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Bear market rebalancing question.
Old 09-11-2015, 04:55 PM   #1
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Bear market rebalancing question.

Reading an older sticky thread on the Boglehead forum that is interesting..Came across this statement by Grogs in a discussion on the market sharp downturn in 2011

That's where asset allocation comes in. Let's say you're just hitting retirement, and you have $1MM saved up, split equally between stocks and bonds. If the stock market drops by 50%, your AA is now 67% bonds and 33% stocks. You would sell bonds until you AA was back down to 50/50. If doing a 4% SWR, that would be about 6.25 years of selling bonds. Hopefully the stocks recover before then, and you can rebalance back to 50/50. If it's "really ugly" and stocks are still down 50% after 6+ years, then sure, you might have to start selling at a big loss.

I'm recently RE and haven't experienced a bear market yet .. is this rebalancing strategy for taking distributions on target for inevitable down years?
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Old 09-11-2015, 05:11 PM   #2
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Quote:
Originally Posted by Tailgate View Post
Reading an older sticky thread on the Boglehead forum that is interesting..Came across this statement by Grogs in a discussion on the market sharp downturn in 2011

That's where asset allocation comes in. Let's say you're just hitting retirement, and you have $1MM saved up, split equally between stocks and bonds. If the stock market drops by 50%, your AA is now 67% bonds and 33% stocks. You would sell bonds until you AA was back down to 50/50. If doing a 4% SWR, that would be about 6.25 years of selling bonds. Hopefully the stocks recover before then, and you can rebalance back to 50/50. If it's "really ugly" and stocks are still down 50% after 6+ years, then sure, you might have to start selling at a big loss.

I'm recently RE and haven't experienced a bear market yet .. is this rebalancing strategy for taking distributions on target for inevitable down years?
See bold above... it looks like you start and end with a 50/50 allocation. This is just standard re-balancing. Note he started with the assumption of 50/50... not that this is the best... or worst allocation.

Re-balancing is typically done at fixed intervals or when the allocation is some predefined percentage out of balance. This is not a magical %, but one you choose in your investment policy.
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Old 09-11-2015, 05:22 PM   #3
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Originally Posted by bingybear View Post
See bold above... it looks like you start and end with a 50/50 allocation. This is just standard re-balancing. Note he started with the assumption of 50/50... not that this is the best... or worst allocation.

Re-balancing is typically done at fixed intervals or when the allocation is some predefined percentage out of balance. This is not a magical %, but one you choose in your investment policy.
What surprised me is the length of time to be selling (6.25 years) he says it will take to get even. But that makes sense when a recession clobbers the AA so quickly.
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Old 09-11-2015, 05:30 PM   #4
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I didn't read the original, but it sounds from the quote like they're just using the withdrawals to rebalance. I think many of us would be rebalancing once a year or by a trigger when things got too far out of whack. Taking 6.5 years to rebalance is not the standard process. Of course I think plenty of people "forgot" to rebalance at all during 2008-2009.
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Old 09-11-2015, 05:53 PM   #5
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We try to keep our withdrawal / rebalance method as simple and as mechanical as possible.
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Old 09-11-2015, 06:06 PM   #6
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Originally Posted by Tailgate View Post
What surprised me is the length of time to be selling (6.25 years) he says it will take to get even. But that makes sense when a recession clobbers the AA so quickly.
This was based on the assumption that you don't re-balance in one step, but take your withdraw from the bonds to do the re-balancing.... and I think assumes that stocks don't really come back.
from OP
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You would sell bonds until you AA was back down to 50/50. If doing a 4% SWR, that would be about 6.25 years of selling bonds
This approach to spread out the re-balancing and if stocks come back the time may be shorter that noted, but you miss the advantage of re-balancing. I took this phrase to be a different thought on re-balancing ...If you did it in this manner.
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Old 09-12-2015, 09:05 AM   #7
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I don't think that many people here use only withdrawals to rebalance. I rebalance to 60/34/6 stocks/bonds/cash each December and do interim rebalancing oppotrunistically.
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Old 09-12-2015, 11:08 AM   #8
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I didn't read the original, but it sounds from the quote like they're just using the withdrawals to rebalance. I think many of us would be rebalancing once a year or by a trigger when things got too far out of whack. Taking 6.5 years to rebalance is not the standard process. Of course I think plenty of people "forgot" to rebalance at all during 2008-2009.
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I don't think that many people here use only withdrawals to rebalance.
+1


Normally I don't withdraw anything for spending but dividends. I rebalance once a year in January, taking the previous year's (cash) dividends for the coming year's spending. Also on rare occasion I do rebalance when my AA gets way out of balance due to market events. I did that in 2008-2009.

When I rebalance, I'm selling only the assets that are doing relatively well, to buy the assets that are doing relatively poorly. So, I'm not selling the assets that are doing the worst.

As an aside, I have intentionally set up separate, reliable income streams from various sources such as a tiny pension, social security (which I finally claimed last year), and the TSP "G Fund". The "G Fund" is a government bond fund guaranteed never to drop in share price, therefore providing me with a small but stable pension-like income. Now that I have SS, these three income streams will cover all or nearly all of my bare bones expenses if I ramp up the LBYM efforts. I would probably want to do that during a really bad market so that I could buy more shares using my dividend money, instead of using it to live on as I have been so far in retirement.

So far in retirement, the only time I have ever dipped into my principal was to cover the expenses of buying and moving into my new "dream home" before selling my old home. I simply would not have not moved had the market plunged at the wrong time. At times like that I would tell myself, "Tough beans, suck it up!" Other than the move, I have never withdrawn principal but instead, just rebalance it.
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