Rebalancing in bear market de-cumulation

Thrugelmir

Phrygian said:

Just reading all this makes my brain hurt. Maybe I'm not cut out for investing. Maybe I should use my investments to clear off the mortgage debt on my BTLs and just live of the returns from those plus state pension. Maybe.

The QE experiment is drawing to a close. Rising interest rates are a given in the longer term. Being highly leveraged needs to be weighed up. As debt is something you can directly control. With investments you are in the lap of the gods as to the outcome. 

MK62

zagfles said:

The current negative real returns on cash/bonds don't actually make a vast difference to how long they'll last, even if they averaged -3%, they'd last almost 9 years before having to sell equities.   PH would still likely do better than most.

Model it and see.......

In many/most, cases PH will be fine, (along with many other plans), but what would cane you is a bad sequence of returns on equities around the time you start to draw on them in 9 years.....

But in a scenario of -3% returns on cash/bonds and negative or zero returns on equities, no realistic plan is going to do well.

True enough.....

PH would still likely do better than most.

Possibly, but that remains to be seen....

PH is actually quite a cautious approach, it doesn't do as well in an extended strong bull market as the equity % will be decreasing all the time.

I'm not sure what you mean here.......with PH, as you sell your bonds and don't rebalance, the equity % increases....

But those who have an emotional attitude to risk may panic at the thought of possibly being in 100% equities...so probably not for them.

.....or those with a more cavalier attitude to risk may not fully appreciate the actual risk they are taking.....

zagfles

MK62 said:

zagfles said:

The current negative real returns on cash/bonds don't actually make a vast difference to how long they'll last, even if they averaged -3%, they'd last almost 9 years before having to sell equities.   PH would still likely do better than most.

Model it and see.......

In many/most, cases PH will be fine, (along with many other plans), but what would cane you is a bad sequence of returns on equities around the time you start to draw on them in 9 years.....

So how does your plan cope with a flat/bear market for 9 years followed by a bad SOR then? What even is your plan, you seem to want to pick holes in mine and others but aren't even telling us what your plan is.

PH is actually quite a cautious approach, it doesn't do as well in an extended strong bull market as the equity % will be decreasing all the time.

I'm not sure what you mean here.......with PH, as you sell your bonds and don't rebalance, the equity % increases....

You've really not understood it.

In an "extended strong bull market" eg 10-20% growth pa, equities will be rising and hitting the "20% increase" threshold regularly, every year or 2. When that happens, 20% equities are sold, bringing total equities value back down to about the value they were originally.

The sale of those equities will increase the bonds/cash holding by far more than the drawdown of 4% or so during a "strong bull market". So the equity % of the entire portfolio drops during a strong bull market as bonds/cash are being added to be the sale of equities far faster than they're being withdrawn to fund drawdown.

During a flat/bear market, equities % increases as equities aren't being sold and bonds/cash being withdrawn.

Let me know when you've read the book and understood it, then it may be worth continuing this discussion.

Prism

Audaxer said:

Prism said:

MK62 said:

DT2001 said:

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

Fair enough.....that's the question I was asking.

It's pretty much the definition of a forced seller though.......generally, not where I want to be tbh, but if you're happy......

Don't kid yourself that it's not your decision though.

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

In these cases where no cash was held in retirement pots, some retirees must have had to sell equities in bear markets. That could be very risk especially if you have a poor sequence of returns in the first decade of retirement. If you have a relatively small percentage withdrawal rate, your portfolio will probably survive, but if you require a higher withdrawal rate than say 4% I think it is too risky to have no cash buffer. 

Sure, the original Bengen 4% rule assumes that you sell and rebalance every year regardless of the markets. There is no cash pot and if you rebalance you are selling both equities and bonds. 4% has survived every scenario, although that was based on US stocks and bonds. Its a bit lower for UK markets.

I have never seen a study that suggests that the withdrawal rate is higher with a cash buffer but there is one earlier in the thread that suggests it is lower.

MK62

Prism said:

Audaxer said:

Prism said:

MK62 said:

DT2001 said:

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

Fair enough.....that's the question I was asking.

It's pretty much the definition of a forced seller though.......generally, not where I want to be tbh, but if you're happy......

Don't kid yourself that it's not your decision though.

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

In these cases where no cash was held in retirement pots, some retirees must have had to sell equities in bear markets. That could be very risk especially if you have a poor sequence of returns in the first decade of retirement. If you have a relatively small percentage withdrawal rate, your portfolio will probably survive, but if you require a higher withdrawal rate than say 4% I think it is too risky to have no cash buffer. 

Sure, the original Bengen 4% rule assumes that you sell and rebalance every year regardless of the markets. There is no cash pot and if you rebalance you are selling both equities and bonds. 4% has survived every scenario, although that was based on US stocks and bonds. Its a bit lower for UK markets.

I have never seen a study that suggests that the withdrawal rate is higher with a cash buffer but there is one earlier in the thread that suggests it is lower.

Well, historically, it's true that, on average, holding a cash buffer means a slightly lower withdrawal rate, but nobody has claimed otherwise...on average. The point of a cash buffer is not to maximise withdrawals during average or good times, rather to minimise the reduction in withdrawal during the not so good times........but it isn't a panacea.
If maximising withdrawal, on average, is the goal then just go with 100% equities - historically, on average, that has given you the highest withdrawal rate. Personally I'd be wary of basing decisions on historical averages though.....the reality might turn out to be very different from that average.
For all we know, today, being 100% in equities, at say 60, might turn out to have been the right call........so who's brave enough to risk it?
I suppose a cash buffer is really an extension of the split equity/bond portfolio.....that bond allocation isn't there to maximise withdrawals either......

DT2001

Audaxer said:

Prism said:

MK62 said:

DT2001 said:

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

Fair enough.....that's the question I was asking.

It's pretty much the definition of a forced seller though.......generally, not where I want to be tbh, but if you're happy......

Don't kid yourself that it's not your decision though.

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

In these cases where no cash was held in retirement pots, some retirees must have had to sell equities in bear markets. That could be very risk especially if you have a poor sequence of returns in the first decade of retirement. If you have a relatively small percentage withdrawal rate, your portfolio will probably survive, but if you require a higher withdrawal rate than say 4% I think it is too risky to have no cash buffer. 

I agree that a poor SOR could lead to selling equities in a bear market. If you rebalance annually you will have been selling equities earlier so potentially even more risky?
If you have a cash buffer, at what level do you set it and when do you rebalance? 

I see the disadvantage of a cash pot as it misses out on investment growth during the better years which is part and parcel of the pot surviving long term. 

As Zagfles says PH is a more conservative approach as it protects more during a bear but can lag during a bull run because of the selling at the 20%+ marker and ending up with a higher % in bonds than the ‘ideal’. Most retirees priority is protecting against failure not dying richer.

Audaxer

Prism said:

Audaxer said:

Prism said:

MK62 said:

DT2001 said:

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

Fair enough.....that's the question I was asking.

It's pretty much the definition of a forced seller though.......generally, not where I want to be tbh, but if you're happy......

Don't kid yourself that it's not your decision though.

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

In these cases where no cash was held in retirement pots, some retirees must have had to sell equities in bear markets. That could be very risk especially if you have a poor sequence of returns in the first decade of retirement. If you have a relatively small percentage withdrawal rate, your portfolio will probably survive, but if you require a higher withdrawal rate than say 4% I think it is too risky to have no cash buffer. 

Sure, the original Bengen 4% rule assumes that you sell and rebalance every year regardless of the markets. There is no cash pot and if you rebalance you are selling both equities and bonds. 4% has survived every scenario, although that was based on US stocks and bonds. Its a bit lower for UK markets.

I have never seen a study that suggests that the withdrawal rate is higher with a cash buffer but there is one earlier in the thread that suggests it is lower.

If people retire at 60 or earlier drawing 4%, that should be safe in most cases as they will be getting State Pension in the next 6 or 7 years, which will reduce the percentage they need to withdraw thereafter. That should therefore reduce the need for a cash buffer at that time.

However another way to look at it is if you want to spend more in retirement rather than end up being the richest person in the graveyard, you could convert more into cash for spending after you get your State Pension.

MK62

zagfles said:

You've really not understood it.

In an "extended strong bull market" eg 10-20% growth pa, equities will be rising and hitting the "20% increase" threshold regularly, every year or 2. When that happens, 20% equities are sold, bringing total equities value back down to about the value they were originally.

The sale of those equities will increase the bonds/cash holding by far more than the drawdown of 4% or so during a "strong bull market". So the equity % of the entire portfolio drops during a strong bull market as bonds/cash are being added to be the sale of equities far faster than they're being withdrawn to fund drawdown.

During a flat/bear market, equities % increases as equities aren't being sold and bonds/cash being withdrawn.

Let me know when you've read the book and understood it, then it may be worth continuing this discussion.

You do come across as quite defensive, and tbh a little condescending......perhaps if you'd stated 10-20% growth pa instead of the rather more vague "extended strong bull market".......

In any case you seem to have forgotten about inflation......20%pa growth would indeed see the equity % fall in all reasonable inflation scenarios (unless it rises above 8% for an extended period but then we might all be in a spot of bother), but 10%pa growth would need to see inflation down at c2.5% or below before the equity % would fall, and even then, ever so slightly (depending on the withdrawal rate of course).......at eg 3% inflation the equity % would still rise, despite the rebalancing from equities to bonds (which would be every 3 years btw).......and at the current inflation rate, the equity % would rise quite strongly....

All academic though......in such an unlikely scenario, pretty much any plan would work...perhaps 100% equities best of all.....if you are taking an initial 4% index linked, and equities are rising at 10% pa, you'd have to do something really silly to mess that up......

I'm not overly interested in which plan handles the good times best though.....more in which will handle the bad times better......fair enough, you might feel the PH plan you've read about will do that best for you......for us, I feel otherwise, so maybe we should just leave it there.

So how does your plan cope with a flat/bear market for 9 years followed by a bad SOR then?

The bond allocation and cash buffer/bucket/pot (call it what you will) are there to deal with a bad equity SOR.....as I don't plan to be 100% in equities at 9 years in, I won't be as negatively affected by such a bad equity SOR.

In the end it's all a series of what ifs.......you can only plan within reasonable limits. A bad SOR might still affect me negatively, just perhaps not as much. I tend to model things as if year 2000 might be right around the corner.....and unlike yourself and some others I have no DB pension to act as a "buffer" here...if I did my view of things might be different. Perhaps psychologically the DB pension and "cash buffer" offer something similar, even if they differ in reality.

What even is your plan, you seem to want to pick holes in mine and others but aren't even telling us what your plan is.

There's that defensiveness again.......it's not your plan, it's one in the public domain......pointing out potential issues, in what might be, admittedly, pessimistic circumstances, isn't picking holes at you....it's simply offered in discussion - this is a forum after all. I'm not an expert here, and nor do I claim to be......my total experience of actual pension withdrawal planning comes down to two (mine and my OH's), one in drawdown and one still to come, so unlike an IFA for instance, my real world experience is somewhat limited.....I'm just another interested party trying to muddle through (though I have to confess to having modelled various plans to death a bit too much tbh..  ...)

My plan is no secret either....it's a fairly simple one - around 70/20/10 in equity/bonds/cash......each tax year I decide how much to take out from the equity/bonds depending on performance, tax issues etc, and when to take it (might be in one go, might be mutiple times...and before it's pointed out, yes I'm well aware I might get it wrong - but for me, it's not about trying to guess which day this or that will peak (not possible, at least not regularly).....more about just deciding if it's a good or bad time to sell). All spending is from cash so the percentages do vary......that's unavoidable as I don't want to be rebalancing all the time, and I'm not overly religious about the exact percentages. The cash is all over the place tbh.....I have to confess that this one area where I do chase returns a bit.......I opened a HL Active Savings a while ago and this has proved quite useful.

As to timing sales, I already said I take a view at the time........the new tax year is almost here, and so new allowances etc......at the moment I doubt I'll be selling equities (that might change later in the tax year though), so it'll probably be some bonds, and as inflation is higher now I'm happy to run the cash down a bit more than usual. Not claiming perfection ......and I'm sure there are plenty of circumstances where I might have been better off following another plan (though I believe that'd be true no matter which plan I followed)......feel free to pick holes in it, as I really won't mind......I'm always open to new ideas (as long as they pass the stress test of course... )

Finally....serious question......if someone said to you today that they had a £750k portfolio, 100% in global equities, and they liked the 60/40 PH plan, would you then tell them to sell £300k worth of equities on Monday morning?

zagfles

MK62 said:

Prism said:

Audaxer said:

Prism said:

MK62 said:

DT2001 said:

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

Fair enough.....that's the question I was asking.

It's pretty much the definition of a forced seller though.......generally, not where I want to be tbh, but if you're happy......

Don't kid yourself that it's not your decision though.

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

In these cases where no cash was held in retirement pots, some retirees must have had to sell equities in bear markets. That could be very risk especially if you have a poor sequence of returns in the first decade of retirement. If you have a relatively small percentage withdrawal rate, your portfolio will probably survive, but if you require a higher withdrawal rate than say 4% I think it is too risky to have no cash buffer. 

Sure, the original Bengen 4% rule assumes that you sell and rebalance every year regardless of the markets. There is no cash pot and if you rebalance you are selling both equities and bonds. 4% has survived every scenario, although that was based on US stocks and bonds. Its a bit lower for UK markets.

I have never seen a study that suggests that the withdrawal rate is higher with a cash buffer but there is one earlier in the thread that suggests it is lower.

Well, historically, it's true that, on average, holding a cash buffer means a slightly lower withdrawal rate, but nobody has claimed otherwise...on average. The point of a cash buffer is not to maximise withdrawals during average or good times, rather to minimise the reduction in withdrawal during the not so good times........but it isn't a panacea.
If maximising withdrawal, on average, is the goal then just go with 100% equities - historically, on average, that has given you the highest withdrawal rate. Personally I'd be wary of basing decisions on historical averages though.....the reality might turn out to be very different from that average.
For all we know, today, being 100% in equities, at say 60, might turn out to have been the right call........so who's brave enough to risk it?
I suppose a cash buffer is really an extension of the split equity/bond portfolio.....that bond allocation isn't there to maximise withdrawals either......

It's maximise the "safe" withdrawal rate that's the issue, not average. PH tends to increase the SWR compared to rebalancing, analysed in McClung's book.

zagfles

MK62 said:

zagfles said:

You've really not understood it.

In an "extended strong bull market" eg 10-20% growth pa, equities will be rising and hitting the "20% increase" threshold regularly, every year or 2. When that happens, 20% equities are sold, bringing total equities value back down to about the value they were originally.

The sale of those equities will increase the bonds/cash holding by far more than the drawdown of 4% or so during a "strong bull market". So the equity % of the entire portfolio drops during a strong bull market as bonds/cash are being added to be the sale of equities far faster than they're being withdrawn to fund drawdown.

During a flat/bear market, equities % increases as equities aren't being sold and bonds/cash being withdrawn.

Let me know when you've read the book and understood it, then it may be worth continuing this discussion.

You do come across as quite defensive, and tbh a little condescending......perhaps if you'd stated 10-20% growth pa instead of the rather more vague "extended strong bull market".......

Well you've made it clear you don't understand PH yet are constantly trying to pick holes in it. You didn't really think a "strong bull market" was inflation plus 7.5% did you? S&P TR in 2021 was up over 20% plus inflation. So that was a really really strong bull market if you think 7.5% over inflation is a strong bull market

I'm not overly interested in which plan handles the good times best though.....more in which will handle the bad times better......fair enough, you might feel the PH plan you've read about will do that best for you......for us, I feel otherwise, so maybe we should just leave it there.

Good idea. Bye then, and good luck.