Rebalancing in bear market de-cumulation

zagfles

MK62 said:

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......

There's a difference between using a long term plan and sticking to it than making it up as you go along. Do people do the same during the accumulation phase?

"No, I won't invest my pension contribution this month, the market's very high, I'll leave it in cash for now"

I'd wager anyone who made such "judgement calls" during the accumulation phase is worse off than someone who just stuck with the plan of investing their contribution monthly without thinking they know better than the market. Short term market timing is a mug's game.

Audaxer

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.

If you can afford it, then it is best to have more than 2 years cash buffer, especially if you don't have other sources of guaranteed income like DB pensions. However if having say, 5 years cash buffer is going leave your pot with not enough investments to allow you to safely draw your required level of income, then I agree a big cash buffer is a problem.

MK62

zagfles said:

MK62 said:

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......

There's a difference between using a long term plan and sticking to it than making it up as you go along.

Perhaps, but who said anything about not having a long term plan?......all we are talking about here is deciding when to sell assets to cash in order to make a withdrawal. I will most likely be making a withdrawal in the next tax year (and so selling assets to cash to do just that) .......at the moment, I doubt very much I'll be doing that in April, but if your "long term plan" says to do just that, then fine, go with it. I will however rebalance things.

zagfles said:

 Do people do the same during the accumulation phase?

"No, I won't invest my pension contribution this month, the market's very high, I'll leave it in cash for now"

I'd wager anyone who made such "judgement calls" during the accumulation phase is worse off than someone who just stuck with the plan of investing their contribution monthly without thinking they know better than the market. Short term market timing is a mug's game.

No, they don't in general.......but the decumulation phase isn't the same.......during accumulation, downturns are an opportunity, whereas in decumulation, they are anything but........

As for your wager.....well there's no way to know either way. I suspect over the last 10 years, you may well be right.....apart from a few blips it's generally been a constantly rising market until now......but perhaps over the preceding 10 years the story might be very different.......and as for the next 10, well who knows?

Thrugelmir

zagfles said:

MK62 said:

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......

Short term market timing is a mug's game.

Banking a profit and sitting on the sidelines is a judgement call. That often comes down to actually understanding what you are invested in. Why the fund has risen so much. Rather than assuming that the market is always efficient and priced correctly.  As we are the market too. Collectively our actions move share prices as well. We are not bystanders. 

zagfles

Thrugelmir said:

zagfles said:

MK62 said:

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......

Short term market timing is a mug's game.

Banking a profit and sitting on the sidelines is a judgement call. That often comes down to actually understanding what you are invested in. Why the fund has risen so much. Rather than assuming that the market is always efficient and priced correctly.  As we are the market too. Collectively our actions move share prices as well. We are not bystanders. 

Well obviously. But it seems most people aren't able to predict short term market movements. Anyone who can do reliably, as I said earlier, will be admiring the view of their private island from their luxury yacht. The rest of them will win some and lose others. And usually boast about those they win and not mention those they lose.

Thrugelmir

zagfles said:

Thrugelmir said:

zagfles said:

MK62 said:

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......

Short term market timing is a mug's game.

Banking a profit and sitting on the sidelines is a judgement call. That often comes down to actually understanding what you are invested in. Why the fund has risen so much. Rather than assuming that the market is always efficient and priced correctly.  As we are the market too. Collectively our actions move share prices as well. We are not bystanders. 

Well obviously. 

Might be to you. Not to others. 

Prism

MK62 said:

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. 

Its not the fact of having cash that I am struggling to understand, which in the dot.com example would have helped, although likely not as much as bonds would have. Its the adhoc rebalancing, or lack of, that comes from treating it a separate pot.

Having a 10% allocation of the whole retirement pot to cash vs having a 2-3 year cash pot alongside your main retirement pot both have very similar starting points. However the first example rebalances based on whichever rules you plan for (annual rebalance, cash and bonds first, prime harvesting etc). It involves no opinion or difficult decisions. It is simply there as a low volatility option with guaranteed returns as part of the whole.

The second example, keeping it as a pot separate to the whole introduces decisions that must be made. Its not going to get rebalanced each year (as that would mean its not a separate pot). When do we spend from it? Do we top it up each year that we don't spend from it to account for increased inflation and keeping it good for a 2-3 year spend. Where does that money come from to keep it up with inflation? These are all judgement calls to make unless we come up with a formula that we follow regardless. I have never seen anyone put forward a reliable cash pot spend and replenishment formula - the usual is use it when the markets are down...

So sure, hold cash as part of the portfolio but don't treat it as a separate thing with its own rules. Rebalance it along with everything else and keep it simple. If there is a stock market crash then the fact it reduces that overall impact means it has already worked.
  

zagfles

MK62 said:

zagfles said:

MK62 said:

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......

There's a difference between using a long term plan and sticking to it than making it up as you go along.

Perhaps, but who said anything about not having a long term plan?......all we are talking about here is deciding when to sell assets to cash in order to make a withdrawal. I will most likely be making a withdrawal in the next tax year (and so selling assets to cash to do just that) .......at the moment, I doubt very much I'll be doing that in April, but if your "long term plan" says to do just that, then fine, go with it. I will however rebalance things.

zagfles said:

 Do people do the same during the accumulation phase?

"No, I won't invest my pension contribution this month, the market's very high, I'll leave it in cash for now"

I'd wager anyone who made such "judgement calls" during the accumulation phase is worse off than someone who just stuck with the plan of investing their contribution monthly without thinking they know better than the market. Short term market timing is a mug's game.

No, they don't in general.......but the decumulation phase isn't the same.......during accumulation, downturns are an opportunity, whereas in decumulation, they are anything but........

As for your wager.....well there's no way to know either way. I suspect over the last 10 years, you may well be right.....apart from a few blips it's generally been a constantly rising market until now......but perhaps over the preceding 10 years the story might be very different.......and as for the next 10, well who knows?

It's pointless having a long term plan if you don't stick to it and make short term market timing decisions. If your long term plan is something like Prime Harvesting for instance, you'll never sell equities except after they've risen by a substantive amount eg 20% (unless you end in the extreme scenario of 100% equities, but in such cases most alternative strategies would likely have fared far worse).

A plan that eg involves selling equities once a year to fund withdrawals doesn't seem sensible, it's far too tempting to give in to short term market timing temptation. A strategy like PH is also market timing, but on a far longer term scale. As are virtually all drawdown and even accumulation strategies when you think about it, as they all make the underlying assumption that equities grow long term, otherwise why use equities?

So it's still a gamble, but less of a gamble than short term speculation of market direction. Longer term prediction of market direction is more reliable though obviously not totally reliable. So stuff like PH effectively extends and long-term'ises the "cash buffer" strategy, with a solid defined plan rather than relying on off the cuff "judgement calls" where your speculate on short term market movements.

PS I'm not saying PH is the best strategy and it's right for everyone, I'm not even totally sure I'll use it myself, but I'll certainly be using some sort of long term strategy that doesn't rely on having to make judgements on short term market movements, and is based on a logical rather than emotional attitude to risk.

zagfles

Prism said:

MK62 said:

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. 

Its not the fact of having cash that I am struggling to understand, which in the dot.com example would have helped, although likely not as much as bonds would have. Its the adhoc rebalancing, or lack of, that comes from treating it a separate pot.

Having a 10% allocation of the whole retirement pot to cash vs having a 2-3 year cash pot alongside your main retirement pot both have very similar starting points. However the first example rebalances based on whichever rules you plan for (annual rebalance, cash and bonds first, prime harvesting etc). It involves no opinion or difficult decisions. It is simply there as a low volatility option with guaranteed returns as part of the whole.

The second example, keeping it as a pot separate to the whole introduces decisions that must be made. Its not going to get rebalanced each year (as that would mean its not a separate pot). When do we spend from it? Do we top it up each year that we don't spend from it to account for increased inflation and keeping it good for a 2-3 year spend. Where does that money come from to keep it up with inflation? These are all judgement calls to make unless we come up with a formula that we follow regardless. I have never seen anyone put forward a reliable cash pot spend and replenishment formula - the usual is use it when the markets are down...

So sure, hold cash as part of the portfolio but don't treat it as a separate thing with its own rules. Rebalance it along with everything else and keep it simple. If there is a stock market crash then the fact it reduces that overall impact means it has already worked.
  

Exactly - it doesn't even need to be part of your "pension", we'll have cash outside the pension as you get much better interest rates unwrapped and we'll use the £1k PSA plus £5k "0% starting rate" to avoid tax on interest, but we'll treat the total holistically, as one pot.

Then if I want to spend cash but drawdown from the pension to use up my income tax allowance, but have only equities in the pension, I'd sell equities in the pension and buy equities outside at the same time eg in an ISA using my unwrapped cash, so maintaining the same equity level.

MK62

Out of curiosity then, when does your plan tell you to make your cash withdrawal(s), and what criteria drive that decision?