Rebalancing in bear market de-cumulation

MK62

zagfles said:

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during a strong bull market as bonds/cash are being added to be the sale of equities far faster than they're being withdrawn to fund drawdown.

During a flat/bear market, equities % increases as equities aren't being sold and bonds/cash being withdrawn.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

Actually I'd very much consider 7.5% above inflation a strong bull run, over an extended period, as you originally stated......but perhaps you feel one year is an extended period.

MK62

DT2001 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. 

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.

It might.....but you could say the same about the 40-50% you might have in bonds.....that also misses out on investment growth during those same good years......unless bonds also have good returns at the same time (and personally I wouldn't be expecting that any time soon).

NannaH

For those who have primarily mixed asset funds like VLS,  what’s the optimum strategy? 

 A much larger buffer in cash (3-5 years?) and a selection of different equity percentage funds?  

So perhaps a third in 20-40% for the first 10 years, possibly in income funds that can be sold if needed then 2/3rds in 80-100% for 10+ years out?   

Presumably you could harvest any superior growth from your high equity funds along the way for extra cash ( say anything over 10% in a year) ? 

Is there any merit in a strategy like that? 

I assume most people have mixed asset funds rather than seperate equity + bonds,  especially in their default work pensions. 

zagfles

MK62 said:

zagfles said:

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

Actually I'd very much consider 7.5% above inflation a strong bull run, over an extended period, as you originally stated......but perhaps you feel one year is an extended period.

But apparently you wouldn't consider 10% above inflation over an extended period a strong bull run, since you simply stated "I'm not sure what you mean here.......with PH, as you sell your bonds and don't rebalance, the equity % increases....".

So either you didn't understand, or you don't think that 10%+ over inflation can be included in the definition of a "strong bull market".

I really suggest you stop digging. Anyway, we're through, bye.

DT2001

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. 

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... )

You are timing the market?
If you are not keeping to your 70/20/10 year on year and you sell bonds (shortly as you say) and run down your cash what will you do if we appear to be in bear market for 3, 5 or 10 years?

I don’t see how your strategy copes better than PH with a poor SOR which is your prime concern?
You could adapt PH to hold some cash and a bond ladder to cover time until SPA - not sure how old you are - or work in an annuity somewhere along the way.

Just some different ideas.

Prism

MK62 said:

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?

Doesn't seem any reason to put it off. I someone felt that an equities/bonds approach was better than just equities then they should change it. That nothing to do with PH, annual rebalancing or a cash pot though that I can see. 

Thrugelmir

One way to rebalance is not to automatically reinvest the income generated. The cash can either be used to top up the savings float or be redeployed into a different asset class. 

k6chris

Thrugelmir said:

One way to rebalance is not to automatically reinvest the income generated. The cash can either be used to top up the savings float or be redeployed into a different asset class. 

Which then brings in an element of 'natural yield'!  Not come across Prime Harvesting before this thread (not really started looking serious at withdrawing yet).  I keep a monthly tracking spreadsheet, so adding in a line for actual inflation would seem to be an easy way of seeing when the 'sell equity' trigger is reached? 

Thrugelmir

k6chris said:

Thrugelmir said:

One way to rebalance is not to automatically reinvest the income generated. The cash can either be used to top up the savings float or be redeployed into a different asset class. 

Which then brings in an element of 'natural yield'!  Not come across Prime Harvesting before this thread (not really started looking serious at withdrawing yet).  I keep a monthly tracking spreadsheet, so adding in a line for actual inflation would seem to be an easy way of seeing when the 'sell equity' trigger is reached? 

Income is simply a byproduct of investing. I've always taken the active view that I wish to have a choice. Not simply auto reinvested by default. I don't invest purely for income per se. Though my individual shareholdings tend to favour cash generative companies, with solid balance sheets and quality management teams.