Rebalancing in bear market de-cumulation

MK62

zagfles said:

Eh? That's perfectly clear in the PH plan, as I said above. You sell when equities have risen 20% (above inflation). That's when. Obviously there's the question of how often you check, probably monthly, or maybe more often if you're getting close. In the meantime, you drawdown from cash/bonds.

You really don't get it. PH doesn't "ignore" SOR risk, it's what it's designed for! It prevents having to sell equities during periods of bad returns in all but the most extreme circumstances, provided you start from a relatively high bonds/cash percentage, which as above I intend to. Read McClung's book, or at least the free part of it linked from the the monevator link above. 

....and if equities don't rise 20% above inflation before your bonds run out?

Once the bonds are gone, you effectively then have no plan......just a portfolio of 100% equities and a monthly drawdown figure inherited from the now spent plan......you wouldn't really have avoided equity sequence risk at all....just kicked the can down the road.....and it still won't tell you when to sell your remaining equities either.... .

Also, why do you think SOR risk can only affect equities and not bonds?

DT2001

MK62 said:

zagfles said:

Eh? That's perfectly clear in the PH plan, as I said above. You sell when equities have risen 20% (above inflation). That's when. Obviously there's the question of how often you check, probably monthly, or maybe more often if you're getting close. In the meantime, you drawdown from cash/bonds.

You really don't get it. PH doesn't "ignore" SOR risk, it's what it's designed for! It prevents having to sell equities during periods of bad returns in all but the most extreme circumstances, provided you start from a relatively high bonds/cash percentage, which as above I intend to. Read McClung's book, or at least the free part of it linked from the the monevator link above. 

....and if equities don't rise 20% above inflation before your bonds run out?

Once the bonds are gone, you effectively then have no plan......just a portfolio of 100% equities and a monthly drawdown figure inherited from the now spent plan......you wouldn't really have avoided equity sequence risk at all....just kicked the can down the road.....and it still won't tell you when to sell your remaining equities either.... .

Also, why do you think SOR risk can only affect equities and not bonds?

My understanding (and I’m new to PH so maybe incorrect) is that if you end up with 100% equities the bear market would have been dire. My reasoning being - assume 60/40 portfolio with the 40% in bonds/‘cash’ (I’ve seen suggested a bond ladder to provide minimal downside) should last 10 years at a U.K. SWR unless long term high inflation. How often in history has a bear market lasted that long?

Again it shows that flexibility in your plan is the key. You will not just watch your original strategy failure without taking some action.

zagfles

MK62 said:

zagfles said:

Eh? That's perfectly clear in the PH plan, as I said above. You sell when equities have risen 20% (above inflation). That's when. Obviously there's the question of how often you check, probably monthly, or maybe more often if you're getting close. In the meantime, you drawdown from cash/bonds.

You really don't get it. PH doesn't "ignore" SOR risk, it's what it's designed for! It prevents having to sell equities during periods of bad returns in all but the most extreme circumstances, provided you start from a relatively high bonds/cash percentage, which as above I intend to. Read McClung's book, or at least the free part of it linked from the the monevator link above. 

....and if equities don't rise 20% above inflation before your bonds run out?

Once the bonds are gone, you effectively then have no plan......just a portfolio of 100% equities and a monthly drawdown figure inherited from the now spent plan......you wouldn't really have avoided equity sequence risk at all....just kicked the can down the road.....and it still won't tell you when to sell your remaining equities either.... .

Also, why do you think SOR risk can only affect equities and not bonds?

Again - read McClung's book instead of trying to pick holes in something you don't understand. It's comprehensively analysed and backtested using historic data from international markets. It might not be for you, you might prefer having a cash buffer and making short term market timing "judgement calls".  Good luck with that.

zagfles

DT2001 said:

MK62 said:

zagfles said:

Eh? That's perfectly clear in the PH plan, as I said above. You sell when equities have risen 20% (above inflation). That's when. Obviously there's the question of how often you check, probably monthly, or maybe more often if you're getting close. In the meantime, you drawdown from cash/bonds.

You really don't get it. PH doesn't "ignore" SOR risk, it's what it's designed for! It prevents having to sell equities during periods of bad returns in all but the most extreme circumstances, provided you start from a relatively high bonds/cash percentage, which as above I intend to. Read McClung's book, or at least the free part of it linked from the the monevator link above. 

....and if equities don't rise 20% above inflation before your bonds run out?

Once the bonds are gone, you effectively then have no plan......just a portfolio of 100% equities and a monthly drawdown figure inherited from the now spent plan......you wouldn't really have avoided equity sequence risk at all....just kicked the can down the road.....and it still won't tell you when to sell your remaining equities either.... .

Also, why do you think SOR risk can only affect equities and not bonds?

My understanding (and I’m new to PH so maybe incorrect) is that if you end up with 100% equities the bear market would have been dire. My reasoning being - assume 60/40 portfolio with the 40% in bonds/‘cash’ (I’ve seen suggested a bond ladder to provide minimal downside) should last 10 years at a U.K. SWR unless long term high inflation. How often in history has a bear market lasted that long?

Again it shows that flexibility in your plan is the key. You will not just watch your original strategy failure without taking some action.

Indeed, also the historic testing seems to show when you do get the extreme case of 100% equities, it's at a time (naturally) when valuations are low, so a good time historically to be in 100% equities. But it's actually very rare you end up in 100% equities, and if you do, the plan hasn't "failed" anyway, it's part of the plan. Other plans would likely have fared worse in long bear markets.

MK62

DT2001 said:

My understanding (and I’m new to PH so maybe incorrect) is that if you end up with 100% equities the bear market would have been dire. My reasoning being - assume 60/40 portfolio with the 40% in bonds/‘cash’ (I’ve seen suggested a bond ladder to provide minimal downside) should last 10 years at a U.K. SWR unless long term high inflation. How often in history has a bear market lasted that long?

Again it shows that flexibility in your plan is the key. You will not just watch your original strategy failure without taking some action.

Well, no 10 year bear market is required really.....remember, with Prime Harvesting, equities aren't touched until/unless they rise 20% "above inflation".

Admittedly, adjusted equity returns would have to be fairly weak, probably inflation higher than average, and returns from bonds poor (ie below inflation) too......but does this sound familiar?

History?.....well, if you'd retired in Jan 2000 (fair enough, a bad time to retire in hindsight, but nobody knew that at the time), with an All Share tracker, then including dividends, it wouldn't have hit 20% above inflation until 2017 - to be fair, high bond returns pre GFC might well have mitigated that to some degree, but for 17 years?

An S&P 500 tracker would have taken 14-15 years (in dollar terms....probably less in GBP terms, but I don't have that data).

I totally agree about flexibility......and modifying the PH strategy with variable withdrawals would certainly move the goalposts (and completely change the strategy).....but it always seems to boil down to varying withdrawals.....in the end, it's pretty much the only thing you can control (at least to a degree anyway).

Thrugelmir

DT2001 said:

MK62 said:

zagfles said:

Eh? That's perfectly clear in the PH plan, as I said above. You sell when equities have risen 20% (above inflation). That's when. Obviously there's the question of how often you check, probably monthly, or maybe more often if you're getting close. In the meantime, you drawdown from cash/bonds.

You really don't get it. PH doesn't "ignore" SOR risk, it's what it's designed for! It prevents having to sell equities during periods of bad returns in all but the most extreme circumstances, provided you start from a relatively high bonds/cash percentage, which as above I intend to. Read McClung's book, or at least the free part of it linked from the the monevator link above. 

....and if equities don't rise 20% above inflation before your bonds run out?

Once the bonds are gone, you effectively then have no plan......just a portfolio of 100% equities and a monthly drawdown figure inherited from the now spent plan......you wouldn't really have avoided equity sequence risk at all....just kicked the can down the road.....and it still won't tell you when to sell your remaining equities either.... .

Also, why do you think SOR risk can only affect equities and not bonds?

How often in history has a bear market lasted that long?

Not just a question of the bear market itself. The markets peaked in July 2007 and didn't recover 2013 (4 years into the bull market) some 6 years later. For this period of time your equities portfolio would have been under water.  

Was an entire decade when the SP500 underperformed inflation (US measurement). 

Prism

MK62 said:

DT2001 said:

My understanding (and I’m new to PH so maybe incorrect) is that if you end up with 100% equities the bear market would have been dire. My reasoning being - assume 60/40 portfolio with the 40% in bonds/‘cash’ (I’ve seen suggested a bond ladder to provide minimal downside) should last 10 years at a U.K. SWR unless long term high inflation. How often in history has a bear market lasted that long?

Again it shows that flexibility in your plan is the key. You will not just watch your original strategy failure without taking some action.

Well, no 10 year bear market is required really.....remember, with Prime Harvesting, equities aren't touched until/unless they rise 20% "above inflation".

Admittedly, adjusted equity returns would have to be fairly weak, probably inflation higher than average, and returns from bonds poor (ie below inflation) too......but does this sound familiar?

History?.....well, if you'd retired in Jan 2000 (fair enough, a bad time to retire in hindsight, but nobody knew that at the time), with an All Share tracker, then including dividends, it wouldn't have hit 20% above inflation until 2017 - to be fair, high bond returns pre GFC might well have mitigated that to some degree, but for 17 years?

An S&P 500 tracker would have taken 14-15 years (in dollar terms....probably less in GBP terms, but I don't have that data).

I totally agree about flexibility......and modifying the PH strategy with variable withdrawals would certainly move the goalposts (and completely change the strategy).....but it always seems to boil down to varying withdrawals.....in the end, it's pretty much the only thing you can control (at least to a degree anyway).

In the Jan 2000 example bonds beat inflation by between 3%-4% until around 2016 where they dropped off to 3%. MCSI World hit its +20% target in around 2014. Stress levels aside, I believe a 2000 retiree had it pretty easy.

I think our current situation might be more like the 1970s with bonds doing very little and equities worse. Still, this is fully tested in the McClung book and PH survives that period better then the standard 60/40 with yearly rebalancing model. A cash pot model is also tested which copes with a 4% withdrawal too.

NannaH

This is all very interesting, I have a question : say you’ve had 5 years living off cash/bonds and it’s almost gone, your equity portion has grown by 20% above inflation - but you would have to sell 40% to put you back to the original split, No?    So then you have enough cash for the next 5 years but what if there is no growth, or even a drop over that period?
You now have less than 80% of the original amount and would have to sell another 40% (assuming you needed the income).  Not a problem with a £1million pot but very worrying if you only have say £150k,  you’d have £90k left in equities that could easily lose half it’s value or more with a bad five years. 

It’s a nasty potential scenario for the next decade with the way things are going. 

Also,  I imagine far fewer people will have the back up of even a small DB pension in the future. 

We’re lucky and can shove another £5k per year into a Sipp for the next 5-7 years, assuming we aren’t all made bankrupt by energy prices😱

Thrugelmir

NannaH said:

This is all very interesting, I have a question : say you’ve had 5 years living off cash/bonds and it’s almost gone, your equity portion has grown by 20% above inflation - but you would have to sell 40% to put you back to the original split, No?    So then you have enough cash for the next 5 years but what if there is no growth, or even a drop over that period?
You now have less than 80% of the original amount and would have to sell another 40% (assuming you needed the income).  Not a problem with a £1million pot but very worrying if you only have say £150k,  you’d have £90k left in equities that could easily lose half it’s value or more with a bad five years. 

It’s a nasty potential scenario for the next decade with the way things are going. 

Also,  I imagine far fewer people will have the back up of even a small DB pension in the future. 

We’re lucky and can shove another £5k per year into a Sipp for the next 5-7 years, assuming we aren’t all made bankrupt by energy prices😱

Hence why annuities were once a popular choice for retirees. Markets have never behaved any differently. 

Prism

NannaH said:

This is all very interesting, I have a question : say you’ve had 5 years living off cash/bonds and it’s almost gone, your equity portion has grown by 20% above inflation - but you would have to sell 40% to put you back to the original split, No?    So then you have enough cash for the next 5 years but what if there is no growth, or even a drop over that period?
You now have less than 80% of the original amount and would have to sell another 40% (assuming you needed the income).  Not a problem with a £1million pot but very worrying if you only have say £150k,  you’d have £90k left in equities that could easily lose half it’s value or more with a bad five years. 

It’s a nasty potential scenario for the next decade with the way things are going. 

Also,  I imagine far fewer people will have the back up of even a small DB pension in the future. 

We’re lucky and can shove another £5k per year into a Sipp for the next 5-7 years, assuming we aren’t all made bankrupt by energy prices😱

Your pot is there to be spent - its entirely possible that it drops over time. In your example it sounds like someone has made it 10 years through their retirement and still has over half the money left even though returns have been poor. The backup in the UK is the state pension if there is no DB and the maths is no different for a small pot vs a large pot.

This rebalancing choice is just one piece of the puzzle. Another important on is a variable withdrawal rate so you may need to cut income if things get dire. That can be temporary or permanent. Another is setting the equity vs bond/cash split so you are happy with the risk. Someone with a high equity split like you example should be prepared to allow the pot to get very low if needed before hopefully a recovery.

The maths is all optional - its there just to let you know that if you follow it there would have been no time in history that it wouldn't have worked. Obviously, this time could be different but we can only work with what we have.