Cash or bonds in retirement?

michaels

DT2001 said:

michaels said:

Suppose you have 50:50 Cash and Equities

Suppose the equities half in value, your portfolio is now 67% cash, 33% equities.

If you don't re-balance the you are saying, before when equities were 'high' I wanted to weight them more highly in my portfolio than I do now when they are 'low' - effectively a buy high / sell low strategy which will not be effective long term for sure.

The scenario I was thinking about was a portfolio 600/200/200 at start of year. You draw 5% which is 25% of your cash and the market drops 20% for equities and 10% for bonds. So ending at 480/180/150. You could then rebalance by selling bonds which have dropped so new figures are 480/165/165. Year 2 sees another drop in markets to 400/150 and cash 125 (5% of reduced total).
Rebalance to 400/140/135. Year 3 sees a recovery of 20% for equities to 480/150/100. At this point you would ‘normally’ sell equities to top up cash BUT then that would be selling low (compared to where you started although maybe higher than actually purchased for).

In your scenario you haven’t drawn down but ignoring that whilst I accept the logic of taking the opportunity to buy ‘low’ you are using cash which might allow you to ride out the storm or a greater part of it.

My question is ‘how should the cash pot be used most effectively?

So I hold cash/bonds to reduce volatility that I might see with an all equities portfolio, lower upside as well as downside, as based on historic experience this gives a higher SWR.

If I were to not rebalance/draw from specific pots based on market history then I am effectively saying I do not think equities are random but that based on their history they are either 'high' or 'low' and that I am adjusting my behaviour based on this insight.

The problem with this assumption is that if 'being lower than previously' were a reliable indicator that markets would rise then the obvious response would be for everyone to try and buy back in at this lower level in order to lock in a certain profit.  But everyone buying back in will push the price back to a level where there is no one way bet investment strategy.  In other words any strategy base don prices being 'high' or 'low' is basically saying that you don't think the markets are efficient and that you think you have extra information over and above what the average market participant has.

BritishInvestor

michaels said:

So I hold cash/bonds to reduce volatility that I might see with an all equities portfolio, lower upside as well as downside, as based on historic experience this gives a higher SWR.

What historic experience is that?