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Old 08-13-2009, 02:59 PM   #41
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But I notice that a lot of folks lump them together. I never understood that, but it does seem to be prevelant.

So, consensus is probably not my view. But I thought I should explain how I see it.
I guess rebalancing falls under the definition of buy and hold in the sense that you try to buy and hold a particular asset allocation. When allocations get out of whack you sell some winners to buy some losers.

I think Vanguard promotes buy and hold investing in their newsletters and articles on their website, however they also encourage rebalancing of your buy and hold portfolio.
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Old 08-13-2009, 03:17 PM   #42
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On the other hand, what criteria do you choose for rebalancing? I remember some posts by some members describing efforts to "tweak" the criteria so it would work better, i.e. the % of imbalance, and how to space the rebalance apart, or something like that. It appeared to me that such tweaking is done by looking in the rearview mirror, which I am not convinced is better than trying to look ahead. I have seen technical analysts trying to back-test their "algorithm" to fit past data, and frankly, their efforts are not very convincing to me.

How do you chose your rebalance criteria, and how often do you change them, if ever? To follow a rigid criteria, would it be better to allow the computer to do it, e.g. psst Wellesley like Uncle Mick likes to say? Thanks in advance for the reply.
I don't really change my criteria, although there have been a couple of evolutions over time.

I have gradually reduced my equity percentage over time. I started out at 60% and am now at 55%, and I now have a general idea of what formula I'll use for reducing it going forward. It makes sense to me to have less equity exposure as I age.

I tend to do some rebalancing every January, because I have to deal with paying taxes and mutual fund distributions that weren't reinvested. I have picked Jan 15 as my date so that I have time to figure out all my distributions and calculate taxes. I have become rather religious about keeping to this fixed date, because any deviation gets me caught in the "should I do it now or should I wait" trap.

Otherwise, I wait until the portfolio is at least some %X out of balance before rebalancing. I like the delta idea - it appeals to me. I think it makes more sense than only using a fixed annual or two year schedule. IMO, under normal circumstances it takes at least 1 to 2 years to asset classes to diverge enough to justify rebalancing, and then trends tend to reverse over 2 to 5 year cycles. So rebalancing at 18 months to 2 years makes a lot of sense. But what if under unusual market conditions asset classes diverge much faster than that? That is why I adopted the "delta" approach early on.

But yes, I am one who has "tweaked" my criteria to not rebalance so often, and of course the tweaking was done looking the in the rear view mirror, because it is about what I will feel more "comfortable" with going forward. This 2008/2009 showed me how often one can end up rebalancing with a criteria as narrow as mine was (5%), so I increased it to at least an 8% band (with 10% being the absolute max), and I will stick with that from here on out. I just don't want to rebalance that often. Solution - widen the criteria. I don't have a problem with that.

I also have another rule I apply that I got from Frank Armstrong. It's the "minimum years of expenses to keep in cash+bonds" rule. I had always intended that I keep a minimum 10 years cash + bonds and not go below that due to rebalancing in a bad bear market. I just hoped I'd never experience such a scenario! Well, I came real close to hitting that this past January! Things were scary enough out there in Jan that I used 12 years as my minimum. I didn't rebalance again in March because according to that criteria I was out of "ammo". In fact, somehow I was already almost down to 11 years.

So, as I was on the downslope catching the falling knife via rebalancing, I got to test this scary stuff in practice, and refine what I thought was reasonable in the future - in terms of my personal sanity.

I deliberately picked an investment methodology that I thought I could live with and follow over all market conditions. A lot of the choices are psychological - knowing myself well enough to know what might work under various circumstances. Picking some deliberate "comfort zones". I think I did find the right system for me, and that is why I have been able to stick to it.

WHEW! So, that is the whole ball of wax - some minor refinements that IMO do not change the spirit of what I am doing, and I don't change my criteria based on market conditions. It's semi-automated in that numbers are pasted into spreadsheets weekly and they flag out-of-balance conditions and how much to buy or sell in each fund is determined by the spreadsheet. I do enter the orders manually.

Audrey
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Old 08-13-2009, 03:21 PM   #43
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I guess rebalancing falls under the definition of buy and hold in the sense that you try to buy and hold a particular asset allocation. When allocations get out of whack you sell some winners to buy some losers.
Yeah, I just don't see that. Buy-and-hold has always referred to given stocks or funds. You can't really "buy and hold" an asset allocation. Well, maybe during accumulation phase when you don't really have to sell something but can shovel money towards the undervalued asset classes, and maybe this is what people mean. But once you are no longer adding money (i.e. retired), you have to sell something in the portfolio! IMO that is no longer "buy-and-hold".

Vanguard may sanction rebalancing, but Jack Bogle recently poo-poo'ed it.

I guess you can ask when is rebalancing appropriate for the long-term investor? When one has a long time-frame (>10 years) or even longer, investing in riskier asset classes and ignoring volatility makes sense IMO. When one gets within 10 years of retirement, the picture changes, and the need to gradually transition to a lower volatility retirement portfolio makes sense. Rebalancing helps reduce volatility.

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Old 08-13-2009, 03:26 PM   #44
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Yeah, I just don't see that. Buy-and-hold has always referred to given stocks or funds. You can't really "buy and hold" an asset allocation. Well, maybe during accumulation phase when you don't really have to sell something but can shovel money towards the undervalued asset classes, and maybe this is what people mean. But once you are no longer adding money (i.e. retired), you have to sell something in the portfolio!
Maybe it is something that you know when you see it. The guy that chases the momentum of hot mutual funds and switches what funds they are in every year is not buy and hold. The guy that trims back his emerging markets small cap value holdings from 7% to 5% after owning them for 10 years is a buy and hold person.

Maybe you can tell a buy and hold investor by asking them what "long term" means in terms of investments. Anything less than 20 years or forever means they are not a long term buy and hold investor.
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Old 08-13-2009, 03:37 PM   #45
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Maybe it is something that you know when you see it. The guy that chases the momentum of hot mutual funds and switches what funds they are in every year is not buy and hold. The guy that trims back his emerging markets small cap value holdings from 7% to 5% after owning them for 10 years is a buy and hold person.
I guess that would depend on why the person decided to trim the emerging small cap value position.

Did he do it because he wanted to change his asset allocation? and why? What there a conscious decision to reduce the volatility of his portfolio? Did he decide to add a new asset class and therefore needed to "make room" for it.

Did he decide that emerging markets might not be as good a bet going forward and he wanted to give more weight so some "hotter" asset class?

Did he have an asset allocation in mind and just not rebalance for 10 years?

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Old 08-13-2009, 03:39 PM   #46
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Here is a link to a recent Vanguard article discussing the different types of buy and hold investing ("set it and forget it" and "stay the course"). The "stay the course" variety consists of rebalancing your portfolio to maintain an asset allocation.

Buy and hold is contrasted with market timing in this regard. Oddly enough, it appears Vanguard's only fund that attempts to time the market in any major sense is the "Asset Allocation" fund (currently 80% equities and 20% bonds).
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Old 08-13-2009, 03:40 PM   #47
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Yeah, I just don't see that. Buy-and-hold has always referred to given stocks or funds. You can't really "buy and hold" an asset allocation. Well, maybe during accumulation phase when you don't really have to sell something but can shovel money towards the undervalued asset classes, and maybe this is what people mean. But once you are no longer adding money (i.e. retired), you have to sell something in the portfolio! IMO that is no longer "buy-and-hold".

Vanguard may sanction rebalancing, but Jack Bogle recently poo-poo'ed it.

Audrey
What Bogle stated was that annual rebalancing added little if any to your return and potentially cost you in expenses and he doesn't do it. On the other hand he is a strong proponent of "age in bonds" so would advise you to "rebalance" to that target if you drifted significantly away from it - again it is risk management not yield boosting.

In retirement you would rebalance by selling your winners to cover expenses and/or buy losers.

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Old 08-13-2009, 04:44 PM   #48
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Note that to many people "buy-and-hold" simply refers to someone who is not constantly playing the market.
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Old 08-13-2009, 07:55 PM   #49
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... I did a rough & tumble stab at a spreadsheet to back test the effects of rebalancing, and the results seemed inconclusive to me...

One thing in my study made me very suspicious - I analyzed with incrementally increasing % delta points to trigger the re-balance, and the results did not vary smoothly at all. Instead of steadily increasing, and then decreasing at some point, the returns jumped one way or the other at certain "magic numbers". So I really suspect that was just data-mining (the bad kind), and it told me which % points hit the optimal peaks/troughs that occurred in that particular data set.
No, I do not have any proof of my own, nor have seen any in literature. I jumped to the above conclusion by seeing that the S&P500, Dow, and Nasdaq went through big gyrations in the last 10 years, and told myself that there were plenty of opportunities to buy low and sell high. In addition, there are anecdotal evidences of people posting here doing well by practicing AA balancing. Connie is the perfect example of "goosing" the AA in a downturn. She reclaimed her Oct 07 high a month or two ago. I wish I had the guts to do that. I think Moemg is also another gutsy lady.

Back to your post about the rebalancing criteria, you have done more than I have, which is zero, with your experiment. I would agree with the result of your exercise of trying to find the "optimal" bands for rebalancing, meaning the return being an erratic function of the band. It is another proof that the market is a random process. By the way, our geekspeak for the no-action band is "hysteresis" when we build a dynamic model of a system.

One can try to fit an "optimal" strategy to a specific stock period, but it doesn't mean much. An optimal hysteresis for rebalancing in 1999-2009 would be different than an optimal value for another period. There were long bull periods where one should not rebalance at all (in hindsight of course).

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No. I personally consider buy-and-hold to be kind of the opposite to rebalancing. In buy-and-hold, you let your winners run. In rebalancing, you trim from your winners and add to your losers.
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Note that to many people "buy-and-hold" simply refers to someone who is not constantly playing the market.
This is also the way I practice buy-and-hold. As I bought individual stocks, I would ride the winner until the fundamental changed. If a stock drops a bit, say 25%, I will investigate to see if I can discern a valid reason. Most of the time, it appears to be just "noise". Else, I will pull the trigger. Small and mid cap stocks are much noisier than the S&P 500, and I often let them drop as much as 50%.

So, my intention when buying a stock is to hold it forever, unless there is a reason to sell it. Just the fact that it has doubled in the last month or year and has outpaced the market does not mean it has to be sold. I do not buy a stock expecting it to double or triple in a year or even a few months, although have stumbled across a few that did. When that happens, it may be due to their cyclical business, or a major breakthrough or invention. I usually try to understand to satisfy my curiosity, then leave them alone. If I thought the stock got to bubble territories, then I would put a trailing stop trying to squeeze a bit more out of it.

My "buy-and-hold" takes a little bit of work, and requires some very subjective judgements, but an occasional 5-bagger would cancel out the little losses I suffered along the way. Most of my positions just fluttered along with the S&P500 anyway.

So, that's what I have been doing. On the other hand, most people here practice what I would call "buy-and-balance", which is a really a "stealth" method of market timing.

Buy-and-balance if applied to individual stocks means that you would sell way early out of Walmart, Home Depot, Cisco, and Intel, etc.., if you were lucky enough to stumble across them 20 years ago.


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Vanguard may sanction rebalancing, but Jack Bogle recently poo-poo'ed it.
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What Bogle stated was that annual rebalancing added little if any to your return and potentially cost you in expenses and he doesn't do it.
See how confusing it can be to a newcomer. As I stated in a previous thread, there are so many Bogleheads practicing different things, and they all claim to follow the guru.


All I can say is this, which I obseved after being in the market for a few years. There are more than one approach to make money, and even many more ways to lose money. In the short term, no method proves conclusively to be the best, and if it did and enough people followed it, it would stop working. And in the long run, we are all dead. Meanwhile, I am trying to have fun and also keep from going broke.
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Old 08-13-2009, 08:52 PM   #50
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I guess that would depend on why the person decided to trim the emerging small cap value position.

Did he do it because he wanted to change his asset allocation? and why? What there a conscious decision to reduce the volatility of his portfolio? Did he decide to add a new asset class and therefore needed to "make room" for it.

Did he decide that emerging markets might not be as good a bet going forward and he wanted to give more weight so some "hotter" asset class?

Did he have an asset allocation in mind and just not rebalance for 10 years?

Audrey
This reminds me of David Frost's interview with Richard Nixon in 1977. Frost asked about obstruction of justice. Nixon said, no, what I did ws not obstruction of justice because it was not my intention to do so. He did admit that the things he did with other intention may have had the effect of obstruting justice.

When you come right down to it, it all depends on the meaning of "is".

Personally I favor the "quacks like a duck, it's a duck" for most purposes.

When it comes to market timing, let's just do and say we don't.

Ha
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Old 08-13-2009, 08:57 PM   #51
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For the record, when doing spreadsheets to try to understand how asset allocation and rebalancing may provide benefit, it doesn't help to just look at the long-term returns. In a generally rising market, rebalancing will not outperform holding the riskier asset classes. Maximizing returns alone is NOT the goal of asset allocation and rebalancing.

What you want to study is the risk-adjusted return, which looks at the volatility (i.e. risk) as well as the performance. What asset allocation rebalancing is trying to do is to significantly reduce the volatility of a portfolio while capturing most of the performance.

It might just be easier to read the works done on Modern Portfolio Theory and The Efficient Frontier. These show the curves of performance versus risk (volatility in terms of standard deviations) for various asset class combinations rebalanced over various periods of time. You can then find the historical sweet spot on the curve that gives that optimizes performance versus volatility for a given set of asset classes. Modern portfolio theory - Wikipedia, the free encyclopedia

I got most of my understanding through Frank Armstrong's web posting. He now has a book that you can read part of it through google books The Informed Investor: a Hype-Free Guide to Constructing a Sound Financial Portfolio

Even Bogle's comments above indicated he ignored the volatility part of the equation.

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Old 08-13-2009, 09:49 PM   #52
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Ah hah!

Audrey, I am glad you bring up MPT. Let's look at the link you provided, namely Modern portfolio theory - Wikipedia, the free encyclopedia.

Scroll down to where it says "Mathematically", then a box to enclose some equations.

This is the same kind of optimization problems we encounter in engineering. In fact, we have worked on problems with several hundreds or thousands of variables, and the subject dynamic system is described by hundreds of pages of equations.

But back to the set of equations on the Wiki page. Where does one get the variances and the correlation coefficients of the returns of different assets? From historical data? Establishing these statistical properties requires a long run. Do we have enough data? And most importantly, we are assuming these stochastic properties are constant. Is it a jump of faith? I claim to be ignorant in these matters and love to be educated by some economists among us.

Comparing this optimization problem to the ones that I deal with, engineers actually have it easier in several ways that I can think off-hand

1) We have manufacturing statistics from hundreds and even thousands of samples of a particular part, hence have very detailed statistics on each part.

2) The performance of each individual part is independent of another part or parameter. If that is not true, their correlation can be modeled and measured very accurately.

3) The effect of a part's performance onto the total system performance is well known, being the laws of physics applied to get those 100's of pages of equations. Using these equations, from the individual part characteristics, we could determine the outcome of the total system very accurately.

So, how could we go wrong?

1) I have seen a supplier changed its manufacturing process and either did not inform us, or we failed to understand its significance. The part new characteristics changed the total system behavior in a subtle and unpredictable way.

2) There were secondary-effect interactions between parts that we were not able to foresee.

3) The equations to propagate each component effect onto the total system were wrong, or most often just inaccurate or incomplete.

4) There are exogenous variables!


So, the equations in the Wiki link do not look that complex, but they bother me. How do they get those sigmas and rhos? And how do we know they stay constant with time?

Note how the assets that were supposed to be uncorrelated got all tangled up in this Great Recession. All except cash that is, causing people to cry out "Deflation".

The optimization result is only as accurate as the values one puts in for the parameters! Please, someone help me understand.
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Old 08-13-2009, 09:55 PM   #53
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The optimization result is only as accurate as the values one puts in for the parameters! Please, someone help me understand.
You already do.

Ha
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Old 08-14-2009, 05:32 AM   #54
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So, the equations in the Wiki link do not look that complex, but they bother me. How do they get those sigmas and rhos? And how do we know they stay constant with time?

Note how the assets that were supposed to be uncorrelated got all tangled up in this Great Recession. All except cash that is, causing people to cry out "Deflation".

The optimization result is only as accurate as the values one puts in for the parameters! Please, someone help me understand.
That is true. All those sigmas and rhos come from historical data. You can waste a lot of time trying to absolutely optimize an allocation based on historical data and drill down to the nth degree, but that is not really the point. The general principle still applies - that diversification and rebalancing across poorly correlated asset classes provides benefit in terms of risk-adjusted return. It's easy to model the general asset classes and their historical correlation and behavior, and the principles of the theory are demonstrated. History is the best we have.

Perhaps part of what is bothering you with Wiki is that it presents a very high-level overview of the mathematical theory, and you need to study some of the published works to get any sense of how the rubber meets the road. That's why I went to an "implementation guide" rather than studying the math to design my portfolio.

If you start arguing that we can't use the past to predict the future, or that market behavior changes during each decade so how cane we use the past, then for the same reason you have to throw out FIREcalc and have nothing on which to estimate portfolio survival. I think using the models makes way more sense than having nothing. And personally, the general principles make sense to me. I made my choices based on seeing graphs of various asset classes and how they behaved independently and as part of rebalanced allocation over time. Simple! The Frank Armstrong web tutorials provided a lot of these graphs and demonstrated how different mixes behaved over time. You could clearly see how small caps helped and to what degree, how international helped, and to what degree. You could make reasoned decisions about whether you even wanted to bother with them. Sure, asset class correlations will change over time, so you can't be guaranteed the exact same ratios will be optimal in the future, but it seems prudent to expect that they might behave in a generally similar fashion - or at least an approximation. It's better than nothing!

I provided the links for folks who question whether there is any "established science" or theory or studies behind the concepts of asset allocation and rebalancing. The answer is yes, there is an 50 year body of work so if you really want to know more, go study it. And studies and estimates of portfolio survival such as FIREcalc the Trinity Study and it's ilk assume that it is prudent to use investment strategies that have resulted from this body of work - that there some long-term benefit in asset allocation and rebalancing.

So don't get caught up on the details of optimization to squeeze out the last bit possible. The optimization is kind of like FIREcalc - 95% success rate is probably "good enough" given future uncertainties - no sense it trying to tweak things to ensure that 100% success rate. Just get things in the general ballpark, and that's probably the best you can do anyway.

And even if most asset classes (but not all) misbehaved similarly during the Great Recession, they did not all behave the same way - so there was some benefit with rebalancing.

It seems to me the questions have been - Is there any benefit to rebalancing, are there any studies that have shown historical benefit? And the answer is yes. Go study the stuff if you want to know.

Audrey

P.S. I was also an engineer - bachelors and masters degrees and 20 year career in the high-tech industry.
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Old 08-14-2009, 09:03 AM   #55
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That is true. All those sigmas and rhos come from historical data. You can waste a lot of time trying to absolutely optimize an allocation based on historical data and drill down to the nth degree, but that is not really the point.
Audrey, we actually agree more than you thought. If my post is a bit provocative, it is mainly to stir up interest of the "bystanders", not to challenge you at all. I will confess to being mischievous.

Let's go through through this. Heh heh heh...

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All those sigmas and rhos come from historical data. You can waste a lot of time trying to absolutely optimize an allocation based on historical data and drill down to the nth degree, but that is not really the point.
YES! I wouldn't and you didn't.

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If you start arguing that we can't use the past to predict the future, or that market behavior changes during each decade so how cane we use the past, then for the same reason you have to throw out FIREcalc and have nothing on which to estimate portfolio survival. I think using the models makes way more sense than having nothing.
NO! It was not my argument. As I said in an earlier post, I totally agree with the saying that although history does not repeat, it rhymes. Firecalc gives us a sense of the beat, so to speak. Way better than nothing. In fact, I love it.

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I provided the links for folks who question whether there is any "established science" or theory or studies behind the concepts of asset allocation and rebalancing.
And the opportunity for me to poke fun at people who take it to the N-th degree.

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So don't get caught up on the details of optimization to squeeze out the last bit possible. The optimization is kind of like FIREcalc - 95% success rate is probably "good enough" given future uncertainties - no sense it trying to tweak things to ensure that 100% success rate. Just get things in the general ballpark, and that's probably the best you can do anyway.
Music to my ears! I was making fun of the people who use these tools to tweak their portfolios to get a desired 3-significant digit answer, or worrying about their portfolio AA being out-of-whack by a few percents. I do use FireCalc as a rough guide as you do. But I have seen people worrying over little changes in the result. Come on people! Remember that history only rhymes and does not repeat. I would rather spend time watching out for those exogenous variables, any sighting of black swans.

By the way, Dory, the author of FireCalc said something about this. He said to not measure with a caliper what you are going to chop with an axe. He knew that if a computer spits out a number to 4 significant digits, people have a penchant to tweak it to get the last bit.

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And even if most asset classes (but not all) misbehaved similarly during the Great Recession, they did not all behave the same way - so there was some benefit with rebalancing...

It seems to me the questions have been - Is there any benefit to rebalancing, are there any studies that have shown historical benefit? And the answer is yes.
NO! That was not my question. Without any math, people already know the intuitive answer: Buy low, sell high. The problem is only in the execution. Here is where we differ. One can buy little, or one can buy a lot. As long as one buys...

The real question is how low is a good low. Hmmm... What was the thread topic again? Something about Dow 7000. Darn... I should have gone "all in" then. No one gave me a software model for "low detection".

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P.S. I was also an engineer - bachelors and masters degrees and 20 year career in the high-tech industry.
I know you are a high-tech worker from your earlier posts. My friends who were the goldbugs I often told about were engineers too. You wouldn't believe what some people with masters and Ph.D.s do for their investment. Many people with common sense do much better than what they did. Oh well, it's their money. And they are still my friends.

By the way, people who are rich do not bother nor worry about these equations like we do. Buffet, Soros, and the like know how to "read" those exogenous variables that the academics do not even know where to stuff into their equations. I wish I had their knowledge and their skill. Bet you those aren't taught in school.

Sooo... Do you feel better now, Audrey? I had posted a congrat on your ER anniversary, but you probably saw it already.
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Old 08-14-2009, 10:22 AM   #56
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The real question is how low is a good low. Hmmm... What was the thread topic again? Something about Dow 7000. Darn... I should have gone "all in" then. No one gave me a software model for "low detection".
Here's the model that I have given before: Buy a sufficiently diversified portfolio of relatively uncorrelated asset classes with very low turnover and very low expenses. Rebalance when reasonable to maintain your asset allocation. Invest regularly and don't try to time the market.

Guaranteed to get you investing during the absolute lows of the market. Also guaranteed to get you investing at the absolute highs of the market.

My point in the OP is not that I'm waiting for a crash or keeping money on the sidelines hoping for one. Rather I prefer to invest at lower prices we saw in the last year versus the higher prices of today. Really I just miss those days of buying stuff really cheap.
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Old 08-14-2009, 10:41 AM   #57
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...Really I just miss those days of buying stuff really cheap.
Yeah, easy for accumulators to say... People who ER'ed like me can only rebalance.

By going from less than 40% equity in late 08 to 60%, from the bottom in March 09 till now, I have "gained" enough to buy another house like the two I currently own. Wait, it would be even a better one, with the RE market as low as it is. Not that I would want another one. What's for?

Still, since you brought up the Dow 7000, I couldn't help thinking that if I had gone "all in", I could have bought a house like Westernskies just did and paid cash for it too with the gain. Oops, forgot that big would-be short-term cap gain... And weren't I thinking about downsizing for less maintenance?

See how we all vacillate between "greed and fear"... One can just turn the porfolio over to the computer like unclemick did, but what's the fun in that?

Should I be in "fear" mode today, seeing that the Dow is down more than 100 as we speak?
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Old 08-14-2009, 10:52 AM   #58
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I am enjoying this discussion - thanks to all who are adding to it. I'll have to take time later to fully absorb it all.

Audrey, thanks for mentioning the refs for re-balancing. It's been years since I read those and didn't recall that they went into that level of detail on re-balancing, so I will take a look.

There is one comment that I sorta-kinda don't agree with:

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Originally Posted by audreyh1 View Post
The optimization is kind of like FIREcalc - 95% success rate is probably "good enough" given future uncertainties - no sense it trying to tweak things to ensure that 100% success rate.
I agree that the absolute success % should not be taken too literally since, as has been said, the future will likely "rhyme" with the past, not repeat it. But I think that some people will infer that 95% and 100% are all "within a margin of error" and that we have little confidence that one is actually better than another. That is what I don't agree with.

As I see it, there is significance in the difference between a FIRECALC reported 95% success rate and a 100% rate. One represents a WR that actually did result in failure in 5% of the past scenarios, and one had zero failures in that time. For a 35 year portfolio, that gave me about an 11% delta in spending.

I think we can say with a very high degree of certainty that a WR that is 11% lower will also have a higher success rate in any future scenario. How can that not be? That is what FIRECALC is telling us, and I don't see how we can ignore that. 100% success is better than 95%. With future patterns, it might not by a 5% point boost, but it will be better.

This seems different than the analysis of optimizing an AA re-balancing point. In that case a point that was better in the past may be worse in the future.

So, I shoot for a 100% success rate. Not because I think that is going to "guarantee" success, but because I don't feel comfortable with a WR that I know would have failed in some past scenarios. I can't predict the future, but we can review the past. So while I don't know that the future will not be worse than the past, I at least have confidence that if it is as bad as the past, my portfolio will survive.

The succinct version: With FIRECALC, 100% does not necessarily mean 100% for future scenarios, but 100% is better than 95%.

And if we want to get technical in the measurement analogy, we could talk about absolute and relative accuracy, linearity, quantization (this applies to the FIRECALC success rates, since failures are discreet steps - it sometimes helps to look at the min/max/avg end values), and repeatability (and probably a few others I've forgotten about).

-ERD50

PS: By "better" I mean a higher success rate. There is the legitimate view that the extra years required to boost the portfolio may be "worse" for some than the small added risk. That's a different (and valid) discussion though.
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Old 08-14-2009, 11:06 AM   #59
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I think we can say with a very high degree of certainty that a WR that is 11% lower will also have a higher success rate in any future scenario. How can that not be? That is what FIRECALC is telling us, and I don't see how we can ignore that. 100% success is better than 95%. With future patterns, it might not by a 5% point boost, but it will be better.

This seems different than the analysis of optimizing an AA re-balancing point. In that case a point that was better in the past may be worse in the future.

So, I shoot for a 100% success rate.
Excellent point, ERD50, regarding enhancing FireCalc success rate vs. optimizing the AA of a portfolio.

Going to a lower WR means a higher chance of leaving a big estate behind. If one strives to avoid that and wants to enjoy as much material pleasure in life as one could, now that becomes a different kind of optimization problem. One chooses between "pleasure now and worry sh*tless later" and a more modest lifestyle. There is no computer model for that!

And then, we all are or had been comtemplating the trade-off between working a few more years vs. the risks of deteriorating health in the future. No computer model there either.

I am not that old but have grown less and less desirous of material things, never craving many of those things even in the past when I was younger. So, it works out OK with my goal of minimizing my WR to ensure 100% safety. Of course I have not told my kids about my assets and plans. They have to learn to earn theirs, regardless.

PS. I will not go as far as an engineer who left behind a $4M portfolio, sleeping on the floor of a homeless shelter in his last years, as reported in a recent thread. I have not asked, but suspect my wife wouldn't go along. That man had a WR of 0%!
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Old 08-14-2009, 01:10 PM   #60
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All of my close friends in their 20's and 30's that view their portfolios as retirement funds "kept the faith" and continued DCA'ing in. Some older associates in their 40's-60's panicked and stopped contributing or sold most/all their equities. The latter group apparently were not comfortable with their asset allocation (but then again I haven't preached to them).

It definitely feels good to not see half your portfolio vaporize, and watch 3-5-10% drops in one day. Those dow 7000 days may not have left us for good. Time will tell. The economy certainly seems to be rebounding or at least getting worse at a much slower rate. But there remains a lot of hurdles to overcome on the road to recovery. That explains why the markets are still off significantly from highs of a couple years ago.
Do not confuse price with value. The market continues to be overvalued from my perspective from a US investor point of view. The consumption of income needed for the government to operate combined with the low cash payouts of dividends leads me to believe these stocks have a long way to go on the down side. Even though the government is offering $4500 for vehicles worth $1000 even that program has rapidly slowed as people are avoiding debt.

Until all the enthusiam has been drained away from young investors such as yourself the bubble will not truly have been popped. The market could even soar on optimism in the near term to above 10,000 and my view would not change as the news continues to be deflationary which is just horrible for stocks.
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