How to be sure a bond fund is hedged

Pat38493

dunstonh said:

OK but then how do you decide when to draw only from cash?

You would always be drawing from the cash.   However, it is a judgement call when to replenish the case through sale of units.

 For example, during 2022 when values were falling, you wouldn't be replenishing that cash through sales of units.  It would just be div/int distributions from the inc units going in.

In normal periods with minor movements, you wouldn't be concerned but during larger negative periods, you would hold back selling units.

I'd be interested to know what you think of the following:
https://earlyretirementnow.com/2021/09/14/bucket-strategies-swr-series-part-48/
https://www.theretirementmanifesto.com/is-the-bucket-strategy-a-cheap-gimmick/
https://earlyretirementnow.com/2023/01/25/discussing-retirement-bucket-strategies-with-fritz-gilbert-swr-series-part-55/

Reading through this I am getting the impression that the bucket strategy is more of a psychological crutch than something that is truly going to make significant differences (on average) to your overall outcome.  The main real difference in this from a standard regular rebalancing is the aspect of adjusting your strategy when "markets are down".

This leaves the question - how do you know when markets are down or up.  Example - right now.  Markets are down compared to their peak in 2021.  However if I google a few financial news articles from recent days, I can find articles stating that we are now in a bull market, articles stating we are just about to have another crash, and articles stating that we will be stuck in a cycle of returns < inflation for a while.  If even experts can't agree how are we supposed to judge?

"Markets up" - also what does this mean - bear markets might typically last a couple of years, but in reality, if you measure the time it takes to get back to the true position you were in before i.e. markets back to the previous peak PLUS even more to compensate for inflation during the intervening time, the average length is more like 10 years according to some tables in those blogs.  Carrying a 10 years cash float is going to hit your average returns quite hard.

So I guess my issue is - give me rule to know when "markets are down" and "markets are up".

dunstonh

This leaves the question - how do you know when markets are down or up.

You are not looking for peak or trough as you cannot time the markets.  However, you do know when a market is down.

 However if I google a few financial news articles from recent days, I can find articles stating that we are now in a bull market, articles stating we are just about to have another crash, and articles stating that we will be stuck in a cycle of returns < inflation for a while.  If even experts can't agree how are we supposed to judge?

Some markets are now in a bull market as they measure that from the low point to the current.   However, a bull market doesn't mean its a new peak.

"Markets up" - also what does this mean - bear markets might typically last a couple of years, but in reality, if you measure the time it takes to get back to the true position you were in before i.e. markets back to the previous peak PLUS even more to compensate for inflation during the intervening time, the average length is more like 10 years according to some tables in those blogs.  Carrying a 10 years cash float is going to hit your average returns quite hard.

Some periods are even longer.  The ten year period between 2000 and 2009 saw equities lower than at the start.   US equities were worse than global and that ignores inflation.   You have to accept that you cannot cover all periods and have to accept loss in value.  That is why sustainable draw rates are lower than what many people think.

But lets say your cash float is 2 years worth of draw.  And your dividend/interest yield from all buckets gets you another three years worth of draw, then it may be 5 years before you need to refloat the cash.     You just make a judgement call each year as to whether its a good time to refloat or not.    2022 was not a good year.  2023 may not be either or 2024.  However, consecutive negative years are not commonplace. triple years even less so and four years is extremely rare.   Judgement calls will need to be made.

Reading through this I am getting the impression that the bucket strategy is more of a psychological crutch than something that is truly going to make significant differences (on average) to your overall outcome.  The main real difference in this from a standard regular rebalancing is the aspect of adjusting your strategy when "markets are down".

Bucketing will likely reduce returns if you get long sustained growth periods but will reduce losses if you get long sustained negative periods.  If you are looking to ensure that what money you have is going to last your life then bucketing would mean you are less likely to run out of money if returns are lower than expected. 

So, what is more important to you.   Protecting what you have and making sure it does its job for your lifetime or aiming for an increased legacy which may, in rarer cases result in you running out money in your lifetime?

All the different strategies will have periods when they are better than the rest.  There is no consistent best strategy in respect of what will give the highest outcome.   However, some are better are sustainability than others.

Prism

JohnWinder said:

 how do you set the criteria for that, and more importantly how do you set the criteria for when to start topping up your cash bucket again?

A wide range of options have been proposed: from 20 years spending as cash, topped every 2 years, to no cash held. People have tested the approaches against historical returns, and some work better than others at different times. You’ll never know which will be best as it depends on an arrangement that perfectly aligns with the sequence and size of future returns. There have been books written on it: Living of you money, by McClung, and earlyretirementnow.com has a whole series of posts on it.

For what its worth, McClung found that a reasonably strong approach was when using a cash/bond bucket, spend it all first regardless of market conditions until it is gone and then start selling equities. No decisions or timing required.

Still wasn't the best strategy overall, which included no buckets at all.

Pat38493

dunstonh said:

But lets say your cash float is 2 years worth of draw.  And your dividend/interest yield from all buckets gets you another three years worth of draw, then it may be 5 years before you need to refloat the cash.     You just make a judgement call each year as to whether its a good time to refloat or not.    2022 was not a good year.  2023 may not be either or 2024.  However, consecutive negative years are not commonplace. triple years even less so and four years is extremely rare.   Judgement calls will need to be made.

So it seems like you look at this more on the level of whether the last year between your last "judgement call" was good or bad (+ve or -ve) rather than looking on a cumulative basis or looking towards crossover points between peaks?

However there still seems to be plenty of naysayers who will say that the judgement calls will end up a mater of luck and you might end up better or worse off, and the differences will not be huge.  Adopting a bucket or a glidepath strategy might give you a very marginal increase in your safe withdrawal rate, but simply having a cash allocation in your re-balanced portfolio isn't that much different unless you get the "judgement calls" right more often than wrong.

leosayer

I'm resurrecting this thread because I've been thinking about Pat38493's earlier question in relation to my own retirement savings plan. "So I guess my issue is - give me rule to know when "markets are down" and "markets are up"."

My concern was that any such rule would have to be quite complex, subjective and it felt like trying to time the market which is not something I try and do any more.

After quite a bit of research I've settled on the old 60/40-style approach with periodic (eg. quarterly) rebalancing. I'm currently at 20% Cash/Bonds and 80% Equities but all my future contributions are into bond funds and I'm targetting an eventual 75/25 split before I retire.

The main benefit is that there is no market timing involved and the rules are simple to follow.

The video linked below was one that helped me to confirm this approach however it is from the US and is quite long:

https://youtu.be/fNP62fSLg1U