Rebalancing in bear market de-cumulation

DT2001

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.

It is a decision based on need for income not trying to second guess/time the market which is what we are trying to avoid?

Prism

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.

Its not that using something like prime harvesting changes the asset allocation - you can still hold cash if you want. Its just that the cash is included in the main pot as something be rebalanced along with bonds and equities. PM just takes the decision of what to sell, or not sell if its already cash, away. Its based on a formula rather than an ad-hoc cash buffer approach.

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

MK62

Prism said:

Its not that using something like prime harvesting changes the asset allocation - you can still hold cash if you want. Its just that the cash is included in the main pot as something be rebalanced along with bonds and equities. PM just takes the decision of what to sell, or not sell if its already cash, away. Its based on a formula rather than an ad-hoc cash buffer approach.

It's not the "what to sell" I was asking about, more the "when to sell" it.......

Prism said:

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

You'd need to explain that further......it's a hugely sweeping statement.

Need and want are different.......the higher the equity percentage of your investment portfolio, and the higher the withdrawal rate, the more desirable a cash buffer becomes......but, true, you don't actually need one per se.

I'm not sure about "assuming that 'this time its different'".......for me, it might be more "in case it's different".......but your statement could easily be reversed as "anyone who doesn't keep a cash buffer is assuming that "this time it'll be the same again"....... .

MK62

DT2001 said:

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.

It is a decision based on need for income not trying to second guess/time the market which is what we are trying to avoid?

Yes, but if that need coincides with a general market slump?......it's not about trying to get the best price, more about avoiding being forced into taking the worst one.......middle of the road is fine for me.

Audaxer

Prism said:

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.

Worth repeating that there has never historically been a need to hold any cash at all in a retirement pot, outside of that years spends. So anyone that has cash either in the pot or in a separate cash buffer is assuming that 'this time its different'. The only reason it might be different is due to QE and the current price of bonds but that is far from a given. 

In these cases where no cash was held in retirement pots, some retirees must have had to sell equities in bear markets. That could be very risk especially if you have a poor sequence of returns in the first decade of retirement. If you have a relatively small percentage withdrawal rate, your portfolio will probably survive, but if you require a higher withdrawal rate than say 4% I think it is too risky to have no cash buffer. 

MK62

zagfles said:

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?

I'm not sure you'd understand my plan......

It doesn't need to be a 10 year bear market......a couple of bad years at the start, coupled with high inflation and poor bond performance might make ending up in 100% equities not quite as extreme an event as you might think.

Selling?....I'm not trying to get the best price (it'd be nice but it's not realistic)....it's more about avoiding being forced into taking the worst (though it's my choice). If an equity bear market did persist for 10 years then eventually I'd be screwed, just like everyone else who is invested in that market......I could only ride it out for so long before I too would become a forced seller. This all general talk though.....in reality it would depend on what you were invested in.

It also depends on exactly how you'd characterise a 10 year bear market - the longest on record (2000-2002) was about 2.5 years, "officially".....but the S&P 500 TR took 6 years to get back to the same level it was in mid 2000.......inflation adjusted, just under 13 years......(and 14 years before it hit +20% above inflation). The total return on bonds, generally, was good pre GFC, as were returns on cash (interest rates were relatively high, and inflation close to long term average) - this is definitely not what we have now, and nor are we likely to return to that any time soon, unfortunately.

Phrygian

Just reading all this makes my brain hurt. Maybe I'm not cut out for investing. Maybe I should use my investments to clear off the mortgage debt on my BTLs and just live of the returns from those plus state pension. Maybe.

Audaxer

MK62 said:

zagfles said:

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?

I'm not sure you'd understand my plan......

It doesn't need to be a 10 year bear market......a couple of bad years at the start, coupled with high inflation and poor bond performance might make ending up in 100% equities not quite as extreme an event as you might think.

Selling?....I'm not trying to get the best price (it'd be nice but it's not realistic)....it's more about avoiding being forced into taking the worst (though it's my choice). If an equity bear market did persist for 10 years then eventually I'd be screwed, just like everyone else who is invested in that market......I could only ride it out for so long before I too would become a forced seller. This all general talk though.....in reality it would depend on what you were invested in.

It also depends on what percentage income you are drawing from your portfolio. 4% is the often quoted 'Safe Withdrawal Rate' but that is unlikely to survive a 10 year bear market at the start of your retirement. If you are lucky enough to only need a 2% withdrawal rate, I would think that is probably going to survive a 10 year bear market, even at the start of retirement.

zagfles

MK62 said:

zagfles said:

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?

I'm not sure you'd understand my plan......

It doesn't need to be a 10 year bear market......a couple of bad years at the start, coupled with high inflation and poor bond performance might make ending up in 100% equities not quite as extreme an event as you might think.

Selling?....I'm not trying to get the best price (it'd be nice but it's not realistic)....it's more about avoiding being forced into taking the worst (though it's my choice). If an equity bear market did persist for 10 years then eventually I'd be screwed, just like everyone else who is invested in that market......I could only ride it out for so long before I too would become a forced seller. This all general talk though.....in reality it would depend on what you were invested in.

It also depends on exactly how you'd characterise a 10 year bear market - the longest on record (2000-2002) was about 2.5 years, "officially".....but the S&P 500 TR took 6 years to get back to the same level it was in mid 2000.......inflation adjusted, just under 13 years......(and 14 years before it hit +20% above inflation). The total return on bonds, generally, was good pre GFC, as were returns on cash (interest rates were relatively high, and inflation close to long term average) - this is definitely not what we have now, and nor are we likely to return to that any time soon, unfortunately.

So, you're not going to tell us your plan after obsessing over intricate details like exact sell dates on ours

But yes you make a good point about the definition of a long bear market - with PH it doesn't matter how long the bear market is, what matters is when the market gets to the point where it's 20% up. So in the 2000 case, it would be 14 years, so if you started with a 60/40 allocation, you'd be living off cash/bonds for the first 10 years (even assuming a zero real return on cash/bonds for that period, it was probably positive on average 2000-2010). The actual sequence of returns during the first 10 years don't matter, it's just the overall change that matters, because you're not selling equities.

Then from 2010-2014 you'd be in 100% equities, selling equities for your drawdown, until 2014 when equities have risen 20% so you can now start selling equities into cash/bonds. So you would be selling some equities at a loss, but being in 100% equities from 2010 was an excellent time to be in 100% equities, so using PH from 2000 would likely have beaten any annual rebalancing strategy with or without a few years' cash buffer. McClung analyses similar scenarios. When I have time I'll have a go at PH for that period compared to annual rebalancing.

The current negative real returns on cash/bonds don't actually make a vast difference to how long they'll last, even if they averaged -3%, they'd last almost 9 years before having to sell equities. But in a scenario of -3% returns on cash/bonds and negative or zero returns on equities, no realistic plan is going to do well. PH would still likely do better than most. PH is actually quite a cautious approach, it doesn't do as well in an extended strong bull market as the equity % will be decreasing all the time. But those who have an emotional attitude to risk may panic at the thought of possibly being in 100% equities...so probably not for them.

zagfles

Phrygian said:

Just reading all this makes my brain hurt. Maybe I'm not cut out for investing. Maybe I should use my investments to clear off the mortgage debt on my BTLs and just live of the returns from those plus state pension. Maybe.

Deciding what plan to use can involve in depth technical discussions, but implementing the plan is usually fairly easy. A bit like deciding which car to get can involve in depth technical analysis but driving it is easy.

Most drawdown plans are simple. Far simpler than understanding all the rules, responsibilities, legal requirements etc of being a landlord, what to do if your tenant doesn't pay rent and wrecks the place, or gets an unauthorised pet etc etc.