Rebalancing in bear market de-cumulation

zagfles

dunstonh said:

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.  

Any decent strategy would look at the entirety of your investments inside and outside your pension (including cash) in terms of asset allocation. In terms of whether you actually draw spending money from your pension or from outside your pension, that's likely to be driven by tax, but you can rebalance within and outside the pension to maintain your desired asset allocation across your entire portfolio.

Making "judgement calls" whenever the market moves is market timing and that's what Mordko seemed to be saying, so he's right if that's what he meant. Short term market timing is generally considered a bad idea unless you really think you know better than the market. Reacting to market movements off the cuff without a underlying strategy by making "judgement calls" is what novice investors do when they go into a panic and sell on drops. Variable asset allocation eg using cash when markets drop is fine if driven by a researched strategy (eg prime harvesting) but not if driven by emotional gut reactions.

dunstonh

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? 

Are you being silly on purpose or is this just to continue your anti-IFA ranting?

DT2001

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.

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/

Does that approach assume bonds do well when equities don’t?

DT2001

Deleted_User said:

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 said:

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. 

Do you like McClungs idea of rebalancing when equities have risen by more than 20% ( after adjusting for inflation)? Cannot remember how often he suggests checking this though.

I understand your criticism of dunstonh that you interpret his comment of a judgement call being the same as timing the market (?) however a judgement call could be based on a combination of how much the market had moved (hopefully up) but maybe not quite the 20% v the ‘cash’ pot left. So in effect not timing the market, as you hope the market will continue up but reducing the effect of a downturn.

BritishInvestor

zagfles said:

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.

"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."

I can't see why that's a bad thing. Sticking to the plan is one of the most important determinants of success.

BritishInvestor

GazzaBloom said:

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! :-)

 

Model worst-case real income drops using Guyton in Timeline and you can see a potential drawback.

BritishInvestor

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. 

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/

Some analysis on the various rebalancing approaches

https://www.betafolio.co.uk/blog/2020/11/19/research-note-evidence-based-rebalancing/

zagfles

DT2001 said:

Deleted_User said:

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 said:

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. 

Do you like McClungs idea of rebalancing when equities have risen by more than 20% ( after adjusting for inflation)? Cannot remember how often he suggests checking this though.

I quite like it, will probably use it myself. But the idea isn't really to "rebalance" at all, it's basically to sell 20% equities when they've risen 20%, in the meantime, draw from bonds/cash. That is not "rebalancing" as it's usually understood, ie it doesn't seek to achieve a particular ratio, you do the same with the equities regardless of how much you have in bonds/cash. The only balance you choose is the starting balance. It's possible to end up in 100% equities in extreme cases, or if you started with a high equity balance, so it's probably not suitable for those with an emotional attitude to risk.

See https://monevator.com/dynamic-asset-allocation-and-withdrawal-in-retirement/

I understand your criticism of dunstonh that you interpret his comment of a judgement call being the same as timing the market (?) however a judgement call could be based on a combination of how much the market had moved (hopefully up) but maybe not quite the 20% v the ‘cash’ pot left. So in effect not timing the market, as you hope the market will continue up but reducing the effect of a downturn.

Well yes there are alternative strategies, the point is you need a planned strategy rather than using gut reaction or "judgement calls" on the fly. For instance if you're asking "is now a good time to buy/sell", that is short term market timing and generally considered bad investing.

If you have a long term strategy, whether that be maintaining a fixed asset allocation, or using a dynamic technique like Prime Harvesting or one of the alternative, that's fine, but if you're winging it and constantly asking "is now a good time..." you're trying to predict short term market movements, and if you can do that successfully you won't be on MSE, you'll be admiring the view of your private island from your luxury yacht.

MK62

Deleted_User said:

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. 

That's not how I read it.........he was saying to rebalance your portfolio, but then to decide whether to move any into cash.....you don't have to do both at the same time. Whenever you decide to sell to cash you could argue you are timing the market, but you have to do it at some point, so it's either random, on a whim, or a judgement call.....I know which I'd rather do....
PS....I suppose you could also do it on a fixed date each year...in a rigid plan....but then why have a cash buffer if your plan is rigid like that?

zagfles

BritishInvestor said:

zagfles said:

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.

"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."

I can't see why that's a bad thing. Sticking to the plan is one of the most important determinants of success.

Personally if I go to see a professional about anything, I want their opinion on what the best plan is. Not have their recommendation based on my likelyhood of sticking to the plan. But I only use professionals I trust, like when my doctor prescibed me a course of medication which he said could make me worse before making me better, but to stick with it till the end. I did. It worked.

I guess that faith in the financial services industry isn't there, so when an adviser recommends a plan they need to take into account whether the client will trust them and so stick with the plan. So it's understandable. But clients need to understand they aren't being recommended the best plan, they're being recommended a plan the adviser thinks they have the emotional capacity and trust in to not ditch at the slightest hint of a problem.

So far better to understand the plan yourself, then you'll be more likely to stick to it. And if you are capable of that, you are capable of managing it yourself without having to pay an adviser a large chunk of your investments over your lifetime for an inferior plan.