interesting article

[bosco]

I apologize in advance to Azanon if this has been posted before....

http://www.fpanet.org/journal/articles/2006_Issues/jfp0806-art6.cfm

However, I was wondering if anyone here could shed any light on the following statement from the article

"An increase of almost a quarter-percentage-point in the withdrawal rate is afforded by increasing the rebalancing interval to 75 months, as shown in Figure 3"

I have read that rebalancing less frequently than once per year has benefits. But I've not seen it quantified like this and frankly, am a bit sketical. I'm not sure I'd trust that graph--seems like over-analysis to me. A quarter point SWR in the midst of a sea of data....seems lonely

any comments or insights?

 

[brewer12345]

They don't say, but I bet taht the really long rebalancing interval requires you to accept a lot more volatility.

 

[samclem]

"An increase of almost a quarter-percentage-point in the withdrawal rate is afforded by increasing the rebalancing interval to 75 months, as shown in Figure 3"

Maybe my procrastination is going to pay off again!!

 

[bosco]

They don't say, but I bet taht the really long rebalancing interval requires you to accept a lot more volatility.

they do say that further down, the logic being the portfolio could get very overweighted in equities over this period.

 

[mickeyd]

Pretty interesting article. Thanks for posting it. I have saved it for further reference.

I think that the following, which happen to be the last 2 sentences in the piece, say it all 

Thus, the risks of any withdrawal plan can be only approximately assessed. Any attempt to project a high degree of precision in these calculations promises more than any professional can reasonably expect to deliver to his or her clients.

 

[Gone4Good]

The foundation withdrawal scheme assumes rebalancing of the portfolio once a year, at the end of every year. An increase of almost a quarter-percentage-point in the withdrawal rate is afforded by increasing the rebalancing interval to 75 months, as shown in Figure 3. But longer rebalancing intervals imply possibly significant departures from the initial asset allocation and greater portfolio volatility. As a result, this client elected a rebalancing interval of 57 months, which still adds an increment of 0.10 percent to the withdrawal rate, but provides for somewhat lower volatility.

Wow. This whole process has data mining written all over it. "A rebalancing of 57 months adds an increment of 0.10 percent to the withdrawal rate". Are you kidding me? These CFPs are going to "optimize" a whole batch of seniors into bankruptcy based on historical analysis presented as scientific fact.

 

[Nords]

Wow.  This whole process has data mining written all over it.

Yup. I wonder if someone from a brokerage or a fund company was paying for this study... because after all, only a professional financial manager has the steely discipline to ignore shepherd your portfolio for 57-75 months.

they do say that further down, the logic being the portfolio could get very overweighted in equities over this period.

Gosh... a higher percentage of equities leads to a higher return, and over longer periods of time the volatility balances out? Imagine that!!

Maybe these guys should write a book. They could call it "Modern Portfolio Theory" or something like that...

 

[Gone4Good]

Yup.  I wonder if someone from a brokerage or a fund company was paying for this study... because after all, only a professional financial manager has the steely discipline to ignore shepherd your portfolio for 57-75 months.

Interesting though that daily rebalancing doesn't yield better results.

 

[Nords]

Interesting though that daily rebalancing doesn't yield better results.

Just better commissions.

 

[d]

Interesting though that daily rebalancing doesn't yield better results.

with daily rebalancing you will tend to miss the most of the buying-low, selling-high advantage that rebalancing brings. consider the extreme of rebalancing every hour!

 

[donheff]

The replies in this thread are helpful. When I looked at the graphs and read the very precise estimates of 12 month, versus 48 month, versus 57 month rebalancing I got uncomfortable. Where are these numbers coming from? But I forgot that this is an outfit that will be glad to manage our money for a fee to help us see the light.

 

[Gone4Good]

Interesting though that daily rebalancing doesn't yield better results.

with daily rebalancing you will tend to miss the most of the buying-low, selling-high advantage that rebalancing brings. consider the extreme of rebalancing every hour!

Nords, Dory, others . . .  the forum need a "sarcasm icon" so that such sentiment can be clearly marked. 

 

[REWahoo]

Nords, Dory, others . . . the forum need a "sarcasm icon" so that such sentiment can be clearly marked.

I think we also need one of BMJ's "sarchasm" icons..

Sarchasm: The gulf between the author of sarcastic wit and the person who doesn't get it.

 

[fire5soon]

Nords, Dory, others . . . the forum need a "sarcasm icon" so that such sentiment can be clearly marked.

Sarcasm? What sarcasm? I have absolutely no idea what you’re talking about…

 

[Nords]

Nords, Dory, others . . .  the forum need a "sarcasm icon" so that such sentiment can be clearly marked. 

I seen icons as an abdication of one's ability to find the appropriate words...

 

[Meadbh]

Bengen's article is based entirely on probablility and mathematical projection of historical data. The same is true of FIRECALC. The scientist in me wants to know whether such projections have been validated by prospective cohort studies of real investors.   

 

[bosco]

I seen icons as an abdication of one's ability to find the appropriate words...

I agree. It took mankind thousands of years to develop an alphabet in order to advance beyond drawing pictures on cave walls. Now we want to go back to that epoch? One reason I've never understood the Mac fanatics. I find a desktop or window littered with icons far more confusing than a nice alphabetical listing.

although I do still get a kick out of this one reminds me of the old pouring spouts that used to come with a bottle of Kirin Beer.

 

[astromeria]

Some people are more/less visually oriented or for that matter, aurally oriented than others. Doesn't make one way right and the other way wrong. Smilies express emotion, not facts. My problem with them is that they aren't nuanced enough, hence I combine them. I can see why people might find them irritating, though.

 

[donheff]

I seen icons as an abdication of one's ability to find the appropriate words...

Yeah but most of us screw up the subtleties of the language now and then without realizing it. Or our readers don't understand irony and get POd for nothing. Better to use a visual sledge hammer to make sure they realize you are joking

 

[modlair]

From a contrarian point of view, for the same reason Monte Carlo tends to be more negative than actual historical data, there could be real mathematical value in slower rebalancing.

The idea being, there is some undefined relationship of the future to the past. This translates to markets that do not "turn on a dime". If there has been a recent period of big runup, it could take months before a crash unfolds, e.g., the S&P was still higher at the end of 2000 than it had been at the start of 1999. That's two years, and the Crash of 2000 began in March. The real avalanche extended from 2001 to late 2002.

50+ mos looks pretty high and dangerous, but 12 may indeed be needlessly short.

 

[sgeeeee]

I've seen a number of studies that indicate that rebalance intervals longer than 1 year result in better average long term performance than 1 year rebalance intervals.

But the real benefit of rebalancing is not to maximize returns but to minimize risk. The longer the interval between rebalancing events, the higher the probability is that you are get into a significantly higher risk situation.

<sarcastic smile>,</sarcastic smile>

 

[donheff]

squeee -- why use the new icon, that wasn't a sarcastic post? <ironic smile></ironic smile>