If you are old, why bother with rebalancing!!?

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bertilak
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Re: If you are old, why bother with rebalancing!!?

Post by bertilak » Wed Feb 06, 2019 6:35 pm

livesoft wrote:
Tue Feb 05, 2019 11:48 am
GoldStar wrote:
Tue Feb 05, 2019 11:45 am
If I don't re-balance for 40 years won't my risk profile drift from where I want it? Or my growth expectations do so?
No, one's portfolio won't drift that much in reality, so the risk profile drift is moot.
I look at it as accepting the drift because
  1. The chosen AA has a lot of slop in it. it's a ballpark position that may or may not (most likely) have been optimal to begin with. Who's to say a drifted portfolio is better or worse than the original choice.
  2. It will take a LOT of drift to make a discernible difference especially if investing new money (including dividend reinvestment) or spending from the portfolio is done in a way to nudge the AA towards the original choice.
It is only when moving money around for reasons other than actively rebalancing that I pay attention to the target AA.
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tadamsmar
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Re: If you are old, why bother with rebalancing!!?

Post by tadamsmar » Wed Feb 06, 2019 8:25 pm

livesoft wrote:
Tue Feb 05, 2019 11:38 am
After seeing all the many many threads on how to rebalance and how to set up a retired person's portfolio along with all the "I didn't hit my rebalancing trigger even though the market dropped 20%" posts, I have come to the conclusion that ...

If one has any portfolio of equities:bonds in an asset allocation of between 30:70 and 70:30 and one is over age 62 (especially if one is collecting SS benefits), then there is no point is worrying about rebalancing, no point in looking at one's asset allocation, and no actual point in rebalancing.

It seems to me that one's portfolio will take care of itself no matter what one does because one is going to die within 40 years anyways.

That means at that time and going forward that one doesn't need LifeStrategy funds. One doesn't need Target Date Funds. One can just forget about looking at their portfolio pretty much ever again.
You'll spend 30 years taking RMD from tax-deferred where your bonds are. You could end up 100:0.
Last edited by tadamsmar on Wed Feb 06, 2019 8:40 pm, edited 2 times in total.

Ping Pong
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Re: If you are old, why bother with rebalancing!!?

Post by Ping Pong » Wed Feb 06, 2019 8:34 pm

Deng! Now I have to add age as an input to my rebalancing process. And an if-statement, too. You just made my rebalancing more complicated.

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livesoft
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Re: If you are old, why bother with rebalancing!!?

Post by livesoft » Wed Feb 06, 2019 8:38 pm

tadamsmar wrote:
Wed Feb 06, 2019 8:25 pm
You'll spend 30 years taking RMD from tax-deferred where your bonds are. You could end up 100:0.
And that's part of the point. The 30 years of expected growth in equities should allow a 70% drop in equities and you would still have enough for the rest of your life at that older age.
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Re: If you are old, why bother with rebalancing!!?

Post by pascalwager » Thu Feb 07, 2019 3:51 pm

On page 168 of "Investor's Manifesto", Bill Bernstein discusses why, for a retiree, it may not be wise to re-balance back into stocks after a steep stock decline. Simply, rebalancing could consume bond reserves needed during a prolonged period of dismal stock performance.

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Re: If you are old, why bother with rebalancing!!?

Post by longinvest » Thu Feb 07, 2019 4:51 pm

pascalwager wrote:
Thu Feb 07, 2019 3:51 pm
On page 168 of "Investor's Manifesto", Bill Bernstein discusses why, for a retiree, it may not be wise to re-balance back into stocks after a steep stock decline. Simply, rebalancing could consume bond reserves needed during a prolonged period of dismal stock performance.
When a retiree is worried about a remote possibility of a 80% stock plunge and doesn't intend to rebalance his portfolio after such a deep plunge, he should immediately change his portfolio according to the following calculation, and then rebalance his portfolio to this new allocation once a year, regardless of market conditions:

S = Current Stock allocation
B = 1 - S
New Stock Allocation = (S X (1 - 80%)) / ((S X (1 - 80%)) + B)
New Bond Allocation = 1 - New Stock Allocation

For example, if the current allocation is 60/40 stocks/bonds, I get:
S = 60%
B = 40%
New Stock Allocation = (60% X (1 - 80%)) / ((60% X (1 - 80%)) + 40%) = 23%
New Bond Allocation = 1 - 23% = 77%

The investor is willing to hold onto a 23/77 stocks/bonds portfolio in the depth of a crisis, without buying more stocks which got significantly cheaper than today. There's no reason the investor should possess more than 23% of his current portfolio in stocks which are currently 400% more expensive.

Changing his allocation today and then rebalancing on schedule regardless if market conditions would make a significant difference if the crisis ever happens. I've illustrated this in a previous post.

But, behavior trumps logic in real life. Some investors might agree with this analysis yet be unable to rebalance, even with a 23/77 stocks/bonds portfolio. Personally, I think that 23% in stocks is too low. To deal with this behavioral problem, I would suggest to simply invest the money into a conservative all-in-one fund like Vanguard's Target Retirement Income fund which has a 30/70 stocks/bonds allocation and let Vanguard's managers take care of rebalancing.
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Dale_G
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Re: If you are old, why bother with rebalancing!!?

Post by Dale_G » Thu Feb 07, 2019 5:31 pm

I am not old, but closing in on 82.

When I retired in 2001 I was 60/40 and maintained that through the dot com bubble and 2008/2009. It took a lot of bonds sales in 2008/2009 to stay at that allocation, but it all worked out well in the end.

In 2013 I decided to reset the equity allocation 2% higher. When equities reached that level, I put about 1/4 of the "profits" into bonds and ratcheted the equity allocation up by another 2%. The percentages at which rebalancing occurs in either direction followed.

I am now at 75% equities. I'll probably stop when and if I reach 80%. I do have a floor and ceiling on the bond assets that may eventually rule.

Dale
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Re: If you are old, why bother with rebalancing!!?

Post by pascalwager » Thu Feb 07, 2019 6:03 pm

longinvest wrote:
Thu Feb 07, 2019 4:51 pm
pascalwager wrote:
Thu Feb 07, 2019 3:51 pm
On page 168 of "Investor's Manifesto", Bill Bernstein discusses why, for a retiree, it may not be wise to re-balance back into stocks after a steep stock decline. Simply, rebalancing could consume bond reserves needed during a prolonged period of dismal stock performance.
When a retiree is worried about a remote possibility of a 80% stock plunge and doesn't intend to rebalance his portfolio after such a deep plunge, he should immediately change his portfolio according to the following calculation, and then rebalance his portfolio to this new allocation once a year, regardless of market conditions:

S = Current Stock allocation
B = 1 - S
New Stock Allocation = (S X (1 - 80%)) / ((S X (1 - 80%)) + B)
New Bond Allocation = 1 - New Stock Allocation

For example, if the current allocation is 60/40 stocks/bonds, I get:
S = 60%
B = 40%
New Stock Allocation = (60% X (1 - 80%)) / ((60% X (1 - 80%)) + 40%) = 23%
New Bond Allocation = 1 - 23% = 77%

The investor is willing to hold onto a 23/77 stocks/bonds portfolio in the depth of a crisis, without buying more stocks which got significantly cheaper than today. There's no reason the investor should possess more than 23% of his current portfolio in stocks which are currently 400% more expensive.

Changing his allocation today and then rebalancing on schedule regardless if market conditions would make a significant difference if the crisis ever happens. I've illustrated this in a previous post.

But, behavior trumps logic in real life. Some investors might agree with this analysis yet be unable to rebalance, even with a 23/77 stocks/bonds portfolio. Personally, I think that 23% in stocks is too low. To deal with this behavioral problem, I would suggest to simply invest the money into a conservative all-in-one fund like Vanguard's Target Retirement Income fund which has a 30/70 stocks/bonds allocation and let Vanguard's managers take care of rebalancing.
Not the main issue, but Estrada showed that 30/70 is too low in stocks--high failure rates for a retiree with a moderate-sized portfolio. The minimum should be 40/60. And the Vanguard Life Strategy funds don't include any TIPS, so might not work for a retiree. (Incidentally, I wonder how many know that the Life Strategy Funds are intended by Vanguard to be used to finance "Life's Adventures".)

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Re: If you are old, why bother with rebalancing!!?

Post by longinvest » Thu Feb 07, 2019 6:13 pm

pascalwager wrote:
Thu Feb 07, 2019 6:03 pm
longinvest wrote:
Thu Feb 07, 2019 4:51 pm
But, behavior trumps logic in real life. Some investors might agree with this analysis yet be unable to rebalance, even with a 23/77 stocks/bonds portfolio. Personally, I think that 23% in stocks is too low. To deal with this behavioral problem, I would suggest to simply invest the money into a conservative all-in-one fund like Vanguard's Target Retirement Income fund which has a 30/70 stocks/bonds allocation and let Vanguard's managers take care of rebalancing.
Not the main issue, but Estrada showed that 30/70 is too low in stocks--high failure rates for a retiree with a moderate-sized portfolio. The minimum should be 40/60. And the Vanguard Life Strategy funds don't include any TIPS, so might not work for a retiree. (Incidentally, I wonder how many know that the Life Strategy Funds are intended by Vanguard to be used to finance "Life's Adventures".)
1) Failure rate means that the study modeled a constant inflation-adjusted withdrawal amount equal to 4% of the portfolio on the day of retirement which was taken annually for from the portfolio regardless of market returns for a period equal to exactly 30 years. This method is usually called "Safe" Withdrawal Rate (SWR). Failure means that the portfolio got depleted before 30 withdrawals. I know of no single person who has ever followed such a senseless method into the depth of a crisis. The human brain wouldn't allow the investor to blindly run his portfolio into the ground.

Our wiki contains a withdrawal method called variable percentage withdrawal (VPW) which is sensible and is mathematically guaranteed to never prematurely deplete the portfolio.

2) I suggested the Vanguard Retirement Income fund which contains TIPS, in the quoted post.
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Re: If you are old, why bother with rebalancing!!?

Post by Artsdoctor » Thu Feb 07, 2019 8:10 pm

"Note that this thread is about old people. They are already retired, so there is no retirement goal anymore."

62? Seriously?

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zaboomafoozarg
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Re: If you are old, why bother with rebalancing!!?

Post by zaboomafoozarg » Fri Feb 08, 2019 12:02 am

Habit, probably.

I certainly can't imagine livesoft not rebalancing every time the market swings by a couple percent...

pascalwager
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Re: If you are old, why bother with rebalancing!!?

Post by pascalwager » Fri Feb 08, 2019 5:58 pm

longinvest wrote:
Thu Feb 07, 2019 6:13 pm
pascalwager wrote:
Thu Feb 07, 2019 6:03 pm
longinvest wrote:
Thu Feb 07, 2019 4:51 pm
But, behavior trumps logic in real life. Some investors might agree with this analysis yet be unable to rebalance, even with a 23/77 stocks/bonds portfolio. Personally, I think that 23% in stocks is too low. To deal with this behavioral problem, I would suggest to simply invest the money into a conservative all-in-one fund like Vanguard's Target Retirement Income fund which has a 30/70 stocks/bonds allocation and let Vanguard's managers take care of rebalancing.
Not the main issue, but Estrada showed that 30/70 is too low in stocks--high failure rates for a retiree with a moderate-sized portfolio. The minimum should be 40/60. And the Vanguard Life Strategy funds don't include any TIPS, so might not work for a retiree. (Incidentally, I wonder how many know that the Life Strategy Funds are intended by Vanguard to be used to finance "Life's Adventures".)
1) Failure rate means that the study modeled a constant inflation-adjusted withdrawal amount equal to 4% of the portfolio on the day of retirement which was taken annually for from the portfolio regardless of market returns for a period equal to exactly 30 years. This method is usually called "Safe" Withdrawal Rate (SWR). Failure means that the portfolio got depleted before 30 withdrawals. I know of no single person who has ever followed such a senseless method into the depth of a crisis. The human brain wouldn't allow the investor to blindly run his portfolio into the ground.

Our wiki contains a withdrawal method called variable percentage withdrawal (VPW) which is sensible and is mathematically guaranteed to never prematurely deplete the portfolio.

2) I suggested the Vanguard Retirement Income fund which contains TIPS, in the quoted post.
After studying Estrada, choosing a 30/70 AA might itself be considered senseless, unless one has a sufficiently large portfolio. Simply select a 60/40 AA and you're protected from failure while using maximum 4% withdrawals.

The originator devoted an entire book to VPW and it's probably optimal (and complicated); otherwise I know you wouldn't recommend it. I have a pension and for me, Estrada is just a rough guide at this point.

Considering the Vg Retirement Income Fund (RI), it could be used in conjunction with a stock fund, maybe Total World Stock (TWS), to increase the stock allocation. For example: 29% TWS + 71% RI = 50/50 AA. But I wouldn't personally do this because I don't want or need to use intermediate maturities to stretch for bond yield; but many retirees probably do need to do this if they have a high bond allocation.

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Re: If you are old, why bother with rebalancing!!?

Post by Kevin M » Sat Feb 09, 2019 1:36 pm

pascalwager wrote:
Fri Feb 08, 2019 5:58 pm
After studying Estrada, choosing a 30/70 AA might itself be considered senseless, unless one has a sufficiently large portfolio. Simply select a 60/40 AA and you're protected from failure while using maximum 4% withdrawals.
This assumes that the future will resemble the past. It may not, so I don't think we can say with certainty that a 60/40 AA with a 4% withdrawal rate guarantees no failure in the future.

Also, it's the size of the portfolio relative to residual expenses in retirement that matters. A 0/100 portfolio could be perfectly fine if your portfolio is large enough relative to your residual living expenses. For one person this might be $1M, for another it might be $5M.

Kevin
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Re: If you are old, why bother with rebalancing!!?

Post by Dandy » Sat Feb 09, 2019 3:12 pm

Probably true in most cases.

Not a big fan in rebalancing most sub accounts but feel the overall equity/fixed income allocation has some rebalancing value especially maintaining adequate fixed income assets.

There are many expensive potential bumps in the road for many retirees as they age and maybe not so gracefully. May not want to close the book on managing risk altogether. Also, extreme/"never" before seen things can still happen e.g. cuts to Social Security? Living to 110? Negative interest rates ( :oops: happened already), etc.

Agree fussing with portfolio in mid to late retirement is less needed/useful but severe market plunges can still affect sleeping well even if it shouldn't.

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Re: If you are old, why bother with rebalancing!!?

Post by pascalwager » Sat Feb 09, 2019 7:25 pm

I'm 76 and I'll definitely re-balance between US and int'l stocks in the "future". I've never had any direct experience re-balancing between stocks and bonds--my former advisor used to do this for my small bond AA prior to 2012. But I have re-allocated between stocks and bonds a few times in recent years to the point where I now have a 52/48 AA. I may just allow this ratio to increase in the "future".

My "bonds" are currently 100% money market due to the relatively flat yield curve. If the yield curve steepens, I may increase the overall maturity (using MMF and ST funds) up to a maximum of 2 1/2 to 3 years. If perchance my pension should be compromised during a recession, then I might be motivated to increase overall maturity up to, but not beyond, the yield curve sweet spot.

Because of my pension, I'm still using bonds for portfolio stability rather than for income potential as though I were still in the accumulation stage of retirement investing.

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Re: If you are old, why bother with rebalancing!!?

Post by pascalwager » Fri Nov 15, 2019 9:38 pm

Dottie57 wrote:
Tue Feb 05, 2019 11:57 am
I guess I turn OLD in March. /sigh
Me too, but 15 years ago.

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