Rebalancing in bear market de-cumulation

Prism

There is nothing wrong with selling equities when they are not at an all time high. A cash buffer can be used for several things - to top up a lower withdrawal from the main pot. To reduce volatility. As an alternative to bonds. You need to decide why you have a cash buffer at all first.

michaels

Looked at holistically, a cash buffer to be used when markets are 'low' is basically a variable allocation strategy.  Withdrawals from the cash pot increase the proportion of equities when markets fall, withdrawals from the equity pot (and even re-balancing to replenish the cash pot) when markets are 'high' does the opposite. 

[Deleted User]

dunstonh said:

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.

That’s advice to, quite  literally, time the market.  Bad investment advice. 

The body of literature describing why its a bad idea is overwhelming.  The reason people rebalance is to keep portfolio risk exposure at an acceptable level.  Telling someone in the early phases of retirement to increase risk is as bad as it gets. 

As for the frequency of rebalancing, there are different approaches.  Once a year is one of them.  Here is another popular approach (Larry Swedroe’s 5/25 rule): https://awealthofcommonsense.com/2014/03/larry-swedroe-525-rebalancing-rule/

Audaxer

Deleted_User said:

dunstonh said:

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.

That’s advice to, quite  literally, time the market.  Bad investment advice. 

The body of literature describing why its a bad idea is overwhelming.  The reason people rebalance is to keep portfolio risk exposure at an acceptable level.  Telling someone in the early phases of retirement to increase risk is as bad as it gets. 

How is that bad investment advice, as he is saying to rebalance to 60/40 to keep risk exposure at that level?

Prism

Audaxer said:

Deleted_User said:

dunstonh said:

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.

That’s advice to, quite  literally, time the market.  Bad investment advice. 

The body of literature describing why its a bad idea is overwhelming.  The reason people rebalance is to keep portfolio risk exposure at an acceptable level.  Telling someone in the early phases of retirement to increase risk is as bad as it gets. 

How is that bad investment advice, as he is saying to rebalance to 60/40 to keep risk exposure at that level?

I would say its the difficulty of judging when to balance/spend/refloat the cash. Basing a decision on if it feels like a good time to do it is very difficult to judge. When is it a good time to use the cash pot? 10% down? 20%? 50%? It makes it all a bit of a judgement call.

The simple way is to rebalance to the starting portfolio every year - but then thats not really a cash pot.

dunstonh

That’s advice to, quite  literally, time the market.  Bad investment advice. 
The body of literature describing why its a bad idea is overwhelming.  The reason people rebalance is to keep portfolio risk exposure at an acceptable level.  Telling someone in the early phases of retirement to increase risk is as bad as it gets. 

Wrong. But then again you usually are.

Please point to any literature that says it is a bad idea to rebalance your portfolio.     

dunstonh

I would say its the difficulty of judging when to balance/spend/refloat the cash. Basing a decision on if it feels like a good time to do it is very difficult to judge. When is it a good time to use the cash pot? 10% down? 20%? 50%? It makes it all a bit of a judgement call.

Everything you do is a judgement call.   In the majority of years, you could refloat the cash annually. In a small number of years, you could defer it a year and do it the year after.     In a generational level event, you may have your hands forced.    You are always making a decision that is largely based on a judgement call.

It's not really any different to stopping or reducing the draw and using your cash savings outside of the pension for a period.  Sooner or later you will need to decide when it's right to bring some money back as cash.   Doing it now is a choice.  Doing it next year is a choice.  Doing it in 2 or 3 or 4 years is a choice.  All are judgement calls.

Do you have 12 months cash, 18 months, 24 months, 36 or 60 months etc.  Again, a judgement call.  

zagfles

michaels said:

Looked at holistically, a cash buffer to be used when markets are 'low' is basically a variable allocation strategy.  Withdrawals from the cash pot increase the proportion of equities when markets fall, withdrawals from the equity pot (and even re-balancing to replenish the cash pot) when markets are 'high' does the opposite. 

Indeed, and using a variable allocation strategy is fine as long as it has some structure and rules, rather than just "ooh markets have dropped I'll use cash this month".

[Deleted User]

dunstonh said:

That’s advice to, quite  literally, time the market.  Bad investment advice. 
The body of literature describing why its a bad idea is overwhelming.  The reason people rebalance is to keep portfolio risk exposure at an acceptable level.  Telling someone in the early phases of retirement to increase risk is as bad as it gets. 

Wrong. But then again you usually are.

Please point to any literature that says it is a bad idea to rebalance your portfolio.     

It is a good idea to rebalance.  This is a really bad one, bad advice:

If it's not a good time to sell the investments to cash then you defer that decision

Do you really need me to reference sources explaining that timing the market and increasing risk early on in retirement is a bad idea for investors?  That ignorant? 

Now, if you were to tell me that making judgement calls on timing of selling investments to cash is good for advisor’s job security, I would agree.  Making investment look more complex, more scary is really good for that. 

[Deleted User]

Audaxer said:

Deleted_User said:

dunstonh said:

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.

That’s advice to, quite  literally, time the market.  Bad investment advice. 

The body of literature describing why its a bad idea is overwhelming.  The reason people rebalance is to keep portfolio risk exposure at an acceptable level.  Telling someone in the early phases of retirement to increase risk is as bad as it gets. 

How is that bad investment advice, as he is saying to rebalance to 60/40 to keep risk exposure at that level?

That’s not bad advice. But that’s not what he is saying. He is telling the guy to not sell equity, not rebalance if it is “bad time”.  See above.