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Asset Allocation - Rebalancing when approaching ER or Retired
Old 10-21-2008, 04:35 AM   #1
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Asset Allocation - Rebalancing when approaching ER or Retired

This thread is about rebalancing between Fixed and Equity positions in the portfolio.

During the accumulation phase, it makes sense to set those equity positions fairly aggressively and put money in the fixed when there is an equity run up and use the excess fixed to buy equity when the stock market drops. It helps to lockin profits and buy low (without trying to time).

But when one is approaching the draw down phase, some choose a slightly different approach than that used during accumulation.

I am about 3 years from ER. My general plan has been to shoot for a 60/40 mix at age 55. With the 40% fixed used as a pool of money for income. Let the 60% equity grow (over years) and as it grow (one way or another) move some of it to fixed for future income... attempt to replenish the stock/fixed mix (and reduce the equity allocation as we age say 55/45 at 65 and so on). Of course dividends form equity go to fixed first... then sell stock.

But replenishing the fixed allocation would only happen if equities are growing (from stock sales). If the stock market drops, I did not intend to sell stocks in a down market (unless forced to do so). The plan is to have enough fixed to ride out the bad market.

This approach is intended to be a risk management technique to no sell during bad times.

Do you approach rebalancing this way when approaching ER? For example: In our current situation are you holding your equity position and (not buying or selling)... intending to use your fixed for income and wait out the bear?
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Old 10-21-2008, 08:38 AM   #2
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I'm not there yet. But when I get closer to retirement, I plan to look at my asset allocation not in terms of percentages but in terms of the number of years of withdrawals I keep in "safer" stuff (sort of like the Ray Lucia strategy). I suspect as retirement gets near I'll keep about 10 years of expected withdrawals in the safer stuff, and whatever is left will ride with equities.

Over that 10 year period there should be some decent opportunities to replenish the "safe stuff" buckets by selling stock when it's not depressed.
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Old 10-21-2008, 08:46 AM   #3
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My plan is to rebalance my equity portion to no more than 25% when entering retirement. I am waiting for the end of this recession so I can determine the effects of Ray Lucia's bucket theory.

Anyone currently in retirement using buckets?

How is it working for you?
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Old 10-21-2008, 08:56 AM   #4
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My plan is to rebalance my equity portion to no more than 25% when entering retirement. I am waiting for the end of this recession so I can determine the effects of Ray Lucia's bucket theory.

Anyone currently in retirement using buckets?
Close but not retired, I am pretty well bucketized per Lucia and plan to follow his withdrawal scheme after FIRE (though using a percent-of-total-assets SWR rather than 4%+inflation). I am intentionally heavy in B2 versus B1 while still working, but I'll move that back when I hit withdrawal phase.

I keep asking myself how I would react if this were the real deal (not pre-retirement with pleny of income) and repeatedly tell myself that it is very reassuring to have 12 years of at least bare-bones expenses in Buckets 1 and 2. Probably giving up some overall gains in the long haul, but more than ever it's worth that trade-off to me.

Buckets is not the only way to achieve this, but it fits together conceptually very well for me and keeps me on target.
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Old 10-21-2008, 09:18 AM   #5
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In answer to original question, Yes.

Have been retired since 2000 and (so far) feel comfortable in this approach. We have 3 buckets in our allocation, although not Ray Lucia buckets nor do we follow his approach. Our "buckets":

35% Stock
35% Wellesley Income Fund
30% Cash and Bond

By taking all dividends and interest to cash, we have normally not triggered rebalancing very often. Triggering guideline is to check at each quarter end for each of the 3 allocations to be within 5% of their target. This past quarter end we are down to a little over 31% stock. The question will be if we fall below 30% do we just continue spending out of Cash and Bond or do we also shift some $ to Stock.
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Old 10-29-2008, 04:24 AM   #6
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{bump}

I did not get many responses on this one.

Are any of you that are approaching ER or in ER or Full Retirement going to use fixed to buy equities?

For example: you were 60/40... the stock market drop puts you now at something like 40/60. Are you going to rebalance to 60/40 to capture the buying opportunity? Or are you hanging onto the fixed (not taking the risk) because it is intended to provide income in bad times?

This is exactly the situation many of us face. Will you roll the dice or sit tight? And Why?
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Old 10-29-2008, 07:15 AM   #7
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...
Are any of you that are approaching ER or in ER or Full Retirement going to use fixed to buy equities?
....
YES! retired end of Aug. after moving into bucket mode a year ago. I plan to gradually move some of ginnie mae's into stock funds to increase that allocation. When I went to re-balance in July '07, I figured the stock market was high enough for me, considering I was so close to retirement, and cashed out down to 4%. FIRECALC says I need 25% in equities but will go higher.
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Old 10-29-2008, 07:32 AM   #8
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...
Are any of you that are approaching ER or in ER or Full Retirement going to use fixed to buy equities?
....
I wish to be 62% plus-minus 5% in equities. Because of the market drop, I am now about 50% equities. I have already moved about 18% of my 401(k) from bonds to equities. I will continue to make such moves. That is, I will be rebalancing. Why? Because it works. It ain't rolling the dice.
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Old 10-29-2008, 07:32 AM   #9
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Originally Posted by chinaco View Post
{bump}

I did not get many responses on this one.

Are any of you that are approaching ER or in ER or Full Retirement going to use fixed to buy equities?

For example: you were 60/40... the stock market drop puts you now at something like 40/60. Are you going to rebalance to 60/40 to capture the buying opportunity? Or are you hanging onto the fixed (not taking the risk) because it is intended to provide income in bad times?

This is exactly the situation many of us face. Will you roll the dice or sit tight? And Why?
Yes, and I have done so this year. I have already been retired 9 years. But my portfolio has to survive another 40, so I feel that I have to sell some fixed to buy stocks when they are beaten down like they are right now. And so I did! I figure this rebalancing is necessary to keep up with inflation in the long run. The portfolio survival models assume you rebalance.

Unfortunately, my bonds have been beaten down too - just not as much. There is plenty of risk in fixed too - unless you are all US Govt bonds.

Basically, IMO you pick an asset allocation that you think appropriate for your retirement, and then you rebalance occasionally. In most cases, hopefully you are selling stocks to add to your fixed as your portfolio grows, but sometimes nasty things happen, and you do the opposite.

I do have a minimum threshold for number of years after-tax expenses in fixed income which I won't go below when rebalancing. I feel like 10 years is a rather conservative number for this.

Here's another strong motivation for rebalancing - during a long secular bear market like we are probably in (starting from 2000), the market doesn't just crash and sit there at the lows. Instead, there are usually huge stock market rallies after huge selloffs, even if it takes another 10 years to get back to a secular bull. Rebalancing lets you take advantage of this volatility and theoretically, after each crash/recovery your portfolio is better off, even if it takes 10 years for the markets to get back to new highs. In other words, the markets can appear to go nowhere for a decade, but your portfolio can still grow.

Audrey
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Old 10-29-2008, 09:18 PM   #10
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Quote:
Originally Posted by chinaco View Post
{bump}

I did not get many responses on this one.

Are any of you that are approaching ER or in ER or Full Retirement going to use fixed to buy equities?

For example: you were 60/40... the stock market drop puts you now at something like 40/60. Are you going to rebalance to 60/40 to capture the buying opportunity? Or are you hanging onto the fixed (not taking the risk) because it is intended to provide income in bad times?

This is exactly the situation many of us face. Will you roll the dice or sit tight? And Why?
I've been ERed since 2000, and I aim for 60/40. I've only had to rebalance once, in 2002 (up until this latest debacle, that is). I let it get 5% out before I even consider doing anything.
I don't have a set time to rebalance - maybe I should, but I'm not convinced. DH and I have our own model similar to Firecalc, and it rebalances on January 1st each year, but I don't.
I've settled into a pattern of buying a little bit of equity mutual finds each Friday in my IRA (I think it will be a pattern). I'm not going to leap into anything in a big way because I may not be a chicken but I've been clucking a lot lately.
We have about 10 years of expenses in fixed, all bonds and CDs and such that we plan to hold to maturity.
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Old 10-30-2008, 07:34 AM   #11
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Audrey makes good points. I have been retired since 2000 and haven't needed to do much re-balancing during that time. We have Stock, Wellesley, and Bond allocations each of which we plan to keep within 5% of their allocation. We check our allocation at the end of each quarter after distributions.

We have been thinking about changing our allocation and have decided to use this down turn to do so. We will be reducing stock 5% target-wise and looks like the market has made this change for us and we can do this passively; ie., not actually make any trades. Wouldn't do this if weren't already considering it, but this is a good time for such a passive change for those inclined.
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Old 10-30-2008, 08:07 AM   #12
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Quote:
Originally Posted by chinaco View Post
{bump}

I did not get many responses on this one.

Are any of you that are approaching ER or in ER or Full Retirement going to use fixed to buy equities?

For example: you were 60/40... the stock market drop puts you now at something like 40/60. Are you going to rebalance to 60/40 to capture the buying opportunity? Or are you hanging onto the fixed (not taking the risk) because it is intended to provide income in bad times?

This is exactly the situation many of us face. Will you roll the dice or sit tight? And Why?
Yes, I have rebalanced back to my planned 45:55 AA that I had before this market drop, and I believe that is generally the best course of action.

I was a little slow to do it because it is hard to let go of that cash when the market is looking this bad, as you have noticed! I finally managed to rebalance in three steps between October 10th-20th. It was easier a little at a time.

It's a LOT more fun to rebalance at the top! But even then, one always has the nagging feeling that rebalancing means missing out on some of the gains.

What I haven't done yet that I probably should do at some point, is to move more of my MM cash into bond funds.
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Old 10-30-2008, 08:16 AM   #13
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Yes, I have rebalanced back to my planned 45:55 AA that I had before this market drop, and I believe that is generally the best course of action.

I was a little slow to do it because it is hard to let go of that cash when the market is looking this bad, as you have noticed!
It is even more difficult to let go of that cash when you don't have a j*b and depend on it for 100% of your income.

I've not rebalanced yet, and am sitting at 38/62 rather than my desired (I think) 45/55. Maybe I'll work up the courage to do something about it in the next couple of weeks...
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Old 10-30-2008, 08:21 AM   #14
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I know rebalancing is really tough for those who have already retired! It's scary just thinking about it.

Maybe consider just moving it up to 40/60? You might decide that is where you want it to be, anyway. It's a nice, round number. If you did that in 4 steps, you'd only have to move a half of a percent per step.

When does that SS income start rolling? Pretty soon, as I recall, since you decided to take it at 62 due to market conditions lately. Maybe the day you receive your first SS paycheck would be a good time to start thinking about rebalancing at least partially.
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Old 10-30-2008, 08:26 AM   #15
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It is even more difficult to let go of that cash when you don't have a j*b and depend on it for 100% of your income.

I've not rebalanced yet, and am sitting at 38/62 rather than my desired (I think) 45/55. Maybe I'll work up the courage to do something about it in the next couple of weeks...
But in 2 weeks, we may be at 12,000. Panic buying.
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Old 10-30-2008, 08:30 AM   #16
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When does that SS income start rolling? Pretty soon, as I recall, since you decided to take it at 62 due to market conditions lately. Maybe the day you receive your first SS paycheck would be a good time to start thinking about rebalancing at least partially.
SS doesn't kick in until February. My head tells me I should do something before then even though my stomach doesn't necessarily agree. Taking a DCA approach is a good suggestion and I may do just that.
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Old 10-30-2008, 08:31 AM   #17
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But in 2 weeks, we may be at 12,000. Panic buying.
Bring it on...
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Old 10-30-2008, 08:42 AM   #18
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I think for those finding it hard to rebalance under these conditions - of course, you don't have to at all - but giving yourself a "safety net" is also one way to handle it.

How long do you think it will take for the markets to recover? Ten years? Longer? If you have that number of years expenses in cash/bonds (in today's dollars), then you have that many years "safety net" built-in and you can afford wait for the equity portion to recover. If I recall correctly, historically there has been no 10 year period in which S&P500 was negative.

Anyway - that is how I handle the angst of selling bonds/cash and buying stocks in such a scary environment. I've done some nibbling at these levels. I'm down to 12 years cash/bonds now, and I'm willing to let it go gradually lower to 10 if we get a few more scary "buying opportunities" like last week.

Another caveat: If I only had a 20 year time horizon, I might not bother to rebalance, but as I have a 40 year time horizon, I feel compelled to do so. Of course - if I had a 20 year time horizon I probably would have had a much lower equity allocation anyway.

Just my thoughts - as an already retired rebalancer

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Old 10-30-2008, 08:43 AM   #19
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Our target AA is 50/50. Now it is at 46/54. Plan to re-balance before the year ends.
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Old 10-30-2008, 09:37 AM   #20
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SS doesn't kick in until February. My head tells me I should do something before then even though my stomach doesn't necessarily agree. Taking a DCA approach is a good suggestion and I may do just that.
Good. Rebalancing doesn't have to be an all or nothing sort of thing. You could just rebalance a half percent or percent, and see how that feels. And as Audrey points out, there is no law saying that you HAVE to rebalance at all, though for most of us it's a pretty doggone good idea.

Now might be a good time to thoroughly reconsider AA, though. There would be no necessity of rebalancing at all, if you decide that the best move for you and your wife is to maintain a 38:62 AA permanently.
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