Soft vs Hard Rebalancing

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

I like one-way rebalancing in accumulation because your paycheck is essentially a stream of fixed income. In other words, you aren't buying too much when you rebalance into equities.
US & FM (5% seed) | 350K Cash
HootingSloth
Posts: 956
Joined: Mon Jan 28, 2019 3:38 pm

Re: The Day the 4% Rule Died

Post by HootingSloth »

alluringreality wrote: Tue Jun 28, 2022 2:08 pm
AerialWombat wrote: Tue Jun 28, 2022 9:28 am Marseille, what I hear you saying across this entire discussion is that you don’t actually have an AA. Asset allocation. “Allocation” means you’ve chosen a specific target percentage. Your approach may start with an AA, but then you let the market dictate how much you have in equities and make no adjustments. Thus, you end up with some ratio of stocks to cash, but it was most certainly not “allocated”.
Someone splitting funds into two investment categories, such as stocks and fixed income, meets a general definition for allocate. In the future markets can potentially increase or decrease relative value of the two investments. From the perspective of a buy and hold investor, the original allocation generally remains, regardless how market price might move. It could be suggested that moving assets from one investment category into the other after a price move may essentially amount to a different allocation than the original. Basically rebalancing amounts to a reallocation of funds in a different manner than the original investment, even as the target remains the same. I'm fully aware of your intent within the quote, and an alternate perspective from William Sharpe is simply presented in the following. Essentially he takes the position that traditional asset allocation policies require transactions with other investors when market prices change, while Adaptive Asset Allocation Policies would not include such a requirement.
https://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf
I always found it interesting that there are some academic undercurrents pushing back against the idea that one should rebalance back to a fixed asset allocation. The paper you linked, and Sharpe's Global Market Portfolio and "lockbox" approaches, have also made me feel relatively more comfortable with less rebalancing. John Cochrane also made some thought provoking arguments in his piece, which apply to things like factor investing and market timing, but also apply to the question of whether you should rebalance to a fixed asset allocation or allow your allocation to float with the market, in his article Portfolio advice in a multifactor world, published in the third quarter of 1999. One concise statement of the general idea:
Do not forget, the average investor holds the market. If you're pretty much average, all this thought (ED NOTE: laid out earlier in the article) will lead you right back to holding the market index. To rationalize anything but the market portfolio (ED NOTE: the market portfolio Cochrane is referring to includes market weights for stocks and bonds), you have to be different from the average investor in some identifiable way. The average investor sees some risk in value stocks that counteracts their attractive average returns. Maybe you should too! Right now the average investor is feeling very wealthy and risk-tolerant, therefore stock prices have risen to unprecedented levels and expected stock returns look very low. It's tempting to sell, but perhaps you're feeling pretty wealthy and risk-tolerant as well.
The basic idea here is that when the stock market rises, you become more able to bear risk, and so it may be that your asset allocation should rise as well. Of course, the timing of the article's publication, and the irony in the bolded suggestion when we know how things unfolded from there, might undercut the persuasiveness of the argument for some.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
Zeno
Posts: 788
Joined: Wed Sep 12, 2018 10:44 am

Re: The Day the 4% Rule Died

Post by Zeno »

I will study some more.
Last edited by Zeno on Mon Jul 11, 2022 9:19 pm, edited 1 time in total.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

I have nothing against Merriman but the tables seem quite biased toward international.

1970 retirees holding US only didn't do well because of stagflation. Meanwhile Japan was kicking during the 70s & 80s.

Now, for us heading into 2023, US might not do so hot...but there's no Japan equivalent on the international front.
US & FM (5% seed) | 350K Cash
User avatar
firebirdparts
Posts: 3577
Joined: Thu Jun 13, 2019 4:21 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by firebirdparts »

I'm not retired, so I don't know how this "feels" but I think people should envision that nature is going to cause you to hold onto equities when they're down. When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.

It seems like many many times we've had arguments in which people didn't envision it this way, and perhaps even when told they should, they felt like their intellectual powers were just vastly superior to people who thought it was that simple.

I think it's that simple.

Whether you are accumulating or spending, you kinda have to rebalance with the inflows and outflows. It's just so appealing.

I, like others, may be missing the entire point of this spinoff thread. But it sure sounded like the above problem all over again.

spend that cash, you don't have to argue about it. Just spend it.
A fool and your money are soon partners
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

firebirdparts wrote: Tue Jun 28, 2022 7:46 pm When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.
This is soft rebalancing in a nutshell. Alas, when people talk "rebalancing," this isn't it. They actually reset the AA first, then withdraw proportionally from both assets.

As you probably noted, soft rebalancing feels more natural than hard rebalancing.
US & FM (5% seed) | 350K Cash
User avatar
NearlyRetired
Posts: 285
Joined: Fri Aug 09, 2019 12:56 pm
Location: United Kingdom

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by NearlyRetired »

Marseille07 wrote: Wed Jun 29, 2022 12:17 am
firebirdparts wrote: Tue Jun 28, 2022 7:46 pm When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.
This is soft rebalancing in a nutshell. Alas, when people talk "rebalancing," this isn't it. They actually reset the AA first, then withdraw proportionally from both assets.

As you probably noted, soft rebalancing feels more natural than hard rebalancing.
Aah, I was wondering what soft rebalancing was - that would be how I would do it, if I decide to. Interestingly, when I have run scenarios through FI Calc and cFIREsim, I haven't noticed descernable changes in outcome if I rebalance or not.
To err is to be human, to really mess up, use a computer
User avatar
firebirdparts
Posts: 3577
Joined: Thu Jun 13, 2019 4:21 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by firebirdparts »

Marseille07 wrote: Wed Jun 29, 2022 12:17 am
firebirdparts wrote: Tue Jun 28, 2022 7:46 pm When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.
This is soft rebalancing in a nutshell. Alas, when people talk "rebalancing," this isn't it. They actually reset the AA first, then withdraw proportionally from both assets.

As you probably noted, soft rebalancing feels more natural than hard rebalancing.
Money is fungible. I think I've seen this discussion collapse numerous times before on this exact subject.

One group says "I've invented a totally new thing, the grilled cheese sandwich"
And another group says "That's not a grilled cheese sandwich"
When what's really needed is somebody to say "You are doing it right. The rest of us never talked about grilled cheese in here because we all eat one every day and there's just nothing to say about it.
A fool and your money are soon partners
nigel_ht
Posts: 4378
Joined: Tue Jan 01, 2019 10:14 am

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by nigel_ht »

firebirdparts wrote: Wed Jun 29, 2022 8:50 am
Marseille07 wrote: Wed Jun 29, 2022 12:17 am
firebirdparts wrote: Tue Jun 28, 2022 7:46 pm When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.
This is soft rebalancing in a nutshell. Alas, when people talk "rebalancing," this isn't it. They actually reset the AA first, then withdraw proportionally from both assets.

As you probably noted, soft rebalancing feels more natural than hard rebalancing.
Money is fungible. I think I've seen this discussion collapse numerous times before on this exact subject.

One group says "I've invented a totally new thing, the grilled cheese sandwich"
And another group says "That's not a grilled cheese sandwich"
When what's really needed is somebody to say "You are doing it right. The rest of us never talked about grilled cheese in here because we all eat one every day and there's just nothing to say about it.
Well he’s using Texas toast vs regular bread…
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

firebirdparts wrote: Wed Jun 29, 2022 8:50 am Money is fungible. I think I've seen this discussion collapse numerous times before on this exact subject.

One group says "I've invented a totally new thing, the grilled cheese sandwich"
And another group says "That's not a grilled cheese sandwich"
When what's really needed is somebody to say "You are doing it right. The rest of us never talked about grilled cheese in here because we all eat one every day and there's just nothing to say about it.
Well if soft-rebalancing is what people actually do then there isn't much to discuss.

But my understanding is that lots of people actually reset their AA then withdraw proportionally from both assets. Not saying something is wrong with that, but that's where we can discuss the pros and cons.

Money may be fungible but not all rebalancing schemes are the same.
US & FM (5% seed) | 350K Cash
marcopolo
Posts: 6484
Joined: Sat Dec 03, 2016 10:22 am

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by marcopolo »

Marseille07 wrote: Wed Jun 29, 2022 12:17 am
firebirdparts wrote: Tue Jun 28, 2022 7:46 pm When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.
This is soft rebalancing in a nutshell. Alas, when people talk "rebalancing," this isn't it. They actually reset the AA first, then withdraw proportionally from both assets.

As you probably noted, soft rebalancing feels more natural than hard rebalancing.
I don't think this is really true. I certainly don't do it that way because it would involve more buying and selling than would be necessary by flipping the order.

The way I do it, and i suspect many people do as well, is to do what you call soft rebalancing first, and then check if hard rebalancing is required. This works for both accumulation and withdrawal phases.

I set up bands say +/- 5%, with a target AA, say 60/40.

During accumulation, put new money into whatever asset is lower than target. Then check to see if AA is more than 5% out of whack (equities > 65% or < 55%), only do hard rebalancing if that is the case.

During withdrawal, take money from whatever asset is higher than target. Then check to see if AA is more than 5% out of whack (equities > 65% or < 55%), only do hard rebalancing if that is the case.

The soft rebalancing takes care of things most of the time. Following this approach, I have only had to do hard rebalancing a handful of times (2008/9; March 2020, maybe a couple others I don't recall).
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

marcopolo wrote: Wed Jun 29, 2022 12:05 pm The way I do it, and i suspect many people do as well, is to do what you call soft rebalancing first, and then check if hard rebalancing is required. This works for both accumulation and withdrawal phases.

I set up bands say +/- 5%, with a target AA, say 60/40.

During accumulation, put new money into whatever asset is lower than target. Then check to see if AA is more than 5% out of whack (equities > 65% or < 55%), only do hard rebalancing if that is the case.

During withdrawal, take money from whatever asset is higher than target. Then check to see if AA is more than 5% out of whack (equities > 65% or < 55%), only do hard rebalancing if that is the case.

The soft rebalancing takes care of things most of the time. Following this approach, I have only had to do hard rebalancing a handful of times (2008/9; March 2020, maybe a couple others I don't recall).
OK, then the only difference I see is that you have +/- 5% bands which sometimes require hard rebalancing. I don't have such requirements.
US & FM (5% seed) | 350K Cash
marcopolo
Posts: 6484
Joined: Sat Dec 03, 2016 10:22 am

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by marcopolo »

Marseille07 wrote: Wed Jun 29, 2022 12:24 pm
marcopolo wrote: Wed Jun 29, 2022 12:05 pm The way I do it, and i suspect many people do as well, is to do what you call soft rebalancing first, and then check if hard rebalancing is required. This works for both accumulation and withdrawal phases.

I set up bands say +/- 5%, with a target AA, say 60/40.

During accumulation, put new money into whatever asset is lower than target. Then check to see if AA is more than 5% out of whack (equities > 65% or < 55%), only do hard rebalancing if that is the case.

During withdrawal, take money from whatever asset is higher than target. Then check to see if AA is more than 5% out of whack (equities > 65% or < 55%), only do hard rebalancing if that is the case.

The soft rebalancing takes care of things most of the time. Following this approach, I have only had to do hard rebalancing a handful of times (2008/9; March 2020, maybe a couple others I don't recall).
OK, then the only difference I see is that you have +/- 5% bands which sometimes require hard rebalancing. I don't have such requirements.
I think that is true. I don't think there is one right or wrong way. Studies show it makes little difference.
Once in a while you get shown the light, in the strangest of places if you look at it right.
alluringreality
Posts: 788
Joined: Tue Nov 12, 2019 10:59 am

Re: The Day the 4% Rule Died

Post by alluringreality »

HootingSloth wrote: Tue Jun 28, 2022 3:26 pm The paper you linked, and Sharpe's Global Market Portfolio and "lockbox" approaches, have also made me feel relatively more comfortable with less rebalancing. John Cochrane also made some thought provoking arguments in his piece, which apply to things like factor investing and market timing, but also apply to the question of whether you should rebalance to a fixed asset allocation or allow your allocation to float with the market, in his article Portfolio advice in a multifactor world, published in the third quarter of 1999.
My general aversion to rebalancing tends to center on how at times I may not fully believe in future "reversals" or "mean reversion". From a behavioral standpoint, I'm not convinced that rebalancing necessarily supports my own "investment discipline". Our business area is generally subject to reduced demand when uncertainty comes around. Shoveling additional fixed income into stocks on market declines doesn't fit extremely well with risk related to my employment. I've taken a look at the Cochrane paper a few times before, and I'm not sure that I fully understand every topic, but I think there's some similar thought in there. Essentially my primary aversion around traditional asset allocation centers on Table 2 and the lower portion of the Constant Mix payoff diagram from Figure 6 in the following, although there are certainly alternate strategies for the consideration.
https://www.semanticscholar.org/paper/D ... 76a5174cca
Last edited by alluringreality on Thu Jun 30, 2022 7:47 am, edited 1 time in total.
30% Savings Bonds, 45% US Indexes, 25% Ex-US Indexes - Buy & Hold
FactualFran
Posts: 1886
Joined: Sat Feb 21, 2015 2:29 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by FactualFran »

Marseille07 wrote: Wed Jun 29, 2022 10:11 am But my understanding is that lots of people actually reset their AA then withdraw proportionally from both assets. Not saying something is wrong with that, but that's where we can discuss the pros and cons.
I don't know what lots of people do, but one way to withdraw from each asset is in proportion to how much the portfolio balance prior to the withdrawal minus the portfolio withdrawal amount is above the target allocation of the asset. For example, if prior to the withdrawal the balance in stocks is $53, the balance in bonds is $51, $4 is to be withdrawn, and the target allocation is 50:50, then withdraw $3 from stocks and $1 from bonds (no money is moved between stocks and bonds).

Rebalancing a portfolio to a fixed target allocation with each withdrawal makes the calculation of the initial withdrawal rate that depleted the portfolio in a number of years for a sequence of return relatively simple. Allowing the allocation to change makes it difficult to determine how much of the difference in the supported initial withdrawal rate is due to different allocations.

If a 50:50 portfolio is allowed to change to 60:40, then the supported withdrawal rate will depend on the changes to the allocation over time. In general, a fixed target allocation of 50:50 will support a different initial withdrawal rate than 60:40.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

FactualFran wrote: Wed Jun 29, 2022 12:57 pm I don't know what lots of people do, but one way to withdraw from each asset is in proportion to how much the portfolio balance prior to the withdrawal minus the portfolio withdrawal amount is above the target allocation of the asset. For example, if prior to the withdrawal the balance in stocks is $53, the balance in bonds is $51, $4 is to be withdrawn, and the target allocation is 50:50, then withdraw $3 from stocks and $1 from bonds (no money is moved between stocks and bonds).

Rebalancing a portfolio to a fixed target allocation with each withdrawal makes the calculation of the initial withdrawal rate that depleted the portfolio in a number of years for a sequence of return relatively simple. Allowing the allocation to change makes it difficult to determine how much of the difference in the supported initial withdrawal rate is due to different allocations.

If a 50:50 portfolio is allowed to change to 60:40, then the supported withdrawal rate will depend on the changes to the allocation over time. In general, a fixed target allocation of 50:50 will support a different initial withdrawal rate than 60:40.
Yes it can certainly be done the way you're describing. It requires calculations up front but fewer money moves between assets.

Soft rebalancing is even easier because in the example above ($53 in stocks, $51 in bonds and you need $4) then I simply draw $4 from stocks and call it a day. Now I withdraw too much from stocks in this example, but this means I'd be drawing from bonds next.
US & FM (5% seed) | 350K Cash
User avatar
LilyFleur
Posts: 2658
Joined: Fri Mar 02, 2018 10:36 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by LilyFleur »

nigel_ht wrote: Wed Jun 29, 2022 8:59 am
firebirdparts wrote: Wed Jun 29, 2022 8:50 am
Marseille07 wrote: Wed Jun 29, 2022 12:17 am
firebirdparts wrote: Tue Jun 28, 2022 7:46 pm When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.
This is soft rebalancing in a nutshell. Alas, when people talk "rebalancing," this isn't it. They actually reset the AA first, then withdraw proportionally from both assets.

As you probably noted, soft rebalancing feels more natural than hard rebalancing.
Money is fungible. I think I've seen this discussion collapse numerous times before on this exact subject.

One group says "I've invented a totally new thing, the grilled cheese sandwich"
And another group says "That's not a grilled cheese sandwich"
When what's really needed is somebody to say "You are doing it right. The rest of us never talked about grilled cheese in here because we all eat one every day and there's just nothing to say about it.
Well he’s using Texas toast vs regular bread…
You haven't lived until you've tasted a grilled cheese sandwich made with my home-baked white bread. Baked in the convection oven, not in some bread machine that gives you a geometric-shaped bread. My grilled cheese sandwiches were legendary at my kids' high school. :mrgreen:

This is a gut feeling: I don't want to withdraw from the part of my savings that has lost earnings recently. I care more about that than about my asset allocation moving from, say, 60/40 to 62/38, which is what happened when I took my first withdrawal from my 401k recently, from my stable value fund (up 1% this year) as opposed to my S&P 500 stock index fund (down 22%-ish) or my total market bond index fund (down 11%-ish). And I may sell some of the bond index fund and move some of it to the stock index fund, to take advantage of buying something more on sale with something less on sale, but less on sale. I'm still thinking on that last bit.

Please respond only if you can write a cogent response without using the word "factors." :sharebeer
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

LilyFleur wrote: Wed Jun 29, 2022 4:27 pm And I may sell some of the bond index fund and move some of it to the stock index fund, to take advantage of buying something more on sale with something less on sale, but less on sale. I'm still thinking on that last bit.
The thing is that this is two-way rebalancing. It seems enticing but you'd be selling equities later, which negates the gains you might have had.
US & FM (5% seed) | 350K Cash
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

HomerJ wrote: Tue Jun 28, 2022 1:30 pm I would never hard rebalance by selling bonds to buy stocks during a crash, but we did make our 401k contributions 100% stocks, so we were buying stocks during the crash, and we saved a lot too, so it did make a difference, and brought us closer back to our target AA of 50/50.
Why not? I think risk tolerance could go both ways; too much risk or too little risk.
US & FM (5% seed) | 350K Cash
FactualFran
Posts: 1886
Joined: Sat Feb 21, 2015 2:29 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by FactualFran »

Marseille07 wrote: Wed Jun 29, 2022 1:09 pm Soft rebalancing is even easier because in the example above ($53 in stocks, $51 in bonds and you need $4) then I simply draw $4 from stocks and call it a day. Now I withdraw too much from stocks in this example, but this means I'd be drawing from bonds next.
Drawing from bonds next indicates that if the next withdrawal is also $4 and the balances before that withdrawal are $56 in stocks and $51 in bonds, then $4 would be taken from bonds, leaving $56 in stocks and $47 in bonds.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

FactualFran wrote: Thu Jun 30, 2022 2:40 pm
Marseille07 wrote: Wed Jun 29, 2022 1:09 pm Soft rebalancing is even easier because in the example above ($53 in stocks, $51 in bonds and you need $4) then I simply draw $4 from stocks and call it a day. Now I withdraw too much from stocks in this example, but this means I'd be drawing from bonds next.
Drawing from bonds next indicates that if the next withdrawal is also $4 and the balances before that withdrawal are $56 in stocks and $51 in bonds, then $4 would be taken from bonds, leaving $56 in stocks and $47 in bonds.
Not quite, I assumed the prices were $49 in stocks, $51 in bonds. If the prices were $56/$51 then you once again draw $4 from stocks.

The concept is really simple, you just draw from whichever is heavier (this example assumes 50/50 but it could be any AA).
US & FM (5% seed) | 350K Cash
FactualFran
Posts: 1886
Joined: Sat Feb 21, 2015 2:29 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by FactualFran »

Marseille07 wrote: Fri Jul 01, 2022 12:09 am Not quite, I assumed the prices were $49 in stocks, $51 in bonds. If the prices were $56/$51 then you once again draw $4 from stocks.

The concept is really simple, you just draw from whichever is heavier (this example assumes 50/50 but it could be any AA).
As far as I can tell none of the investments that I have ever had a zero return between cash flows in or out of the portfolio. A zero return is not a useful assumption.

Taking all of a withdrawal from the investment with a higher balance can seem extreme. Withdrawing $4 from pre-withdrawal balances of $50.02 and $50.01 would result in post-withdrawal balances of $46.02 and $50.01. That seems a strange action to take if the target allocation is 50:50.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

FactualFran wrote: Fri Jul 01, 2022 3:08 pm As far as I can tell none of the investments that I have ever had a zero return between cash flows in or out of the portfolio. A zero return is not a useful assumption.

Taking all of a withdrawal from the investment with a higher balance can seem extreme. Withdrawing $4 from pre-withdrawal balances of $50.02 and $50.01 would result in post-withdrawal balances of $46.02 and $50.01. That seems a strange action to take if the target allocation is 50:50.
By "assumption" I mean I assumed the hypothetical scenario we're talking about so that we're on the same page. I do not assume market returns.
That seems a strange action to take if the target allocation is 50:50.
How do you withdraw $4 from $50.02 and $50.01 then? The hard-reset approach would make it $48.02 and $48.01, and I'm not saying this approach is wrong.
US & FM (5% seed) | 350K Cash
HootingSloth
Posts: 956
Joined: Mon Jan 28, 2019 3:38 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by HootingSloth »

Marseille07 wrote: Fri Jul 01, 2022 3:16 pm
FactualFran wrote: Fri Jul 01, 2022 3:08 pm As far as I can tell none of the investments that I have ever had a zero return between cash flows in or out of the portfolio. A zero return is not a useful assumption.

Taking all of a withdrawal from the investment with a higher balance can seem extreme. Withdrawing $4 from pre-withdrawal balances of $50.02 and $50.01 would result in post-withdrawal balances of $46.02 and $50.01. That seems a strange action to take if the target allocation is 50:50.
By "assumption" I mean I assumed the hypothetical scenario we're talking about to be on the same page. I do not assume market returns.
That seems a strange action to take if the target allocation is 50:50.
How do you withdraw $4 from $50.02 and $50.01 then? The hard-reset approach would make it $48.02 and $48.01, and I'm not saying this approach is wrong.
If you are withdrawing $w from a target 50/50 portfolio with $x in bonds and $y in stocks, then withdraw
MAX(0,MIN(x - .5*(x + y - w), w)) from bonds and MAX(0,MIN(y - .5*(x + y - w), w)) from stocks.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
User avatar
retiredjg
Posts: 48755
Joined: Thu Jan 10, 2008 12:56 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by retiredjg »

Marseille07 wrote: Wed Jun 29, 2022 12:17 am
firebirdparts wrote: Tue Jun 28, 2022 7:46 pm When you need to make a withdrawal, you're going it make it out of whichever asset is over the target.
This is soft rebalancing in a nutshell. Alas, when people talk "rebalancing," this isn't it. They actually reset the AA first, then withdraw proportionally from both assets.

As you probably noted, soft rebalancing feels more natural than hard rebalancing.
I don't know where you got the idea that people commonly rebalance before they withdraw and then withdraw from both sides.

I'm sure that someone somewhere does it, but from what I've seen here over many years...people in withdrawal take from the side that has too much. Many people in accumulation add to the side that has too little. This would especially apply to people investing in a taxable account.

I gather that you would call both of those "soft rebalancing".
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

HootingSloth wrote: Fri Jul 01, 2022 3:31 pm If you are withdrawing $w from a target 50/50 portfolio with $x in bonds and $y in stocks, then withdraw
MAX(0,MIN(x - .5*(x + y - w), w)) from bonds and MAX(0,MIN(y - .5*(x + y - w), w)) from stocks.
Wouldn't this approach emulate hard-rebalancing then withdrawing proportionally from both sides? In the example of $50.02 vs $50.01 and needing $4, I personally think drawing $4 from stocks is just fine.
US & FM (5% seed) | 350K Cash
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

retiredjg wrote: Fri Jul 01, 2022 3:49 pm I don't know where you got the idea that people commonly rebalance before they withdraw and then withdraw from both sides.

I'm sure that someone somewhere does it, but from what I've seen here over many years...people in withdrawal take from the side that has too much. Many people in accumulation add to the side that has too little. This would especially apply to people investing in a taxable account.

I gather that you would call both of those "soft rebalancing".
Not sure what to tell you. If this were practiced more commonly then we wouldn't be talking about 5%/25% bands or whatever though, as there's no such concept if you simply draw from the side that has too much.
US & FM (5% seed) | 350K Cash
User avatar
retiredjg
Posts: 48755
Joined: Thu Jan 10, 2008 12:56 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by retiredjg »

Marseille07 wrote: Fri Jul 01, 2022 4:35 pm
retiredjg wrote: Fri Jul 01, 2022 3:49 pm I don't know where you got the idea that people commonly rebalance before they withdraw and then withdraw from both sides.

I'm sure that someone somewhere does it, but from what I've seen here over many years...people in withdrawal take from the side that has too much. Many people in accumulation add to the side that has too little. This would especially apply to people investing in a taxable account.

I gather that you would call both of those "soft rebalancing".
Not sure what to tell you. If this were practiced more commonly then we wouldn't be talking about 5%/25% bands or whatever though, as there's no such concept if you simply draw from the side that has too much.
I think it is practiced very commonly.

I think much of the discussion about bands is for accumulators which is not really what you are talking about.

But there are still times in de-cumulation where bands are needed even if one generally does draw from the side that has too much. A good example is the short dip we had in 2020 during early COVID. In order to maintain a stock to bond ratio during the drop, people had to sell bonds and buy stocks to stay in their bands.

A few months later, they had to sell stocks and buy bonds as the market recovered.

In times of large market moves, "soft rebalancing" of relatively small amounts is not going to keep a portfolio anywhere near target.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

retiredjg wrote: Fri Jul 01, 2022 5:06 pm I think much of the discussion about bands is for accumulators which is not really what you are talking about.

But there are still times in de-cumulation where bands are needed even if one generally does draw from the side that has too much. A good example is the short dip we had in 2020 during early COVID. In order to maintain a stock to bond ratio during the drop, people had to sell bonds and buy stocks to stay in their bands.

A few months later, they had to sell stocks and buy bonds as the market recovered.

In times of large market moves, "soft rebalancing" of relatively small amounts is not going to keep a portfolio anywhere near target.
Personally, I don't think this is an issue. If I target 80/20 and my AA stays at 70/30, I don't care much because I never sell a single share during that time.
US & FM (5% seed) | 350K Cash
User avatar
retiredjg
Posts: 48755
Joined: Thu Jan 10, 2008 12:56 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by retiredjg »

I think it has already been established that you handle your portfolio differently from many of the commonly accepted concepts here. And that's fine as long as you are satisfied with it. :happy

However, that does not mean that there is no such concept as bands if you simply withdraw from the said that has too much. Those two things are independent of each other.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

retiredjg wrote: Fri Jul 01, 2022 5:33 pm I think it has already been established that you handle your portfolio differently from many of the commonly accepted concepts here. And that's fine as long as you are satisfied with it. :happy

However, that does not mean that there is no such concept as bands if you simply withdraw from the said that has too much. Those two things are independent of each other.
I said there's no such concept if one always soft-rebalances. If you introduce bands and want to use them, then of course the concept is there. And nothing wrong combining both I guess, I was just saying I don't plan to use bands that's all.
US & FM (5% seed) | 350K Cash
HootingSloth
Posts: 956
Joined: Mon Jan 28, 2019 3:38 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by HootingSloth »

Marseille07 wrote: Fri Jul 01, 2022 4:33 pm
HootingSloth wrote: Fri Jul 01, 2022 3:31 pm If you are withdrawing $w from a target 50/50 portfolio with $x in bonds and $y in stocks, then withdraw
MAX(0,MIN(x - .5*(x + y - w), w)) from bonds and MAX(0,MIN(y - .5*(x + y - w), w)) from stocks.
Wouldn't this approach emulate hard-rebalancing then withdrawing proportionally from both sides? In the example of $50.02 vs $50.01 and needing $4, I personally think drawing $4 from stocks is just fine.
It would reach the same result as hard rebalancing only in a case where the distance between your current allocation and your post-withdrawal target allocation is $w or less. If the distance is $w or more, then it just withdraws $w from the overweight asset and nothing from the underweight asset. This is what I do (well, mirror image for contributions). It gets as close to target as possible without actually entering simultaneous buy and sell orders.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

HootingSloth wrote: Fri Jul 01, 2022 7:10 pm It would reach the same result as hard rebalancing only in a case where the distance between your current allocation and your post-withdrawal target allocation is $w or less. If the distance is $w or more, then it just withdraws $w from the overweight asset and nothing from the underweight asset. This is what I do (well, mirror image for contributions). It gets as close to target as possible without actually entering simultaneous buy and sell orders.
Sounds like a good idea.

Personally I'm OK to overshoot a bit because it means I can skip some months without withdrawing from equities, i.e. I simply spend down cash.
US & FM (5% seed) | 350K Cash
HootingSloth
Posts: 956
Joined: Mon Jan 28, 2019 3:38 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by HootingSloth »

Marseille07 wrote: Sat Jul 02, 2022 12:44 am
HootingSloth wrote: Fri Jul 01, 2022 7:10 pm It would reach the same result as hard rebalancing only in a case where the distance between your current allocation and your post-withdrawal target allocation is $w or less. If the distance is $w or more, then it just withdraws $w from the overweight asset and nothing from the underweight asset. This is what I do (well, mirror image for contributions). It gets as close to target as possible without actually entering simultaneous buy and sell orders.
Sounds like a good idea.

Personally I'm OK to overshoot a bit because it means I can skip some months without withdrawing from equities, i.e. I simply spend down cash.
I like doing it this way, and I'm not planning on doing any withdrawal skipping. (Part of why I personally value a withdrawal method, over ad hoc withdrawals, is to make sure that I don't spend too little in retirement.) But any AA differences between overshooting and getting as close as possible should be very small and short-lived, so it's definitely best to do the withdrawals in a way that makes sense for your own methods.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

HootingSloth wrote: Sat Jul 02, 2022 6:39 am I like doing it this way, and I'm not planning on doing any withdrawal skipping. (Part of why I personally value a withdrawal method, over ad hoc withdrawals, is to make sure that I don't spend too little in retirement.) But any AA differences between overshooting and getting as close as possible should be very small and short-lived, so it's definitely best to do the withdrawals in a way that makes sense for your own methods.
I think we're on the same page, though our methods are slightly different.

Skipping withdrawals (from equities) does not mean you're spending too little, because you continue to spend down the fixed income side. The source of withdrawal does not dictate the amount of withdrawal.
US & FM (5% seed) | 350K Cash
FactualFran
Posts: 1886
Joined: Sat Feb 21, 2015 2:29 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by FactualFran »

Marseille07 wrote: Fri Jul 01, 2022 3:16 pm How do you withdraw $4 from $50.02 and $50.01 then? The hard-reset approach would make it $48.02 and $48.01, and I'm not saying this approach is wrong.
My primary concern about the 4% rule is whether I understand Safe Withdrawal Rate (SWR) studies well enough to reproduce the results. The studies that I have looked at use the approach that the balance of each investment in a portfolio changes between withdrawals by the total return of the investment. The portfolio is rebalanced to a fixed allocation with each portfolio withdrawal.

The SWR does not depend on details such as 1) how much is taken from each investment so the target withdrawal amount is taken from the portfolio and 2) how much is moved between investments to rebalance. I described one method for those details in a previous post. How easy the method is to use depends on a person's understanding of elementary investment arithmetic and having a spreadsheet do the arithmetic.
User avatar
LadyGeek
Site Admin
Posts: 83998
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Soft vs. Hard Rebalancing

Post by LadyGeek »

FYI - I modified the thread title at the OP's request.

The OP (or a moderator) can change the thread's title further by editing the Subject: line in Post #1.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

LadyGeek wrote: Sat Jul 02, 2022 1:19 pm FYI - I modified the thread title at the OP's request.

The OP (or a moderator) can change the thread's title further by editing the Subject: line in Post #1.
Thank you very much!
US & FM (5% seed) | 350K Cash
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

FactualFran wrote: Sat Jul 02, 2022 11:57 am My primary concern about the 4% rule is whether I understand Safe Withdrawal Rate (SWR) studies well enough to reproduce the results. The studies that I have looked at use the approach that the balance of each investment in a portfolio changes between withdrawals by the total return of the investment. The portfolio is rebalanced to a fixed allocation with each portfolio withdrawal.

The SWR does not depend on details such as 1) how much is taken from each investment so the target withdrawal amount is taken from the portfolio and 2) how much is moved between investments to rebalance. I described one method for those details in a previous post. How easy the method is to use depends on a person's understanding of elementary investment arithmetic and having a spreadsheet do the arithmetic.
If your goal is to follow the SWR study as closely as you can, then you do want to hard-rebalance to a fixed allocation and withdraw proportionally from both assets.

I have reasons to believe that soft rebalancing comes out ahead, but I do not have studies to back up my belief.
US & FM (5% seed) | 350K Cash
Exchme
Posts: 798
Joined: Sun Sep 06, 2020 3:00 pm

Re: Soft vs. Hard Rebalancing

Post by Exchme »

Whew! Two pages and I think OP's strategy can be boiled down to - all stocks except a non-refillable emergency cash bucket. Use the cash bucket iff stocks are below the minimum stock percentage.

Since that hasn't been studied all that well (at least that I know of), I would use the SWR spreadsheet available at ERN since it has monthly historical data and try it out to at least make sure it wouldn't have failed spectacularly in the past. Then I would think about how the "near misses" might have been different in a way that hurt this strategy more than other strategies.
User avatar
LadyGeek
Site Admin
Posts: 83998
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Soft vs. Hard Rebalancing

Post by LadyGeek »

Exchme wrote: Sat Jul 02, 2022 8:21 pm Use the cash bucket iff stocks are below the minimum stock percentage.
In case someone thinks this as a typo, I assume "iff" is the logical / math meaning as "if and only if".
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

Exchme wrote: Sat Jul 02, 2022 8:21 pm Whew! Two pages and I think OP's strategy can be boiled down to - all stocks except a non-refillable emergency cash bucket. Use the cash bucket iff stocks are below the minimum stock percentage.

Since that hasn't been studied all that well (at least that I know of), I would use the SWR spreadsheet available at ERN since it has monthly historical data and try it out to at least make sure it wouldn't have failed spectacularly in the past. Then I would think about how the "near misses" might have been different in a way that hurt this strategy more than other strategies.
Where did you get the idea of a non-refillable emergency cash bucket? My fixed income happens to be cash but that's actually besides the point. The idea is to simply withdraw from whichever is heavier at the moment.

This idea isn't at all crazy. If you aim for 60/40 and your AA is 50/50, why would you withdraw from equities? You don't.
US & FM (5% seed) | 350K Cash
KlangFool
Posts: 25854
Joined: Sat Oct 11, 2008 12:35 pm

Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Sat Jul 02, 2022 8:54 pm
Exchme wrote: Sat Jul 02, 2022 8:21 pm Whew! Two pages and I think OP's strategy can be boiled down to - all stocks except a non-refillable emergency cash bucket. Use the cash bucket iff stocks are below the minimum stock percentage.

Since that hasn't been studied all that well (at least that I know of), I would use the SWR spreadsheet available at ERN since it has monthly historical data and try it out to at least make sure it wouldn't have failed spectacularly in the past. Then I would think about how the "near misses" might have been different in a way that hurt this strategy more than other strategies.
Where did you get the idea of a non-refillable emergency cash bucket? My fixed income happens to be cash but that's actually besides the point. The idea is to simply withdraw from whichever is heavier at the moment.

This idea isn't at all crazy. If you aim for 60/40 and your AA is 50/50, why would you withdraw from equities? You don't.
Marseille07,

" If you aim for 60/40 and your AA is 50/50, "

For folks that use 5/25 band based rebalancing, the rebalancing would happened immediately. That happened before any withdrawal. Then, the AA would be 60/40 after rebalancing.

I know that is not what you are doing. I am just showing you what others do.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Sat Jul 02, 2022 9:53 pm Marseille07,

" If you aim for 60/40 and your AA is 50/50, "

For folks that use 5/25 band based rebalancing, the rebalancing would happened immediately. That happened before any withdrawal. Then, the AA would be 60/40 after rebalancing.

I know that is not what you are doing. I am just showing you what others do.

KlangFool
Yeah, I just find it somewhat amusing because this poster says they aren't aware of people actually hard-rebalancing.
retiredjg wrote: Fri Jul 01, 2022 3:49 pm I don't know where you got the idea that people commonly rebalance before they withdraw and then withdraw from both sides.
I thought people actually hard-rebalance because that's how the SWR studies did it.
US & FM (5% seed) | 350K Cash
marcopolo
Posts: 6484
Joined: Sat Dec 03, 2016 10:22 am

Re: Soft vs. Hard Rebalancing

Post by marcopolo »

Marseille07 wrote: Sat Jul 02, 2022 9:56 pm
KlangFool wrote: Sat Jul 02, 2022 9:53 pm Marseille07,

" If you aim for 60/40 and your AA is 50/50, "

For folks that use 5/25 band based rebalancing, the rebalancing would happened immediately. That happened before any withdrawal. Then, the AA would be 60/40 after rebalancing.

I know that is not what you are doing. I am just showing you what others do.

KlangFool
Yeah, I just find it somewhat amusing because this poster says they aren't aware of people actually hard-rebalancing.
retiredjg wrote: Fri Jul 01, 2022 3:49 pm I don't know where you got the idea that people commonly rebalance before they withdraw and then withdraw from both sides.
I thought people actually hard-rebalance because that's how the SWR studies did it.
I think the discrepancy comes from theory vs. practice.

In theory, it makes sense to think about rebalancing first, and then taking withdrawals proportionately.

But, in practice, this involves a lot of unnecessary buying and selling. So, I think most people, in practice, take the approach of selling the over-represented asset class first to take their withdrawals, and then only do a hard rebalance only if it is still necessary. With a 5% band you rarely have to do a hard rebalance. So, only one selling step is needed.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

marcopolo wrote: Sat Jul 02, 2022 10:12 pm I think the discrepancy comes from theory vs. practice.

In theory, it makes sense to think about rebalancing first, and then taking withdrawals proportionately.

But, in practice, this involves a lot of unnecessary buying and selling. So, I think most people, in practice, take the approach of selling the over-represented asset class first to take their withdrawals, and then only do a hard rebalance only if it is still necessary. With a 5% band you rarely have to do a hard rebalance. So, only one selling step is needed.
I hope you're right. For some reason many posters don't appear to understand the concept of soft-rebalancing, which I find somewhat concerning.
US & FM (5% seed) | 350K Cash
marcopolo
Posts: 6484
Joined: Sat Dec 03, 2016 10:22 am

Re: Soft vs. Hard Rebalancing

Post by marcopolo »

Marseille07 wrote: Sat Jul 02, 2022 10:32 pm
marcopolo wrote: Sat Jul 02, 2022 10:12 pm I think the discrepancy comes from theory vs. practice.

In theory, it makes sense to think about rebalancing first, and then taking withdrawals proportionately.

But, in practice, this involves a lot of unnecessary buying and selling. So, I think most people, in practice, take the approach of selling the over-represented asset class first to take their withdrawals, and then only do a hard rebalance only if it is still necessary. With a 5% band you rarely have to do a hard rebalance. So, only one selling step is needed.
I hope you're right. For some reason many posters don't appear to understand the concept of soft-rebalancing, which I find somewhat concerning.
I think many people do this naturally, they just don't give it a name.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
Marseille07
Posts: 10520
Joined: Fri Nov 06, 2020 1:41 pm

Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

marcopolo wrote: Sat Jul 02, 2022 10:45 pm I think many people do this naturally, they just don't give it a name.
I think what's new about soft rebalancing is that I don't even have the 5/25 band or w/e you call it.

I have my AA target but I don't forcibly rebalance anything; I'm always nudging one way or the other.
US & FM (5% seed) | 350K Cash
KlangFool
Posts: 25854
Joined: Sat Oct 11, 2008 12:35 pm

Re: Soft vs. Hard Rebalancing

Post by KlangFool »

marcopolo wrote: Sat Jul 02, 2022 10:12 pm
Marseille07 wrote: Sat Jul 02, 2022 9:56 pm
KlangFool wrote: Sat Jul 02, 2022 9:53 pm Marseille07,

" If you aim for 60/40 and your AA is 50/50, "

For folks that use 5/25 band based rebalancing, the rebalancing would happened immediately. That happened before any withdrawal. Then, the AA would be 60/40 after rebalancing.

I know that is not what you are doing. I am just showing you what others do.

KlangFool
Yeah, I just find it somewhat amusing because this poster says they aren't aware of people actually hard-rebalancing.
retiredjg wrote: Fri Jul 01, 2022 3:49 pm I don't know where you got the idea that people commonly rebalance before they withdraw and then withdraw from both sides.
I thought people actually hard-rebalance because that's how the SWR studies did it.
I think the discrepancy comes from theory vs. practice.

In theory, it makes sense to think about rebalancing first, and then taking withdrawals proportionately.

But, in practice, this involves a lot of unnecessary buying and selling. So, I think most people, in practice, take the approach of selling the over-represented asset class first to take their withdrawals, and then only do a hard rebalance only if it is still necessary. With a 5% band you rarely have to do a hard rebalance. So, only one selling step is needed.
Or, some people only do annual withdrawal. The hard rebalancing and withdrawal cannot happen at the same time. In 2020, there were two hard rebalancing within the year.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
dknightd
Posts: 3121
Joined: Wed Mar 07, 2018 11:57 am

Re: Soft vs. Hard Rebalancing

Post by dknightd »

Marseille07 wrote: Sat Jul 02, 2022 10:32 pm For some reason many posters don't appear to understand the concept of soft-rebalancing, which I find somewhat concerning.
I *think* I understand what you mean by soft and hard rebalancing. But I'm not positive.
Soft: take from which ever asset class is overvalued
Hard: Rebalance, then withdraw proportionally.
I guess this assumes you are in the withdrawal phase (though I suppose the same concept could be applied during accumulation)

When I was accumulating, I contributed according to my desired asset allocation. Once a year I did a "hard" rebalance to my desired allocation. This was easy, my 403b provider (TIAA) would do this automatically for me on my birthday.
Now that I'm withdrawing, I currently take my withdraws from "fixed" income. I've left automatic annual rebalancing active on some of my accounts. Others I've turned it off. For various reasons, mostly high variance this year. I have more 403b accounts than I would like - partially because some are taxed in my state, and some are not. Eventually (before RMD kicks in) I plan to have this down to just two accounts. One state taxable, one not. With automatic rebalancing once again in place on all accounts.

There are many ways to do this rebalancing thing. Frankly I do not think it makes much difference how you do it. Currently I do nothing except annual rebalance in some accounts, and others I'm more active. If stocks happen to go way up (like they did in my first 2 years of retirement) I move some to fixed. If stocks happen to go way down (which it looks like they might this year) I'll have to move some fixed into equities.

Either way, for now, all withdrawals come from "fixed". Which for me is TIAA Traditional which always goes up, although lately less than inflation rate.

TIAA allows the option of taking all withdrawals proportionally. I'll probably do that when I'm subject to RMD. It will eventually be my low tech Variable withdrawal method. And keep automatic annual rebalancing in place. Essentially I'll be on auto pilot. I plan to buy more annuities, and at 70 claim SS. Together those should cover my basic expenses. RMD will for fun, or something, not sure yet.

I'm not sure how previous SWR studies handled rebalancing. And it probably does not matter much (at least to me, and probably you). I assume they did "hard" rebalancing since that would be easier to model.

I think 4% is still a useful guidance. Most likely you will not run out of money in 30 years. You might end up with too much left over. I don't think the rebalancing method you choose matters too much.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum.
Post Reply