Rebalancing in bear market de-cumulation

Prism

Its probably worth putting some numbers on these rebalancing approaches at this point. All the below examples start with a 60/40 equities/bonds split but you could probably (untested) swap some of the bonds for cash without changing things much. They also assume a 100% success rate over 30 years. No separate property allocation, no DB or state pension, no gold etc. The point is to see what the lowest safe withdrawal rate would be over the last 90 years or so.

US stocks and bonds 

Standard yearly rebalance - 4%
Prime harvesting - 4.4%

UK stocks and bonds

Standard yearly rebalance - 3%
Prime harvesting - 3.7%

Japan stocks and bonds

Standard yearly rebalance - 3.3%
Prime harvesting - 3.8%

With numbers like these you could argue there is no need for backup cash pot since you never actually run out. Most pots end up much bigger than they started. The boost in SWR lets you either take more income, retire for longer or gives you a bigger safety net.

As mentioned above, in very difficult conditions the bond allocation can get very low and the equity allocation high. This happened in the 1970s when both bond and equity returns were poor, and yet the pot still survived because the equites were mostly intact just as the 80s boom hit.

coyrls

Thrugelmir said:

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). 

It's not going to work trying to find historical situations where a plan won't work, when the plan has been tested against those very historical situations.  It's perfectly possible that in the future there will be a situation where the plan fails.

DT2001

Thrugelmir said:

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). 

If your portfolio is ‘under water’ during the time your drawing off the bonds/cash element it doesn’t matter (other than peace of mind). If when you have to turn to drawing from equities it would be good for it to be at least equal to the original value so that you can continue your decumulation whilst most of your portfolio recovers as a bull market would hopefully just be around the corner.
The odds are very small of this happening so I’d suggest a plan to deal with it, that suits your own circumstances e.g.
If retiring 10 years before SPA and after years 1 and 2 your fund is down 35% you’ll find part time work
or
If retiring closer to SPA and the fund is down X % after 5 years downsize or drop spending by say 25%

If you are not willing to compromise on your drawdown amount adjusted for inflation work longer.

Each individual needs to model their own case. Having spent 26 years self employed we can cope with fluctuating income as part of life but know that the certainty of £x on the same day each month is necessary for others.

DT2001

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".

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).

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

You can choose to wait to retire and have a bigger pot or put in place a plan to cope with the small % chance of retiring in the ‘wrong’ year e.g. as you say varying withdrawals, downsizing or taking on p/time work in the first 5/10 years.

Thrugelmir

coyrls said:

Thrugelmir said:

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). 

It's not going to work trying to find historical situations where a plan won't work, when the plan has been tested against those very historical situations.  It's perfectly possible that in the future there will be a situation where the plan fails.

Merely giving actual examples. As back testing itself can often mean very little. For someone invested in 2007. Four years of the bull market stating in 2009 meant nothing other than recovery.

 Far too easy to look at the past in terms of today. Investing was was a very different activity. No instanteous trading for example. Used to take weeks not seconds to receive settlement or take ownership.

zagfles

DT2001 said:

Thrugelmir said:

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). 

If your portfolio is ‘under water’ during the time your drawing off the bonds/cash element it doesn’t matter (other than peace of mind). If when you have to turn to drawing from equities it would be good for it to be at least equal to the original value so that you can continue your decumulation whilst most of your portfolio recovers as a bull market would hopefully just be around the corner.
The odds are very small of this happening so I’d suggest a plan to deal with it, that suits your own circumstances e.g.
If retiring 10 years before SPA and after years 1 and 2 your fund is down 35% you’ll find part time work
or
If retiring closer to SPA and the fund is down X % after 5 years downsize or drop spending by say 25%

If you are not willing to compromise on your drawdown amount adjusted for inflation work longer.

Each individual needs to model their own case. Having spent 26 years self employed we can cope with fluctuating income as part of life but know that the certainty of £x on the same day each month is necessary for others.

Indeed. Any strategy that includes equities is not going to do well if equities decline for a decade or longer. That's obvious. So whatever strategy you use, you might have to get a PT job, reduce your spending etc. 

However, PH is likely to do better than annual rebalancing in that situation, because even if you end up with 100% equities after 9 or 10 years and have to sell equities for a year or two to eat, you should be far better placed when the recovery eventually comes than someone who has maintained a 60/40 balance throughout as they won't get as much benefit from the recovery.

Also better than than someone who maintained a 80/20 balance throughout, as they had more equities to start with so would be harder hit by the decline, as well as being worse placed when the recovery comes.

MK62

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

DT2001

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

MK62

DT2001 said:

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

Fair enough.....that's the question I was asking.

It's pretty much the definition of a forced seller though.......generally, not where I want to be tbh, but if you're happy......

Don't kid yourself that it's not your decision though.

zagfles

MK62 said:

DT2001 said:

MK62 said:

DT2001 said:

Equities are used to fund income IF bonds/cash run out even if they haven’t hit the 20% above inflation figure.

Yes, exactly.......but you still have to decide when to sell them....they won't sell themselves.

I am not sure what you point you are making. If your decumulation plan is to withdraw monthly/annually (maybe dictated by the platform rules/charges) you sell at that time and put into your bank account. When you get to point X when you have no cash/bonds you sell to provide income - you don’t decide, your circumstances dictate.

Fair enough.....that's the question I was asking.

It's pretty much the definition of a forced seller though.......generally, not where I want to be tbh, but if you're happy......

Don't kid yourself that it's not your decision though.

In my draft PH plan, I would sell equities

a) Once they've risen 20% in real terms

b) In the extreme event of ending up in 100% equities, eg after a 10 year bear market, then I'd sell them monthly to tie in with my provider's drawdown calendar (eg HL it's usually the 17th of the month).

What's your plan? How do you time your sales? How would it cope with a 10 year bear market?