Rebalancing in bear market de-cumulation

zagfles

MK62 said:

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?

Or it's based on a well researched long term strategy rather than random, whim or "judgement call"

Audaxer

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. 

I read it as he was saying you rebalance back to 60/40 once a year whatever the state of the market, and separately decide whether to put more cash into your cash float/buffer. If for example the cash buffer is low from using cash for income in recent times, and markets are now rising again, that would seem to me to be the right time to sell some equity to replenish the cash buffer.

Prism

Audaxer said:

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. 

I read it as he was saying you rebalance back to 60/40 once a year whatever the state of the market, and separately decide whether to put more cash into your cash float/buffer. If for example the cash buffer is low from using cash for income in recent times, and markets are now rising again, that would seem to me to be the right time to sell some equity to replenish the cash buffer.

I think the trouble is that when you really need the cash buffer during a time of poor returns it doesn't seem to help. If you take dot.com as an example and a two year cash buffer, you likely end up spending it all in the initial drop and then you have another year of the downturn to survive with the normal allocation. Four years later you get the GFC. When do you get chance to both pay yourself and regenerate a 2 year cash buffer.

The problem I see with have this floating extra pot is all the decisions you need to make. In my example above, with hindsight, it was wrong to use the cash buffer at the start of the crash but impossible to know at the time.

BritishInvestor

zagfles said:

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.

"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"

For many, many people, this is one and the same.

"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."

It's the long drawn out slumps that tend to cause capitulation, IMO. 

"So far better to understand the plan yourself,"

Yep, simple tends to be better. 

(In my mind I have visions of octogenarians attempting to manage their dynamic asset allocation, GK withdrawal setup, cash buffered, bond laddered strategy while their buddies are down the bowling green enjoying their retirement.

BritishInvestor

Prism said:

Audaxer said:

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. 

I read it as he was saying you rebalance back to 60/40 once a year whatever the state of the market, and separately decide whether to put more cash into your cash float/buffer. If for example the cash buffer is low from using cash for income in recent times, and markets are now rising again, that would seem to me to be the right time to sell some equity to replenish the cash buffer.

I think the trouble is that when you really need the cash buffer during a time of poor returns it doesn't seem to help. If you take dot.com as an example and a two year cash buffer, you likely end up spending it all in the initial drop and then you have another year of the downturn to survive with the normal allocation. Four years later you get the GFC. When do you get chance to both pay yourself and regenerate a 2 year cash buffer.

The problem I see with have this floating extra pot is all the decisions you need to make. In my example above, with hindsight, it was wrong to use the cash buffer at the start of the crash but impossible to know at the time.

"I think the trouble is that when you really need the cash buffer during a time of poor returns it doesn't seem to help."

Yep, potential to be a chocolate teapot.

 "The problem I see with have this floating extra pot is all the decisions you need to make."

Agreed.

MK62

zagfles said:

MK62 said:

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?

Or it's based on a well researched long term strategy rather than random, whim or "judgement call"

.....the irony is that your "well researched long term strategy" will be full of "judgement calls"....they all are, it's just that they are made in advance, rather than at the time......

zagfles

Prism said:

Audaxer said:

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. 

I read it as he was saying you rebalance back to 60/40 once a year whatever the state of the market, and separately decide whether to put more cash into your cash float/buffer. If for example the cash buffer is low from using cash for income in recent times, and markets are now rising again, that would seem to me to be the right time to sell some equity to replenish the cash buffer.

I think the trouble is that when you really need the cash buffer during a time of poor returns it doesn't seem to help. If you take dot.com as an example and a two year cash buffer, you likely end up spending it all in the initial drop and then you have another year of the downturn to survive with the normal allocation. Four years later you get the GFC. When do you get chance to both pay yourself and regenerate a 2 year cash buffer.

The problem I see with have this floating extra pot is all the decisions you need to make. In my example above, with hindsight, it was wrong to use the cash buffer at the start of the crash but impossible to know at the time.

Indeed, which is why the cash (or perhaps "non-equity") "buffer" shouldn't be something you use like an emergency break, it should be integral to your investment plan and asset allocation.

MK62

Prism said:

Audaxer said:

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. 

I read it as he was saying you rebalance back to 60/40 once a year whatever the state of the market, and separately decide whether to put more cash into your cash float/buffer. If for example the cash buffer is low from using cash for income in recent times, and markets are now rising again, that would seem to me to be the right time to sell some equity to replenish the cash buffer.

I think the trouble is that when you really need the cash buffer during a time of poor returns it doesn't seem to help. If you take dot.com as an example and a two year cash buffer, you likely end up spending it all in the initial drop and then you have another year of the downturn to survive with the normal allocation. Four years later you get the GFC. When do you get chance to both pay yourself and regenerate a 2 year cash buffer.

The problem I see with have this floating extra pot is all the decisions you need to make. In my example above, with hindsight, it was wrong to use the cash buffer at the start of the crash but impossible to know at the time.

All true observations.......but would having the 2 year "cash buffer" have resulted in a better or worse outcome than being fully invested at the time of the initial drop?

A cash buffer isn't a panacea - there are limits to what using one can do......and in better times, maintaining one can cost you.....this is the trade-off, and each has to decide upfront if it's for them (another judgement call... )......only hindsight will tell us if it was better to have one or not!

As to making decisions......imho, this comes with managing drawdown yourself from a stock market based retirement portfolio......for those who aren't prepared to make such decisions, then perhaps engaging a good IFA is the way forward, ie pay someone else to make them - the other alternative is an annuity. 

MK62

BritishInvestor said:

(In my mind I have visions of octogenarians attempting to manage their dynamic asset allocation, GK withdrawal setup, cash buffered, bond laddered strategy while their buddies are down the bowling green enjoying their retirement.

Haha......a distinct possibility for some.....

Personally I plan to have a single pension by then, with probably a single fund in it (maybe something like a VLS or Global Strategy etc)......assuming I have any pension money left by then, that is.....

zagfles

BritishInvestor said:

zagfles said:

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.

"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"

For many, many people, this is one and the same.

"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."

It's the long drawn out slumps that tend to cause capitulation, IMO. 

"So far better to understand the plan yourself,"

Yep, simple tends to be better. 

(In my mind I have visions of octogenarians attempting to manage their dynamic asset allocation, GK withdrawal setup, cash buffered, bond laddered strategy while their buddies are down the bowling green enjoying their retirement.

Stuff like prime harvesting is actually simpler than static asset allocation and annual rebalancing. Particularly if you use global funds so you don't need to rebalance within the equity and bond portfolios.

Basically: Have equities risen 20%? Yes - sell 20% equities. No - do nothing. In the meantime, leave equities alone, draw down cash/bonds.