Rebalancing in bear market de-cumulation

Phrygian

Hi, please go easy on me as I'm not an expert in these matters.

So if you keep a 60:40 portfolio and you want to prioritise the cash buffer when drawing down, how do you restore the balance to 60:40?

Presumably you would have to sell the appropriate number of stock to rebalance, but surely you will need to sell more to cover the shortfall? So you are actually selling at a loss.

Ok I have answered my own question I guess. What I am really trying to understand is how a large cash buffer is meant to work when retiring in a bear market.

sheslookinhot

Surely you use cash only and leave the funds alone to allow time to recover.

zagfles

Not sure I understand, you mean if you had 60% equities and 40% cash, and you wanted to maintain 60% equities while equities are falling? Why would you need to sell equities? Drawing from cash only (or mainly) would obviously naturally rebalance in a bear market. If equities fell 10%, then if you drew down 10% of your cash, you've rebalanced. You'd only need to sell equities if you needed to drawdown more than 10% of your cash buffer. 

Phrygian

Thanks, I guess that explains it then, cheers

dunstonh

So if you keep a 60:40 portfolio and you want to prioritise the cash buffer when drawing down, how do you restore the balance to 60:40?

Once a year you rebalance the 60/40 and decide if the cash float needs refloating.  If it's not a good time to sell the investments to cash then you defer that decision. If it is a good time, then you do.

Presumably you would have to sell the appropriate number of stock to rebalance, but surely you will need to sell more to cover the shortfall? So you are actually selling at a loss.

This is why you have a large enough cash float to see you past the majority of negative periods.

Ok I have answered my own question I guess. What I am really trying to understand is how a large cash buffer is meant to work when retiring in a bear market.

As you are drawing from the cash, you are not selling any investments.

Phrygian

Only niggle is what if when cash had run out and bear market worsens? Surely at that point I am 100% in equities and forced to sell at the bottom?

To be honest I would probably get a part time job at that point, but just wondered what the theory was in that particular case.

Albermarle

Phrygian said:

Only niggle is what if when cash had run out and bear market worsens? Surely at that point I am 100% in equities and forced to sell at the bottom?

To be honest I would probably get a part time job at that point, but just wondered what the theory was in that particular case.

No easy answer to that one I am afraid. I suppose with hindsight you would say 
I should have had more cash 
I should have had a more mixed investment portfolio , not just equities .
I should have spent less
I should have retired later 
etc

zagfles

The trouble is most drawdown strategies, even those devised by financial advisers or so-call financial planners, are usually simplistic static allocation/static withdrawal strategies, with the asset allocation based not on what is likely to give the best results, but on what suits the investor's emotional attitude to risk.

There's evidence that dynamic asset allocation can work better, eg strategies like "prime harvesting", and certainly dynamic withdrawal, unless you're actually on the breadline can you not vary the amount you the take out? Isn't it what you'd do in your working life, good times and bad times, eg get a promotion/big bonus and go on an expensive holiday, lose your job and cut back a bit on spending.

Phrygian

Thanks everyone, I think my question has been answered now

GazzaBloom

I saw a video pop up over the weekend that discusses this and suggests that Guyton's inflation adjustment & guardrails rules help with smoothing out market crashes. I have no idea if this works or not.

https://www.youtube.com/watch?v=oyzR7tMmj9o

• Rebalance once a year between cash/bonds/stocks

• Guyton's Inflation Rule: If portfolio has gained over last 12 months, increase drawdown in line with inflation. if portfolio has declined or the drawdown percentage rate exceeds your original drawdown rate

• Guyton's Guardrails: If the new drawdown rate has risen by more than 20% of the original then reduce drawdown amount by 10%, if new drawdown rate is more than 20% less that original rate then increase drawdown amount by 10%

The scenario of stocks and bonds having both fallen in the same year isn't discussed, rebalancing in that scenario means you are selling assets when they are down, so I assume the play would be to ride it out and use another years cash without rebalancing. A multi year decline of both stocks and bonds pushing the cash buffer to its limits may mean Plan B! Stop drawdown, get a part time job, or sell the house! :-)

 

dunstonh

Only niggle is what if when cash had run out and bear market worsens? Surely at that point I am 100% in equities and forced to sell at the bottom?

If you had 3 years worth in cash and used income units to pay into cash, then you would cover around 90% of market loss periods.

When that 10% comes, you just put up with it.   Or you can run a second portfolio in between the cash and the main bit.  The one in between being very low risk.  However, that would have to be cash heavy.  So, the counterargument to that option is to run 4 years cash or maybe even 5 years.

Generally, in retirement, people are looking for more stability and sustainability and not pushing for the best possible return.  So, being a bit heavier in cash is not a bad thing.