Or instead of having two buckets: Risk off and Risk on, you could have 3 for more optimal risk stratification:aj76er wrote: ↑Thu Sep 24, 2020 9:37 am+1Blue456 wrote: ↑Tue Sep 22, 2020 3:51 pm1) Have two portfolios:Leesbro63 wrote: ↑Tue Sep 22, 2020 2:19 pm During 2008-9, I came to the realization that in a Japan-type scenario, rebalancing a mature portfolio (I was age 49 then; I'm 60 now) from bonds into stocks might be a "Pascal's Wager". If you're wrong and stocks keeping going down for a long time, you effectively "flush" good money into bad money that might never recover. Thus negating the reason for "safe" money in the first place. And I amended my investment plan accordingly so that I would never again rebalance from bonds to stocks.
Now, as I get even closer to retirement age, I am wondering what happens if stocks crash and stay down for a long period of time. It might be a "you're dead already" scenario if you DO NOT rebalance into stocks after a crash. In other words, what happens when stocks crash just before or after retirement and we have a 1966-1981 period?
How does one reconcile the "Pascal's Wager" problem with the "you're dead already" problem? n
Portfolio one. I-bonds, TIPS, CDs and other safe income that covers your very basic expenses for 5, 10, 15, 20 years. You draw the line how much makes you comfortable.
Portfolio two. 100/0, 90/10, 80/20, 70/30, 60/40.... etc.
Don’t rebalance from portfolio 2 to portfolio 1. Do rebalance within Portfolio two.
2) Diversify risk by investing internationally?
As I approach the time to start de-risking my portfolio, this is the method I’m leaning towards using. And I believe this is how Bernstein and Swenson think about risking as well.
Total Portfolio = Risk-on Assets + Risk-off Assets
Never rebalance from Risk-off to Risk-on
Risk-on: Equities, Bonds, Real-estate, Precious metals, Commodities
Risk-off: Cash, T-bills, CDs, I-bonds, EE-bonds, TIPS held to duration, Stable value funds, Money market funds
Risk-on portfolio should be equity oriented (e.g. 100/0, 90/10, 80/20, 70/30, 60/40), and should be rebalanced regularly.
Risk-off should be X number of RLE, which is traditionally calculated as your non-discretionary budget subtracting SSN and pensions. I would go further and subtract a worst-case withdrawal rate as taken from the Risk-on portfolio. For example, 2% to 2.5% of initial portfolio balance.
Risk-on portfolio of $1,000,000
Assume a worst-case WR of 2% ($20,000 per year).
Say your non-discretionary budget is $50,000 and you expect to receive $20,000 per year in SSN benefits (CPI adjusted).
RLE = $50,000 - $20,000 - $20,000 = $10,000
Say you want 20X years of RLE as Risk-off portfolio size, this would be:
Risk-off portfolio = $10,000 x 20 = $200,000
Risk off bucket: I-bonds and individual TIPS
So so risk bucket: 60/40 all in one found or conservative TDF with good international diversification
Risk on bucket: 100% small cap or US stock market or whatever you think will make more money over 20-30 years
And instead of using asset allocation, use distribution allocation.