As I approached retirement in 2007 I think I reached about 30% cash and another 20% gold/bear market fund. I thought negative consumer savings, in particular, would cause problems in the coming years, in addition to the higher profile mortgage problems. The plan was to go ahead and spend the cash before selling any equities. Not a big hit to the lifetime return of the portfolio (cash for a few years, but 100% equities as a long term goal), but insurance against a bear market just as I retired. A good time to be conservative. Plus DW decided not to retire with me, a big margin of safety but we still had to make significant portfolio withdrawals (about 2%) with a kid in college.
All of that cash went back into equities from 2008 to 2009. I sold the gold and bear fund and went long with that money fairly early, with the market a little less than 20% down. The cash went back in in about 7 equal steps spaced at 5% to 10% market drops. In March 2009 at the bottom of the dip we probably hit 99% equities, with enough cash for the next few months, and maybe 10% of the portfolio using borrowed money. In 2009 I was selling some equities as we needed more cash. But that was after gains in the market, so the investments were working.
In 2010 the portfolio value was back to a level that supported my original retirement plans plus a decent margin. I started taking more cash out at that point. We're at maybe 10% cash now (actually short-term bonds mostly), with the rest in equities. I paid back the HELOC since the interest rate was above what I can get from a CD. The equity portfolio value at the start of 2010 matched my retirement projections, plus I already have taken out the cash required for about the next two years. We actually have a 2.5% annualized investment return from 10/9/2007 to 1/14/2011 according to Quicken. I'm kind of uncomfortable with this amount of cash, but we still have the youngest kid in college and high expenses for a few more years. No Social Security or pensions coming for a while, and 59 1/2 is still about 3 years in the future. DW is still working, but only as long as she's enjoying it, kind of year to year now.
So I'm nominally 100% equities. When the equity portfolio is above retirement projections I take the excess in cash for near-term expenses. In a bear market I'll reinvest the cash if I have it. Otherwise I sell equities as needed to meet expenses. So far so good. I'd hate to have a bunch of cash or even bonds sitting around throughout 30 year retirement. If my retirement projections end up to be too conservative and the cash gets too high (3 years worth?) I'll let the equity portfolio rise and reset my expectations.
While I felt bad as my equities crashed with the market, even with very wide diversification, I felt more anxiety about the equity prices being so low and not being able to buy even more. I borrowed from my home equity line of credit in order to buy at what ended up as the very bottom of the market. My next step would have been to allocate less to conservative assets and move it to assets likely to rise first in a recovery.
Certainly not for everyone. It takes a little work and flexibility, and maybe an unusual mindset, but it's what I feel most comfortable with.
