Are Ray's Buckets of Money fatally flawed?

[ERD50]

Quote:

Originally Posted by ziggy29 I don't think the concept is purely untestable, but there are a lot of permutations and slight variations one could make, and choosing the "best" of them would feel like excessive data mining. Having said that, it would be interesting to see...

Fair statement. It's really the detail levels that are not defined, they may not be all that significant.

Anyway, if I understand this right, that the goal of 'buckets' is to keep you from having to draw down equities over a 14 year down period, it seems this could be modeled in FireCalc.

Take your expenses, enter any pensions, SS, and dividends from your equity portfolio as a faux-pension. Now, *exclude* equities from your portfolio, and include only your fixed holdings. Adjust your fixed until you survive 14 years.

Now, that would not match up those 14 years with 14 years of a down market, but it would give you some ballpark ideas.

-ERD50

[Rich_by_the_Bay]

Quote:

Originally Posted by audreyh1 I don't remember what he says about rebalancing by buying equities after a bad year. But I have interpreted his approach (or made my own) that you can rebalance by buying equities after a bad year AS LONG AS you maintain the minimum number of years in cash/bonds.

I believe the only time he has you buying equities directly is if a) stocks are down, bonds are up and b) still have an imbalance favoring bonds after you've taken your yearly allowance from bonds.

In other words, you rebalance the two buckets after taking your distribution for the year, so under some situations you are buying stocks. In the current recession, that could get interesting and you'd be buying a lot of equities this year. Of course you then have to rebalance each portfolio internally as well.

[audreyh1]

How much equities you buy depends on how much you can draw down your cash/bonds allocation after withdrawal and maintain your minimum number of years expenses (minus 1 year I suppose). If your bonds have been hurt too (as pretty much everything but treasuries has), there might not be as much available as one would think to buy equities!

Audrey

[Gpond]

Do you hear the 3rd hour today? Good ole Ray ranted on and on about he had no problem with the all expense paid for retreats/vacations for companies that received TARP money. (AIG Spa Retreat is an example).

Seems good like looking out for us Ray was giving his corporate sponsors a nice reach around.

[mathjak107]

although i havent been motivated to do it recently ,a few years back i pulled 15 year blocks of time out going back decades and averaged them out...lo and behold thru crashes, recessions, prosperity etc i was hard pressed to find a period of 15 years where the long term average wasnt within 1% of each other with a 50/50 mix

now i was thinking about the above and pulling the money first out of bucket 3 in good times ... im not so sure you wouldnt severly diminish bucket 3's long term return by constantly siphoning more money out of it and not letting it just run up maximizing the return on bucket 3 because your pulling the money out before it really really had a chance to grow.

as down as we are bucket 3 was at 4,000 15 years ago and still hovering around 8,000 today....while in this case it would have worked out selling some of bucket 3 earlier think about selling some of bucket 3 off only 2 years into a 10 year bull market.... that would kill bucket 3's growth

[Rich_by_the_Bay]

Quote:

Originally Posted by mathjak107 although i havent been motivated to do it recently ,a few years back i pulled 15 year blocks of time out going back decades and averaged them out...lo and behold thru crashes, recessions, prosperity etc i was hard pressed to find a period of 15 years where the long term average wasnt within 1% of each other with a 50/50 mix now i was thinking about the above and pulling the money first out of bucket 3 in good times ... im not so sure you wouldnt severly diminish bucket 3's long term return by constantly siphoning more money out of it and not letting it just run up maximizing the return on bucket 3 because your pulling the money out before it really really had a chance to grow. as down as we are bucket 3 was at 4,000 15 years ago and still hovering around 8,000 today....while in this case it would have worked out selling some of bucket 3 earlier think about selling some of bucket 3 off only 2 years into a 10 year bull market.... that would kill bucket 3's growth

I can't vouch for the numbers in my case, but I really do think that you get maximal returns by leaving B3 alone for as long as you can -- not just from Ray but from other academic studies. "Bonds first" give the best returns overall. My concern is the volatility issue, which narrows down as your 15 year distributions come to the last few years. If the market is brutal then like it is now, it could be painful. I might be willing to trade some returns for peace of mind by rebalancing a bit more aggressively, though not overly so..

[audreyh1]

I don't understand trying to maximize long term returns when you are in withdrawal mode. To me maximizing long term returns also guarantees maximum (short-term) volatility, which means you are going to go through some pretty scary periods on your way to that large portfolio when you are too old to enjoy it. Syphoning off some equities during good years is a way of lowering the volatility of the overall portfolio after it gets riskier due to appreciated equities. So you are trading off your maximum long term return but gaining short term lower volatility.

Since long-term performance against inflation and portfolio survival of certain AA ratios is well researched and documented, a retiree can choose an AA that best meets their personal tradeoff of long-term return/short-term volatility. Theoretically speaking, of course.

Well, anyway, that's why I rebalance (ala Armstrong) instead of using Lucia's version of buckets.

Audrey

[Nords]

Quote:

Originally Posted by samclem That black swan--she's an ugly bird.

Haven't read the book yet, but it's on my list. Spouse says that right now our defensive strategy could best be defined as "gobble gobble"...

Quote:

Originally Posted by Rich_in_Tampa I still like the overall approach, and will stick with it but I think I will rebalance more often (maybe every couple of years). Or maybe rebalance to maintain a 7 year cushion, not 2 years. Sure, my returns may be a little lower overalll but I'll maintain a larger, longer cushion for times like this. Gotta change with the times. If Ray or anyone else comes up with a better-documented revision, I'm all ears. Maybe even look at a SPIA when I'm in my 70s if interest rates are favorable.

I don't think "when" or "how much" is as important to rebalancing as much as the discipline of having a system. "1 January" or "110 minus age" or "after a triple top with a head & shoulders formation", or whatever system is most likely to be followed by its disciple. One of the main benefits of DCA & value averaging is that investors are more likely to stick with the system through all markets.

Here's a FPA article on mechanistic rebalancing recommended by Walkinwood:
http://www.early-retirement.org/foru...54&postcount=9
So now we have our asset allocations set to 23% +/- 20%-- in other words, rebalance when one of them drops below 18% or rises above 28%. Oddly enough it hasn't been a problem in this "no place to hide" black swan.

As for SPIAs: Rich, have you read Milevsky's "Are You A Stock Or A Bond?" ? You might be in for a pleasant surprise about SPIAs:
Raddr's Early Retirement and Financial Strategy Board :: View topic - New book: Milevsky's "Are You a Stock Or a Bond?"

Quote:

Originally Posted by ziggy29 A variant I've toyed with is something like: "when the return on your stock bucket exceeds the average assumed return for stocks (say 9%), take a defined percentage of the excess return and use it to replenish the income buckets." I wonder if there are any backtests developed on a model like this. On one hand it seems intuitive to take some off the table when equities are doing well, but on the other -- how much?

Spouse and I have been through the Oct 1987 plunge and our ER portfolio dropped over 40% during both 2000-2002 and 2008. As life-affirming as our portfolio's survivability may be, the novelty is wearing thin.

From a historical & Monte-Carlo perspective we're doing fine, but from a "sleep at night" perspective she's getting restless. The discussion of "taking some off the table" has come up, although I doubt we'll ever end up with a Buffettesque $40B cash stash waiting for a market such as this.

Best idea we've come up with was to continue reinvesting dividends as long as our asset's share prices are below their long-term moving averages. When they rise above their MAs then we'll start taking dividends in cash and putting them in money markets or long-term CDs. At some point some of that cash may be permanently set aside, but I suspect that it'll go back to work when the share prices drop below their long-term MAs. I suppose part of the discipline of the strategy would be waiting for rock bottom or waiting for a CD to mature before dumping it into an underpriced asset. But instead I think we'd just keep trickling cash into whatever asset drops below 18%.

In the meantime we've refinanced a mortgage and we're either re-renting or selling our rental home. It's always good to be able to play defense.

[haha]

90 % of this thread is the bear market talking. 18 to 24 months into the next bull we'll be hearing a different song.

Ha

[mathjak107]

Quote:

Originally Posted by audreyh1 I don't understand trying to maximize long term returns when you are in withdrawal mode. To me maximizing long term returns also guarantees maximum (short-term) volatility, which means you are going to go through some pretty scary periods on your way to that large portfolio when you are too old to enjoy it. Syphoning off some equities during good years is a way of lowering the volatility of the overall portfolio after it gets riskier due to appreciated equities. So you are trading off your maximum long term return but gaining short term lower volatility. Since long-term performance against inflation and portfolio survival of certain AA ratios is well researched and documented, a retiree can choose an AA that best meets their personal tradeoff of long-term return/short-term volatility. Theoretically speaking, of course. Well, anyway, that's why I rebalance (ala Armstrong) instead of using Lucia's version of buckets. Audrey

although you maximize your bucket 3's returns by leaving it alone and also get highest volatility; you also get the smoothest performance long term also.... while the 15 year ride can be bumpy its also pretty consistant... its that bucket 3 consistancy that actually smooths out the bumps and to some extent makes the system work at peak efficiancy ....

its like daily , yearly and even in a decades time the market returns are everywhere but when you get to that 15 year mark its almost scarey how the return normals out to about the same percentage no matter what the events of any 15 year period. .

soooo you actually have a choice i see after putting our collective heads together here which is why this is my favorite financial forum...

you can have a smaller withdrawl rate and less bumpy ride in the short term by taking money out of 3 and refilling or living on that money in the good years

or you can leave 3 alone and get a higher return and withdrawl rate but a volatile short term ride

[ERD50]

Can someone give me a reference point for how much a retiree would start out with in these buckets? For example, for the default FireCalc conditions, 30 year, 4% SWR, 95% success rate. I guess I'd just like to understand what AA the starting point would be.

-ERD50

[ziggy29]

Quote:

Originally Posted by haha 90 % of this thread is the bear market talking. 18 to 24 months into the next bull we'll be hearing a different song.

You may be right, but I think it's still a good opportunity for everyone to ask themselves whether they really *need* to take as much risk as they have been historically.

After all, the plan isn't always to maximize your expected portfolio size, but to minimize the chances of falling short of what you think you need for your goal.

Plus I think one of the reasons for this mess is because people forgot the lessons that a generation mostly gone learned nearly 80 years ago. It would be a shame if we forgot it again so soon.

[Rich_by_the_Bay]

Quote:

Originally Posted by ERD50 Can someone give me a reference point for how much a retiree would start out with in these buckets? For example, for the default FireCalc conditions, 30 year, 4% SWR, 95% success rate. I guess I'd just like to understand what AA the starting point would be.

You can search prior threads on this for more background, but it is hard to answer your question since it depends on your preferences and particulars. But in a typical scenario, it looks something like 25% cash, 25% bonds, and 50% equities. It's how you withdraw that makes the difference.

[Bikerdude]

Quote:

Originally Posted by haha 90 % of this thread is the bear market talking. 18 to 24 months into the next bull we'll be hearing a different song. Ha

I agree. Its basic human nature to extrapolate the current market condition.

[W2R]

Quote:

Originally Posted by Bikerdude I agree. Its basic human nature to extrapolate the current market condition.

I sure did in early 2007. Now, that seems like such folly.

Ah, it would have been so nice if the 2003-2006 market had continued just a few more years...

[youbet]

Quote:

Originally Posted by Bikerdude I agree. Its basic human nature to extrapolate the current market condition.

Yep. Think back to threads 2 - 3 years ago. The thought for the day everyday was that we were probably working too long, wasting life's precious moments and would undoubtedly be able to have a nice 4% withdrawal rate and still see our portfolios remain stable or even grow in real terms. The biggest question was how to withdraw more to minimize the residual left at death without having temporary dips run you dry.....

What a difference in tone and attitude 2 - 3 years and a bear market brings on!

[ziggy29]

Quote:

Originally Posted by Bikerdude I agree. Its basic human nature to extrapolate the current market condition.

Maybe so, but I also think this market is making the rubber hit the road with respect to evaluating risk tolerance.

It's one thing to say you can stand a 40% market decline when you are talking about hypothetical money in some risk tolerance evaluation. It's quite another to actually lose that much in real money. As a result I do think some risk tolerances will be reevaluated and lot of people will realize they don't have as much of it as they thought.

We certainly do have "recency bias" in our thoughts about being invested, but many of those who lived through the 1930s saw that experience shape money and lifestyle decisions for the rest of their lives. Many of them became very frugal and extremely risk-averse for life. I suspect that to *some* degree, many people who lost a considerable amount of money in this market will be wondering, maybe after the market recovers somewhat, whether they can stomach these gut-wrenching losses again.

[simple girl]

Quote:

Originally Posted by ziggy29 Maybe so, but I also think this market is making the rubber hit the road with respect to evaluating risk tolerance. It's one thing to say you can stand a 40% market decline when you are talking about hypothetical money in some risk tolerance evaluation. It's quite another to actually lose that much in real money. As a result I do think some risk tolerances will be reevaluated and lot of people will realize they don't have as much of it as they thought. We certainly do have "recency bias" in our thoughts about being invested, but many of those who lived through the 1930s saw that experience shape money and lifestyle decisions for the rest of their lives. Many of them became very frugal and extremely risk-averse for life. I suspect that to *some* degree, many people who lost a considerable amount of money in this market will be wondering, maybe after the market recovers somewhat, whether they can stomach these gut-wrenching losses again.

It has certainly affected us that way. Still putting money into the market, but realizing our risk tolerance truly is not as high as we though it was. We have slightly adjusted our target asset allocation as a result.

[haha]

So Ziggy, you are saying "Yes emotion is real?" Or are you sayng that the people who came out of the 30s scared, and who therefore missed the colossal post war bull market were right?

What are you saying?

Ha

[Bikerdude]

Quote:

Originally Posted by ziggy29 Maybe so, but I also think this market is making the rubber hit the road with respect to evaluating risk tolerance. It's one thing to say you can stand a 40% market decline when you are talking about hypothetical money in some risk tolerance evaluation. It's quite another to actually lose that much in real money. As a result I do think some risk tolerances will be reevaluated and lot of people will realize they don't have as much of it as they thought.

Amen to that brother.