Avoiding fluctuations in BND (total bond) when withdrawing

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michaeljc70
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Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Thu Sep 12, 2019 10:02 am

I have a 3 fund portfolio and am retired. I have been keeping 3-6 months of expenses in the money market fund in my brokerage account. I really don't want to deal with CDs. My question is is it worth it to have a short-term bond fund for near term (say 1-3 years) expenses? The reason would be to avoid possible fluctuations in the NAV of BND (selling when NAV is lower due to rising rates). I am wondering if in the long term adding another fund is really worth it or it will just all balance out using the 3 funds. My AA is 75/25.

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vineviz
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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by vineviz » Thu Sep 12, 2019 12:27 pm

michaeljc70 wrote:
Thu Sep 12, 2019 10:02 am
I have a 3 fund portfolio and am retired. I have been keeping 3-6 months of expenses in the money market fund in my brokerage account. I really don't want to deal with CDs. My question is is it worth it to have a short-term bond fund for near term (say 1-3 years) expenses? The reason would be to avoid possible fluctuations in the NAV of BND (selling when NAV is lower due to rising rates). I am wondering if in the long term adding another fund is really worth it or it will just all balance out using the 3 funds. My AA is 75/25.

I don't think it'd be worth adding a fourth fund for that reason. The volatility of BND is so low to begin with that any gains in lower volatility would be completely marginal.

Honestly, if you're maintaining a fixed asset allocation you're going to be selling stock funds way more often than you'll be selling bond funds.
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David Jay
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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by David Jay » Thu Sep 12, 2019 12:36 pm

I keep 2 years expenses in Short Term Bond. I have taken advantage of the big run-up in BND to move next year’s expenses to STB ahead of schedule.
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livesoft
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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by livesoft » Thu Sep 12, 2019 12:45 pm

michaeljc70 wrote:
Thu Sep 12, 2019 10:02 am
I have a 3 fund portfolio and am retired. I have been keeping 3-6 months of expenses in the money market fund in my brokerage account. I really don't want to deal with CDs. My question is is it worth it to have a short-term bond fund for near term (say 1-3 years) expenses? The reason would be to avoid possible fluctuations in the NAV of BND (selling when NAV is lower due to rising rates). I am wondering if in the long term adding another fund is really worth it or it will just all balance out using the 3 funds. My AA is 75/25.
It might not hurt you at all if you pick a ST bond fund with more risk. I posted this figure earlier today of VBTLX / BND and VSCSX / VCSH which is a growth of for the past 3 years. Do you see they turned in about the same performance?

Image

I don't keep any money in CDs nor in money market funds.
Last edited by livesoft on Thu Sep 12, 2019 3:59 pm, edited 1 time in total.
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retiredflyboy
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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by retiredflyboy » Thu Sep 12, 2019 12:52 pm

Personal choice for sure, but I like what you are doing and would resist tampering with it. Keep it simple and stay the course.
Facts are stubborn things. Everything works until it doesn’t.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by dbr » Thu Sep 12, 2019 3:55 pm

When withdrawing the behavior that matters is the behavior of your entire portfolio. At 75/25 fluctuations in BND are irrelevant, at least nearly so.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Thu Sep 12, 2019 5:34 pm

livesoft wrote:
Thu Sep 12, 2019 12:45 pm
michaeljc70 wrote:
Thu Sep 12, 2019 10:02 am
I have a 3 fund portfolio and am retired. I have been keeping 3-6 months of expenses in the money market fund in my brokerage account. I really don't want to deal with CDs. My question is is it worth it to have a short-term bond fund for near term (say 1-3 years) expenses? The reason would be to avoid possible fluctuations in the NAV of BND (selling when NAV is lower due to rising rates). I am wondering if in the long term adding another fund is really worth it or it will just all balance out using the 3 funds. My AA is 75/25.
It might not hurt you at all if you pick a ST bond fund with more risk. I posted this figure earlier today of VBTLX / BND and VSCSX / VCSH which is a growth of for the past 3 years. Do you see they turned in about the same performance?

Image

I don't keep any money in CDs nor in money market funds.
Yes, but look at the 1 year, 5 year and 10 year chart. Big difference in performance.

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michaeljc70
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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Thu Sep 12, 2019 5:36 pm

dbr wrote:
Thu Sep 12, 2019 3:55 pm
When withdrawing the behavior that matters is the behavior of your entire portfolio. At 75/25 fluctuations in BND are irrelevant, at least nearly so.
Thanks. I think you are right. Any difference is probably negligible. I could even see it being to the upside in a situation like the last recession where bond yields plummeted.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by livesoft » Thu Sep 12, 2019 6:12 pm

michaeljc70 wrote:
Thu Sep 12, 2019 5:34 pm
Yes, but look at the 1 year, 5 year and 10 year chart. Big difference in performance.
So what? Aren't you going to sell either one of the bond funds anyways?

Your desire to avoid fluctuations is simply a behavioral "peace-of-mind" mental accounting thing.
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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Thu Sep 12, 2019 7:07 pm

livesoft wrote:
Thu Sep 12, 2019 6:12 pm
michaeljc70 wrote:
Thu Sep 12, 2019 5:34 pm
Yes, but look at the 1 year, 5 year and 10 year chart. Big difference in performance.
So what? Aren't you going to sell either one of the bond funds anyways?

Your desire to avoid fluctuations is simply a behavioral "peace-of-mind" mental accounting thing.
The point is you picked a period where the performance was similar when it generally is not. Of course none of those has a really long history to compare.

I agree on the avoiding fluctuations part. I am just trying to cover my bases. My plan is pretty new and I am trying to see if any tweaks would be beneficial without overly complicating things. I think sticking with what I am doing will be fine.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by livesoft » Thu Sep 12, 2019 7:11 pm

Let me ask this: Is there any 3-year period that the two lines on the chart I presented don't cross?
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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by Artsdoctor » Thu Sep 12, 2019 7:23 pm

michaeljc70 wrote:
Thu Sep 12, 2019 10:02 am
I have a 3 fund portfolio and am retired. I have been keeping 3-6 months of expenses in the money market fund in my brokerage account. I really don't want to deal with CDs. My question is is it worth it to have a short-term bond fund for near term (say 1-3 years) expenses? The reason would be to avoid possible fluctuations in the NAV of BND (selling when NAV is lower due to rising rates). I am wondering if in the long term adding another fund is really worth it or it will just all balance out using the 3 funds. My AA is 75/25.
You're definitely going to find people who keep "buckets." Christine Benz at Morningstar has been a bucket proponent for many years. You'd have a money and short-term bucket, an intermediate-term bucket, and a long-term bucket. Your BND would presumably dump dividends into the short-term bucket.

However, you're going to have to sell shares of BND eventually, as well as your equity shares. While it's tempting to always want to get the best possible price when you sell, ask yourself if you agonized getting the best possible price when you were buying. It's just not going to happen and when it does, you've had a very good day. The cost of doing business means that you'll always have "background noise" when you're buying as well as selling, and that market fluctuations are going to occur, hour-by-hour and day-by-day. You made a decision to buy an ETF as opposed to a fund so presumably you like the trading day volatility.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Thu Sep 12, 2019 7:27 pm

Artsdoctor wrote:
Thu Sep 12, 2019 7:23 pm
michaeljc70 wrote:
Thu Sep 12, 2019 10:02 am
I have a 3 fund portfolio and am retired. I have been keeping 3-6 months of expenses in the money market fund in my brokerage account. I really don't want to deal with CDs. My question is is it worth it to have a short-term bond fund for near term (say 1-3 years) expenses? The reason would be to avoid possible fluctuations in the NAV of BND (selling when NAV is lower due to rising rates). I am wondering if in the long term adding another fund is really worth it or it will just all balance out using the 3 funds. My AA is 75/25.
You're definitely going to find people who keep "buckets." Christine Benz at Morningstar has been a bucket proponent for many years. You'd have a money and short-term bucket, an intermediate-term bucket, and a long-term bucket. Your BND would presumably dump dividends into the short-term bucket.

However, you're going to have to sell shares of BND eventually, as well as your equity shares. While it's tempting to always want to get the best possible price when you sell, ask yourself if you agonized getting the best possible price when you were buying. It's just not going to happen and when it does, you've had a very good day. The cost of doing business means that you'll always have "background noise" when you're buying as well as selling, and that market fluctuations are going to occur, hour-by-hour and day-by-day. You made a decision to buy an ETF as opposed to a fund so presumably you like the trading day volatility.
I agree with it not really being different than when you buy. That is a good point.

The ETF decision was really based on what was the cheapest option at my current brokerage (based on trading fees/commission and ER).

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by rkhusky » Thu Sep 12, 2019 7:46 pm

Isn’t the yield of Prime MM higher than short bond and about the same as short corporate? How much are you really giving up by having an extra $10k-$20k in a mm?
Last edited by rkhusky on Thu Sep 12, 2019 7:57 pm, edited 1 time in total.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by bluquark » Thu Sep 12, 2019 7:48 pm

My mental model is this:

- Your fixed income portfolio takes, as a whole, a certain amount of term factor exposure, which is usually quantified with the single number "duration".
- Since your portfolio is made up of fully liquid assets which you aim to rebalance to AA on a regular basis, withdrawals are "really" coming out of your entire portfolio at AA weight.
- The point of reducing withdrawal volatility is to reduce sequence of return risk.

In this way of thinking, holding an amount of shorter-term instruments for the purpose of the year's expenses is essentially the same as paying for expenses with a bond fund with 5.9 years duration instead of one with 6 years duration. Secondly, from the perspective of sequence of return risk for an early retiree, you probably actually want a duration that is as long as possible even if there were no term premium, since the reinvestment risk dominates the volatility over your withdrawal timeframe.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Thu Sep 12, 2019 8:21 pm

rkhusky wrote:
Thu Sep 12, 2019 7:46 pm
Isn’t the yield of Prime MM higher than short bond and about the same as short corporate? How much are you really giving up by having an extra $10k-$20k in a mm?
So, I looked further into this. I am at TDA (transferred from Vanguard in the last year or so). The default cash sweep pays virtually nothing (.04% on $5k=20k). The other option isn't much better. I guess that is something I didn't consider when moving from Vanguard. Still, considering current MM rates and what I am keeping liquid it is still pretty insignificant .

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by rkhusky » Fri Sep 13, 2019 12:08 pm

michaeljc70 wrote:
Thu Sep 12, 2019 8:21 pm
rkhusky wrote:
Thu Sep 12, 2019 7:46 pm
Isn’t the yield of Prime MM higher than short bond and about the same as short corporate? How much are you really giving up by having an extra $10k-$20k in a mm?
So, I looked further into this. I am at TDA (transferred from Vanguard in the last year or so). The default cash sweep pays virtually nothing (.04% on $5k=20k). The other option isn't much better. I guess that is something I didn't consider when moving from Vanguard. Still, considering current MM rates and what I am keeping liquid it is still pretty insignificant .
The situation for Prime MM seems strange and will probably adjust soon. I would expect Short Bond to be at least 1% higher and Short Corporate to be 2% higher than PMM.

Some options without adding another fund:
Keep things the same.
Add more to MM fund, instead of adding short term bond fund.
Switch MM fund to short term bond fund.

I imagine that the dollar value difference of any of these is not that much, so it's more of a personal preference.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by Artsdoctor » Fri Sep 13, 2019 12:31 pm

rkhusky wrote:
Fri Sep 13, 2019 12:08 pm
michaeljc70 wrote:
Thu Sep 12, 2019 8:21 pm
rkhusky wrote:
Thu Sep 12, 2019 7:46 pm
Isn’t the yield of Prime MM higher than short bond and about the same as short corporate? How much are you really giving up by having an extra $10k-$20k in a mm?
So, I looked further into this. I am at TDA (transferred from Vanguard in the last year or so). The default cash sweep pays virtually nothing (.04% on $5k=20k). The other option isn't much better. I guess that is something I didn't consider when moving from Vanguard. Still, considering current MM rates and what I am keeping liquid it is still pretty insignificant .
The situation for Prime MM seems strange and will probably adjust soon. I would expect Short Bond to be at least 1% higher and Short Corporate to be 2% higher than PMM.

Some options without adding another fund:
Keep things the same.
Add more to MM fund, instead of adding short term bond fund.
Switch MM fund to short term bond fund.

I imagine that the dollar value difference of any of these is not that much, so it's more of a personal preference.
The best rates are short. Really short. The 1-month T-bill is paying the same, if not more, than the 3-month T-bill. A 12-month T-bill is much less. So this inversion is affecting money market rates and short-term bond fund rates. You will make more money in a good money market, like Prime, than you might with a short-term bond fund. However, your principal has no hope of increasing in a money market fund. Consequently, if rates continue to fall, and statistically they will, your money market rate will fall but your short-term bond fund's NAV may increase.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by Phineas J. Whoopee » Fri Sep 13, 2019 7:15 pm

The only thing the buckets strategy does is have you sell investments earlier than you would without it. With an adequate portfolio and a long-ish time horizon it can be expected to reduce your return. It doesn't help with sequence-of-returns any better than simply reducing your stock allocation to begin with.

In fact, it is equivalent to reducing one's equities in an asset allocation.

Now, if one's allocation is wrong by all means improve it, but the buckets approach does nothing to help.

Mathematically speaking, that is.

PJW

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by catalina355 » Fri Sep 13, 2019 8:45 pm

Artsdoctor wrote:
Fri Sep 13, 2019 12:31 pm
rkhusky wrote:
Fri Sep 13, 2019 12:08 pm
michaeljc70 wrote:
Thu Sep 12, 2019 8:21 pm
rkhusky wrote:
Thu Sep 12, 2019 7:46 pm
Isn’t the yield of Prime MM higher than short bond and about the same as short corporate? How much are you really giving up by having an extra $10k-$20k in a mm?
So, I looked further into this. I am at TDA (transferred from Vanguard in the last year or so). The default cash sweep pays virtually nothing (.04% on $5k=20k). The other option isn't much better. I guess that is something I didn't consider when moving from Vanguard. Still, considering current MM rates and what I am keeping liquid it is still pretty insignificant .
The situation for Prime MM seems strange and will probably adjust soon. I would expect Short Bond to be at least 1% higher and Short Corporate to be 2% higher than PMM.

Some options without adding another fund:
Keep things the same.
Add more to MM fund, instead of adding short term bond fund.
Switch MM fund to short term bond fund.

I imagine that the dollar value difference of any of these is not that much, so it's more of a personal preference.
The best rates are short. Really short. The 1-month T-bill is paying the same, if not more, than the 3-month T-bill. A 12-month T-bill is much less. So this inversion is affecting money market rates and short-term bond fund rates. You will make more money in a good money market, like Prime, than you might with a short-term bond fund. However, your principal has no hope of increasing in a money market fund. Consequently, if rates continue to fall, and statistically they will, your money market rate will fall but your short-term bond fund's NAV may increase.
Why do you say that if rates will continue to fall, and statistically they will? They could also rise.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by catalina355 » Fri Sep 13, 2019 8:45 pm

Phineas J. Whoopee wrote:
Fri Sep 13, 2019 7:15 pm
The only thing the buckets strategy does is have you sell investments earlier than you would without it. With an adequate portfolio and a long-ish time horizon it can be expected to reduce your return. It doesn't help with sequence-of-returns any better than simply reducing your stock allocation to begin with.

In fact, it is equivalent to reducing one's equities in an asset allocation.

Now, if one's allocation is wrong by all means improve it, but the buckets approach does nothing to help.

Mathematically speaking, that is.

PJW
Can you explain what the buckets strategy does is have you sell investments earlier than you would without it?

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by Phineas J. Whoopee » Fri Sep 13, 2019 9:00 pm

catalina355 wrote:
Fri Sep 13, 2019 8:45 pm
Phineas J. Whoopee wrote:
Fri Sep 13, 2019 7:15 pm
The only thing the buckets strategy does is have you sell investments earlier than you would without it. With an adequate portfolio and a long-ish time horizon it can be expected to reduce your return. It doesn't help with sequence-of-returns any better than simply reducing your stock allocation to begin with.

In fact, it is equivalent to reducing one's equities in an asset allocation.

Now, if one's allocation is wrong by all means improve it, but the buckets approach does nothing to help.

Mathematically speaking, that is.

PJW
Can you explain what the buckets strategy does is have you sell investments earlier than you would without it?
Sure. Without it one sells from one's portfolio as one needs in order to meet spending requirements, according to one's asset allocation. With it one sells earlier to fill up a cash bucket.

All that accomplishes is to put your equity / fixed income allocation, and cash is properly viewed as fixed income with zero duration, lower in equities. You could accomplish the same thing simply by changing your target allocation and lose the complexity, if in fact your current allocation does not meet your needs.

In a mixed portfolio, if stocks are down they're under target, so one would sell from fixed income. In the opposite situation one would sell from equities. It works out the same except for the fact it's equivalent to changing the allocation in the first place.

If I've failed to explain clearly please let me know and I'll try again.

PJW

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by catalina355 » Mon Sep 16, 2019 5:29 pm

bluquark wrote:
Thu Sep 12, 2019 7:48 pm
My mental model is this:

- Your fixed income portfolio takes, as a whole, a certain amount of term factor exposure, which is usually quantified with the single number "duration".
- Since your portfolio is made up of fully liquid assets which you aim to rebalance to AA on a regular basis, withdrawals are "really" coming out of your entire portfolio at AA weight.
- The point of reducing withdrawal volatility is to reduce sequence of return risk.

In this way of thinking, holding an amount of shorter-term instruments for the purpose of the year's expenses is essentially the same as paying for expenses with a bond fund with 5.9 years duration instead of one with 6 years duration. Secondly, from the perspective of sequence of return risk for an early retiree, you probably actually want a duration that is as long as possible even if there were no term premium, since the reinvestment risk dominates the volatility over your withdrawal timeframe.
I understood that rebalancing frequently (e.g. monthly) is counter-productive. The usual advice here is to rebalance once a year or even once every two years (using rebalancing bands of course). So in that case would it not be better to keep one year's worth of expenses in a MM or ST bond fund rather than rebalancing frequently? Not to mention the added work one would have at tax time.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by catalina355 » Mon Sep 16, 2019 5:34 pm

Phineas J. Whoopee wrote:
Fri Sep 13, 2019 9:00 pm
catalina355 wrote:
Fri Sep 13, 2019 8:45 pm
Phineas J. Whoopee wrote:
Fri Sep 13, 2019 7:15 pm
The only thing the buckets strategy does is have you sell investments earlier than you would without it. With an adequate portfolio and a long-ish time horizon it can be expected to reduce your return. It doesn't help with sequence-of-returns any better than simply reducing your stock allocation to begin with.

In fact, it is equivalent to reducing one's equities in an asset allocation.

Now, if one's allocation is wrong by all means improve it, but the buckets approach does nothing to help.

Mathematically speaking, that is.

PJW
Can you explain what the buckets strategy does is have you sell investments earlier than you would without it?
Sure. Without it one sells from one's portfolio as one needs in order to meet spending requirements, according to one's asset allocation. With it one sells earlier to fill up a cash bucket.

All that accomplishes is to put your equity / fixed income allocation, and cash is properly viewed as fixed income with zero duration, lower in equities. You could accomplish the same thing simply by changing your target allocation and lose the complexity, if in fact your current allocation does not meet your needs.

In a mixed portfolio, if stocks are down they're under target, so one would sell from fixed income. In the opposite situation one would sell from equities. It works out the same except for the fact it's equivalent to changing the allocation in the first place.

If I've failed to explain clearly please let me know and I'll try again.

PJW
That was very helpful. Thank you.

Would you suggest keeping one years expenses in a MM or ST bond fund? I am making a distinction between this approach and buckets. I added more detail in my reply to bluquark.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Mon Sep 16, 2019 5:54 pm

catalina355 wrote:
Mon Sep 16, 2019 5:29 pm
bluquark wrote:
Thu Sep 12, 2019 7:48 pm
My mental model is this:

- Your fixed income portfolio takes, as a whole, a certain amount of term factor exposure, which is usually quantified with the single number "duration".
- Since your portfolio is made up of fully liquid assets which you aim to rebalance to AA on a regular basis, withdrawals are "really" coming out of your entire portfolio at AA weight.
- The point of reducing withdrawal volatility is to reduce sequence of return risk.

In this way of thinking, holding an amount of shorter-term instruments for the purpose of the year's expenses is essentially the same as paying for expenses with a bond fund with 5.9 years duration instead of one with 6 years duration. Secondly, from the perspective of sequence of return risk for an early retiree, you probably actually want a duration that is as long as possible even if there were no term premium, since the reinvestment risk dominates the volatility over your withdrawal timeframe.
I understood that rebalancing frequently (e.g. monthly) is counter-productive. The usual advice here is to rebalance once a year or even once every two years (using rebalancing bands of course). So in that case would it not be better to keep one year's worth of expenses in a MM or ST bond fund rather than rebalancing frequently? Not to mention the added work one would have at tax time.
Though I rebalanced once a year pre-retirement, it seems silly to take out a years worth of expenses to keep doing that. I try to take out money from investments quarterly and do so according to my desired AA. In the end, it probably makes little difference because if you are taking out roughly 4% that isn't very much. Now would I sell more stocks/bonds than I need for expenses to keep the AA? I haven't thought out that far to be honest. I think I wouldn't and would stick with annual rebalancing on my birthday. In other words, a mini rebalancing (Whatever can be done with the withdrawal amount) when I withdraw for expenses and an annual to maintain the AA.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by catalina355 » Mon Sep 16, 2019 6:05 pm

michaeljc70 wrote:
Mon Sep 16, 2019 5:54 pm
catalina355 wrote:
Mon Sep 16, 2019 5:29 pm
bluquark wrote:
Thu Sep 12, 2019 7:48 pm
My mental model is this:

- Your fixed income portfolio takes, as a whole, a certain amount of term factor exposure, which is usually quantified with the single number "duration".
- Since your portfolio is made up of fully liquid assets which you aim to rebalance to AA on a regular basis, withdrawals are "really" coming out of your entire portfolio at AA weight.
- The point of reducing withdrawal volatility is to reduce sequence of return risk.

In this way of thinking, holding an amount of shorter-term instruments for the purpose of the year's expenses is essentially the same as paying for expenses with a bond fund with 5.9 years duration instead of one with 6 years duration. Secondly, from the perspective of sequence of return risk for an early retiree, you probably actually want a duration that is as long as possible even if there were no term premium, since the reinvestment risk dominates the volatility over your withdrawal timeframe.
I understood that rebalancing frequently (e.g. monthly) is counter-productive. The usual advice here is to rebalance once a year or even once every two years (using rebalancing bands of course). So in that case would it not be better to keep one year's worth of expenses in a MM or ST bond fund rather than rebalancing frequently? Not to mention the added work one would have at tax time.
Though I rebalanced once a year pre-retirement, it seems silly to take out a years worth of expenses to keep doing that. I try to take out money from investments quarterly and do so according to my desired AA. In the end, it probably makes little difference because if you are taking out roughly 4% that isn't very much. Now would I sell more stocks/bonds than I need for expenses to keep the AA? I haven't thought out that far to be honest. I think I wouldn't and would stick with annual rebalancing on my birthday. In other words, a mini rebalancing (Whatever can be done with the withdrawal amount) when I withdraw for expenses and an annual to maintain the AA.
I'm not sure why you would need to "sell more stocks/bonds than I need for expenses to keep the AA?". I think you can always keep your AA independent of the amount you withdraw.

I use rebalancing bands, and withdrawing and rebalancing quarterly may impact performance. There have been discussions here on this here. However, I don't have the links handy.

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Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Mon Sep 16, 2019 9:21 pm

catalina355 wrote:
Mon Sep 16, 2019 6:05 pm
michaeljc70 wrote:
Mon Sep 16, 2019 5:54 pm
catalina355 wrote:
Mon Sep 16, 2019 5:29 pm
bluquark wrote:
Thu Sep 12, 2019 7:48 pm
My mental model is this:

- Your fixed income portfolio takes, as a whole, a certain amount of term factor exposure, which is usually quantified with the single number "duration".
- Since your portfolio is made up of fully liquid assets which you aim to rebalance to AA on a regular basis, withdrawals are "really" coming out of your entire portfolio at AA weight.
- The point of reducing withdrawal volatility is to reduce sequence of return risk.

In this way of thinking, holding an amount of shorter-term instruments for the purpose of the year's expenses is essentially the same as paying for expenses with a bond fund with 5.9 years duration instead of one with 6 years duration. Secondly, from the perspective of sequence of return risk for an early retiree, you probably actually want a duration that is as long as possible even if there were no term premium, since the reinvestment risk dominates the volatility over your withdrawal timeframe.
I understood that rebalancing frequently (e.g. monthly) is counter-productive. The usual advice here is to rebalance once a year or even once every two years (using rebalancing bands of course). So in that case would it not be better to keep one year's worth of expenses in a MM or ST bond fund rather than rebalancing frequently? Not to mention the added work one would have at tax time.
Though I rebalanced once a year pre-retirement, it seems silly to take out a years worth of expenses to keep doing that. I try to take out money from investments quarterly and do so according to my desired AA. In the end, it probably makes little difference because if you are taking out roughly 4% that isn't very much. Now would I sell more stocks/bonds than I need for expenses to keep the AA? I haven't thought out that far to be honest. I think I wouldn't and would stick with annual rebalancing on my birthday. In other words, a mini rebalancing (Whatever can be done with the withdrawal amount) when I withdraw for expenses and an annual to maintain the AA.
I'm not sure why you would need to "sell more stocks/bonds than I need for expenses to keep the AA?". I think you can always keep your AA independent of the amount you withdraw.

I use rebalancing bands, and withdrawing and rebalancing quarterly may impact performance. There have been discussions here on this here. However, I don't have the links handy.
AA: 75/25
Year 1: $1M, take out $40k for expenses, market flat, balance $960k.
Year 2Q1: Market tanks 20%. AA is now $720k-(20% drop=144k)=$576k stocks and 240k bond. Time to withdraw $40k/4=$10k. AA is 71/29. You need $612k in stocks to get to 75/25 or $36k but are only withdrawing $10k.

It is just math. Of course, you can rebalance selling more than you need for expenses (and buying in other asset classes) which is what I said.

The difference between quarterly and annual rebalancing is minimal in terms of performance. And it is based on past results.

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catalina355
Posts: 254
Joined: Sun Jun 10, 2018 6:46 pm

Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by catalina355 » Mon Sep 16, 2019 9:39 pm

michaeljc70 wrote:
Mon Sep 16, 2019 9:21 pm
catalina355 wrote:
Mon Sep 16, 2019 6:05 pm
michaeljc70 wrote:
Mon Sep 16, 2019 5:54 pm
catalina355 wrote:
Mon Sep 16, 2019 5:29 pm
bluquark wrote:
Thu Sep 12, 2019 7:48 pm
My mental model is this:

- Your fixed income portfolio takes, as a whole, a certain amount of term factor exposure, which is usually quantified with the single number "duration".
- Since your portfolio is made up of fully liquid assets which you aim to rebalance to AA on a regular basis, withdrawals are "really" coming out of your entire portfolio at AA weight.
- The point of reducing withdrawal volatility is to reduce sequence of return risk.

In this way of thinking, holding an amount of shorter-term instruments for the purpose of the year's expenses is essentially the same as paying for expenses with a bond fund with 5.9 years duration instead of one with 6 years duration. Secondly, from the perspective of sequence of return risk for an early retiree, you probably actually want a duration that is as long as possible even if there were no term premium, since the reinvestment risk dominates the volatility over your withdrawal timeframe.
I understood that rebalancing frequently (e.g. monthly) is counter-productive. The usual advice here is to rebalance once a year or even once every two years (using rebalancing bands of course). So in that case would it not be better to keep one year's worth of expenses in a MM or ST bond fund rather than rebalancing frequently? Not to mention the added work one would have at tax time.
Though I rebalanced once a year pre-retirement, it seems silly to take out a years worth of expenses to keep doing that. I try to take out money from investments quarterly and do so according to my desired AA. In the end, it probably makes little difference because if you are taking out roughly 4% that isn't very much. Now would I sell more stocks/bonds than I need for expenses to keep the AA? I haven't thought out that far to be honest. I think I wouldn't and would stick with annual rebalancing on my birthday. In other words, a mini rebalancing (Whatever can be done with the withdrawal amount) when I withdraw for expenses and an annual to maintain the AA.
I'm not sure why you would need to "sell more stocks/bonds than I need for expenses to keep the AA?". I think you can always keep your AA independent of the amount you withdraw.

I use rebalancing bands, and withdrawing and rebalancing quarterly may impact performance. There have been discussions here on this here. However, I don't have the links handy.
AA: 75/25
Year 1: $1M, take out $40k for expenses, market flat, balance $960k.
Year 2Q1: Market tanks 20%. AA is now $720k-(20% drop=144k)=$576k stocks and 240k bond. Time to withdraw $40k/4=$10k. AA is 71/29. You need $612k in stocks to get to 75/25 or $36k but are only withdrawing $10k.

It is just math. Of course, you can rebalance selling more than you need for expenses (and buying in other asset classes) which is what I said.

The difference between quarterly and annual rebalancing is minimal in terms of performance. And it is based on past results.
I see what you are saying. I would take the 10K from bonds and rebalance if the rebalancing bands have been met.

Do you think there is a difference in taking out a year's expenses and then rebalancing during the year if the rebalancing bands are met, versus doing this quarterly?

Topic Author
michaeljc70
Posts: 5429
Joined: Thu Oct 15, 2015 3:53 pm

Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Mon Sep 16, 2019 9:45 pm

catalina355 wrote:
Mon Sep 16, 2019 9:39 pm
michaeljc70 wrote:
Mon Sep 16, 2019 9:21 pm
catalina355 wrote:
Mon Sep 16, 2019 6:05 pm
michaeljc70 wrote:
Mon Sep 16, 2019 5:54 pm
catalina355 wrote:
Mon Sep 16, 2019 5:29 pm


I understood that rebalancing frequently (e.g. monthly) is counter-productive. The usual advice here is to rebalance once a year or even once every two years (using rebalancing bands of course). So in that case would it not be better to keep one year's worth of expenses in a MM or ST bond fund rather than rebalancing frequently? Not to mention the added work one would have at tax time.
Though I rebalanced once a year pre-retirement, it seems silly to take out a years worth of expenses to keep doing that. I try to take out money from investments quarterly and do so according to my desired AA. In the end, it probably makes little difference because if you are taking out roughly 4% that isn't very much. Now would I sell more stocks/bonds than I need for expenses to keep the AA? I haven't thought out that far to be honest. I think I wouldn't and would stick with annual rebalancing on my birthday. In other words, a mini rebalancing (Whatever can be done with the withdrawal amount) when I withdraw for expenses and an annual to maintain the AA.
I'm not sure why you would need to "sell more stocks/bonds than I need for expenses to keep the AA?". I think you can always keep your AA independent of the amount you withdraw.

I use rebalancing bands, and withdrawing and rebalancing quarterly may impact performance. There have been discussions here on this here. However, I don't have the links handy.
AA: 75/25
Year 1: $1M, take out $40k for expenses, market flat, balance $960k.
Year 2Q1: Market tanks 20%. AA is now $720k-(20% drop=144k)=$576k stocks and 240k bond. Time to withdraw $40k/4=$10k. AA is 71/29. You need $612k in stocks to get to 75/25 or $36k but are only withdrawing $10k.

It is just math. Of course, you can rebalance selling more than you need for expenses (and buying in other asset classes) which is what I said.

The difference between quarterly and annual rebalancing is minimal in terms of performance. And it is based on past results.
I see what you are saying. I would take the 10K from bonds and rebalance if the rebalancing bands have been met.

Do you think there is a difference in taking out a year's expenses and then rebalancing during the year if the rebalancing bands are met, versus doing this quarterly?
I cannot imagine it being more than minimal. I think often people are optimizing on the extreme margins (based on data that is not necessarily the same going forward). BTW, a lot of people don't accept rebalancing only annually is the best solution (pre-retirement).

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catalina355
Posts: 254
Joined: Sun Jun 10, 2018 6:46 pm

Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by catalina355 » Mon Sep 16, 2019 9:53 pm

michaeljc70 wrote:
Mon Sep 16, 2019 9:45 pm
catalina355 wrote:
Mon Sep 16, 2019 9:39 pm
michaeljc70 wrote:
Mon Sep 16, 2019 9:21 pm
catalina355 wrote:
Mon Sep 16, 2019 6:05 pm
michaeljc70 wrote:
Mon Sep 16, 2019 5:54 pm


Though I rebalanced once a year pre-retirement, it seems silly to take out a years worth of expenses to keep doing that. I try to take out money from investments quarterly and do so according to my desired AA. In the end, it probably makes little difference because if you are taking out roughly 4% that isn't very much. Now would I sell more stocks/bonds than I need for expenses to keep the AA? I haven't thought out that far to be honest. I think I wouldn't and would stick with annual rebalancing on my birthday. In other words, a mini rebalancing (Whatever can be done with the withdrawal amount) when I withdraw for expenses and an annual to maintain the AA.
I'm not sure why you would need to "sell more stocks/bonds than I need for expenses to keep the AA?". I think you can always keep your AA independent of the amount you withdraw.

I use rebalancing bands, and withdrawing and rebalancing quarterly may impact performance. There have been discussions here on this here. However, I don't have the links handy.
AA: 75/25
Year 1: $1M, take out $40k for expenses, market flat, balance $960k.
Year 2Q1: Market tanks 20%. AA is now $720k-(20% drop=144k)=$576k stocks and 240k bond. Time to withdraw $40k/4=$10k. AA is 71/29. You need $612k in stocks to get to 75/25 or $36k but are only withdrawing $10k.

It is just math. Of course, you can rebalance selling more than you need for expenses (and buying in other asset classes) which is what I said.

The difference between quarterly and annual rebalancing is minimal in terms of performance. And it is based on past results.
I see what you are saying. I would take the 10K from bonds and rebalance if the rebalancing bands have been met.

Do you think there is a difference in taking out a year's expenses and then rebalancing during the year if the rebalancing bands are met, versus doing this quarterly?
I cannot imagine it being more than minimal. I think often people are optimizing on the extreme margins (based on data that is not necessarily the same going forward). BTW, a lot of people don't accept rebalancing only annually is the best solution (pre-retirement).
I agree with you about people optimizing on the margins. Is rebalancing annually the best solution post-retirement? I am planning on using rebalancing bands.

Topic Author
michaeljc70
Posts: 5429
Joined: Thu Oct 15, 2015 3:53 pm

Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by michaeljc70 » Tue Sep 17, 2019 6:50 am

catalina355 wrote:
Mon Sep 16, 2019 9:53 pm
michaeljc70 wrote:
Mon Sep 16, 2019 9:45 pm
catalina355 wrote:
Mon Sep 16, 2019 9:39 pm
michaeljc70 wrote:
Mon Sep 16, 2019 9:21 pm
catalina355 wrote:
Mon Sep 16, 2019 6:05 pm


I'm not sure why you would need to "sell more stocks/bonds than I need for expenses to keep the AA?". I think you can always keep your AA independent of the amount you withdraw.

I use rebalancing bands, and withdrawing and rebalancing quarterly may impact performance. There have been discussions here on this here. However, I don't have the links handy.
AA: 75/25
Year 1: $1M, take out $40k for expenses, market flat, balance $960k.
Year 2Q1: Market tanks 20%. AA is now $720k-(20% drop=144k)=$576k stocks and 240k bond. Time to withdraw $40k/4=$10k. AA is 71/29. You need $612k in stocks to get to 75/25 or $36k but are only withdrawing $10k.

It is just math. Of course, you can rebalance selling more than you need for expenses (and buying in other asset classes) which is what I said.

The difference between quarterly and annual rebalancing is minimal in terms of performance. And it is based on past results.
I see what you are saying. I would take the 10K from bonds and rebalance if the rebalancing bands have been met.

Do you think there is a difference in taking out a year's expenses and then rebalancing during the year if the rebalancing bands are met, versus doing this quarterly?
I cannot imagine it being more than minimal. I think often people are optimizing on the extreme margins (based on data that is not necessarily the same going forward). BTW, a lot of people don't accept rebalancing only annually is the best solution (pre-retirement).
I agree with you about people optimizing on the margins. Is rebalancing annually the best solution post-retirement? I am planning on using rebalancing bands.
To me, bands are used to minimize buying/selling frequently and I associate them more with monthly/quarterly rebalancing. Of course you can use them for any period, but as a practical matter there is no need to minimize transactions when you are doing it annually. I guess you could argue a band will give a growing asset class more room to run. The same holds true on the downside though.

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vineviz
Posts: 5129
Joined: Tue May 15, 2018 1:55 pm

Re: Avoiding fluctuations in BND (total bond) when withdrawing

Post by vineviz » Tue Sep 17, 2019 7:33 am

michaeljc70 wrote:
Tue Sep 17, 2019 6:50 am
To me, bands are used to minimize buying/selling frequently and I associate them more with monthly/quarterly rebalancing. Of course you can use them for any period, but as a practical matter there is no need to minimize transactions when you are doing it annually. I guess you could argue a band will give a growing asset class more room to run. The same holds true on the downside though.
I agree. To me the most rational strategy in principle would be to set relatively wide rebalancing bands and monitor them constantly . In practice, monthly monitoring would be just as effective.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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