy tool. Consider TIPS or I-bonds.

desiderium
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Re: Dynamic Asset Allocation Strategy -- Thoughts?

Post by desiderium » Tue May 07, 2019 9:29 am

WoodSpinner wrote:
Mon May 06, 2019 10:03 am
MnD wrote:
Sun May 05, 2019 9:50 am
Looks like a dog's dinner to me.
What are you afraid is going to happen with replacing all this with "60/40 AA, periodic/rule based rebalancing".
What evidence do you have that your method would improve outcomes?
I just retired in 2018, at 58, at what was an all time market high and in a turbulent political environment. I plan at least a 30 year retirement for my wife and I and budget greater expenses during the first 12 years of retirement for travel and Roth Conversions. Once SS kicks in at 70, I will have a net positive cash flow for living expenses. The portfolio income will then be gravy and used for more travel, charity and gifts to family.

The impact of a major downturn on my retirement plans during the first twelve years is what I fear most. I am not focused on increasing my wealth— rather being able to spend and enjoy it.

Freely admit, I borrowed concepts from Kitces, Pfau, Bernstein, ERN and others to pull together this approach. Is it better than a straight 60/40? Who knows—ask me in 30 years.

Is it something I understand and can execute — Absolutely!

I would love to Backtest this approach to see how well (or poorly) it might do. I could use some advice and coaching on how to implement this in a MC simulation. Please chime in or PM me if you have any ideas.

My modeling skills in the Flexible Retirement Planner aren’t up to this challenge.

WoodSpinner
Your approach makes sense and it is appropriate to think of how you can manage the worst case scenarios. However, I don't really think these contingencies are as plan-able as people make it sound. The bad scene is probably not going to look just like you imagine and will depend not just on the qualities and duration of the bear but on other factors: inflation, bond returns, employment/economy outlook, health care costs, personal health, integrity of social security benefits, perceived political risk, etc., etc.

The fact is, you are going to muddle through and make adjustments as best you can to make it work

I think the most controllable investment return factor in early retirement is taxation. You appear to have considered this. After that, portfolio performance depends on withdrawals, which depend in turn on spending and possibly on future earned income. These factors will likely have more impact than tweaks to asset allocation.

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