Sequence of Return Risk

MK62

After a quick google it seems, at the start of 2000, US Treasury Note yields were over 6% for 5, 10 and 20 year Treasuries.........the fed target rate was 5.5%, inflation was running at 2.8% and GBP traded at $1.64........the good old days..... (at least before the bubble burst)......it's all a tad different today.

Still, the article does illustrate the huge difference in outcomes you can get if you are unlucky with the sequence of returns in the early years......and gives us a reminder not to rely too much on averages where finance and investments are concerned.

michaels

Most of the research on holding a cash buffer to avoid making withdrawals when markets are 'low' (to time the market) shows it does not lead to higher SWRs.

shinytop

michaels said:

Most of the research on holding a cash buffer to avoid making withdrawals when markets are 'low' (to time the market) shows it does not lead to higher SWRs.

Most/a lot do it though.  I'm not in SWR territory myself as my investment income needs are irregular and to some extent discretionary. 

DT2001

michaels said:

Most of the research on holding a cash buffer to avoid making withdrawals when markets are 'low' (to time the market) shows it does not lead to higher SWRs.

Is that because on average people do not suffer early poor returns or is the research just looking at those unlucky retirees that encounter a poor sequence early on?
If your greatest fear is running out of money within a specific timescale then holding a cash reserve protects against that whilst reducing your ‘on average’ at end of 25/30 year larger pot?

jamesd

michaels said:

Most of the research on holding a cash buffer to avoid making withdrawals when markets are 'low' (to time the market) shows it does not lead to higher SWRs.

Any that do need to be read cautiously because it's a lower return asset than equites or (most of the time) bonds, so lower SWR is expected even if you count it as part of the bond percentage. There's probably a bad assumption or mistake in the study.

We're probably in one of the less common times when cash beats bonds.

DT2001 said:

If your greatest fear is running out of money within a specific timescale then holding a cash reserve protects against that whilst reducing your ‘on average’ at end of 25/30 year larger pot?

Having a year of cash that you exclude from rebalancing makes scheduling income and day to day living easier so it's worth doing. Maybe two, but don't forget the topping up from dividends and interest. Perhaps a year outside SIPP topped up by monthly SIPP payments and a far more fluctuating year inside the SIPP as dividends and interest get paid.

Notepad_Phil

michaels said:

Most of the research on holding a cash buffer to avoid making withdrawals when markets are 'low' (to time the market) shows it does not lead to higher SWRs.

Indeed, though I do wonder what effect a cash buffer has on people's ability to ride out stock market falls? If the typical retiree is more likely to sell everything down during the heights of a crash as they suddenly realise that they've no 'safety net', then that probably has a bigger impact on real SWRs than having a cash buffer.

jamesd

Notepad_Phil said:

Indeed, though I do wonder what effect a cash buffer has on people's ability to ride out stock market falls? If the typical retiree is more likely to sell everything down during the heights of a crash as they suddenly realise that they've no 'safety net', then that probably has a bigger impact on real SWRs than having a cash buffer.

If you run out of cash in that scenario you (should) replenish it from bond sales, not panic sell. Just part of the plan from day one.

[Deleted User]

True. But its hard to sell bonds and buy shares when the former are doing great, the latter are losing you several Honda Civics* per day and the world is ending.

*Since 2008 I count losses in Honda Civics. Only during major bears. 

jamesd

Hard but what people doing drawdown with rebalancing signed up for. Selling bonds for living money is relatively easy. Multi-asset funds can automate rebalancing and make it psychologically easier, all you do is ignore the market. I'm not a great fan of them but this feature is useful. Except, look at how counterproductive monthly rebalancing instead of annual can be.

I still tend to measure by how many years pay it's down, months being too small a unit to matter vs the capital amounts in drawdown. Civics or years of drawdown income work, though.

[Deleted User]

That’s a nice little article.  I like the “luck” conclusion.  And his point about bull in both stocks and bonds since the 80s is true.  And every time stocks dropped, bonds went up. The next little while could easily be different. Say the interest rates go up by 1%...