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Old 05-22-2017, 12:24 PM   #21
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Ideally you wouldn't sell any shares at a market low in a 30% drop. That way when (if?) the market recovers you portfolio fully bounced back. Run some numbers in a spreadsheet and you'll see.
Yeah, well ...... I ran some numbers in a spreadsheet.
And it doesn't work.

https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls

There's two problems. One is, if you spend from your 2-year cash bucket in a declining market, what do you do when your cash bucket is empty and now you HAVE to sell stocks when they are deeply down? Suddenly, you wish that you had sold 10% down a year ago instead of having to sell today at 30% down.


The other is, you need to have a way to refill the cash bucket when the crisis is over. Everybody just does a handwaving explanation, but when you run actual hard numbers, nothing works.
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Old 05-22-2017, 01:21 PM   #22
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Yeah, well ...... I ran some numbers in a spreadsheet.
And it doesn't work.

https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls

There's two problems. One is, if you spend from your 2-year cash bucket in a declining market, what do you do when your cash bucket is empty and now you HAVE to sell stocks when they are deeply down? Suddenly, you wish that you had sold 10% down a year ago instead of having to sell today at 30% down.


The other is, you need to have a way to refill the cash bucket when the crisis is over. Everybody just does a handwaving explanation, but when you run actual hard numbers, nothing works.


What should work is considering the cash as an ultra short bond and spending to balance/rebalance.
Example 58% Stocks, 35% bonds, 7% cash or equivalents (e.g. CD's).
Start with a $1000000 portfolio:
You spend dividends and sell shares as needed to keep the proportions the same and for simplicity's sake let's say that the spend is the dividend rate.(about 2%) which leaves you stable after a year at $1 Million portfolio so allocated. Then...
Portfolio takes a hit. Stocks tumble by 40%, bonds fall 3%.
Now stocks are $348,000, about the same as bonds, $339500, cash is $70000 still. Total portfolio is down so that the cash is making up a higher percentage, so you spend cash and sell bonds to total of $20,000 (mostly cash) and buy stocks to restore the proportions. Allow dividends to reinvest at same time.
Thus cash is maintained at 7% of the portfolio and always spent/ added to to keep the AA the same.
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Old 05-22-2017, 01:37 PM   #23
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What should work is considering the cash as an ultra short bond and spending to balance/rebalance.
Example 58% Stocks, 35% bonds, 7% cash or equivalents (e.g. CD's).
Start with a $1000000 portfolio:
You spend dividends and sell shares as needed to keep the proportions the same and for simplicity's sake let's say that the spend is the dividend rate.(about 2%) which leaves you stable after a year at $1 Million portfolio so allocated. Then...
Portfolio takes a hit. Stocks tumble by 40%, bonds fall 3%.
Now stocks are $348,000, about the same as bonds, $339500, cash is $70000 still. Total portfolio is down so that the cash is making up a higher percentage, so you spend cash and sell bonds to total of $20,000 (mostly cash) and buy stocks to restore the proportions. Allow dividends to reinvest at same time.
Thus cash is maintained at 7% of the portfolio and always spent/ added to to keep the AA the same.
Yes, that's all true (as explained in the Kitces link earlier). But doing things this way is not the "cash bucket" as generally understood. If a person is going with the "buckets" approach, they would not use their cash to buy more stocks when they are down (if withdrawals were not enough to rebalance the portfolio, as you described), they would hold on to the remaining cash to support withdrawals in the following year (to forestall/prevent having to "sell stocks when they are down.")

As Kitces points out, if we continue to rebalance faithfully, then the "cash bucket" is a mirage. However, it can be a useful mirage if it helps people stick with a plan.
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Old 05-22-2017, 01:43 PM   #24
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I know in the past, if I didn't have a large HELOC that I know I could feed my family for 10 years, I might have done something really stupid and regret later on.
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Old 05-22-2017, 02:00 PM   #25
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I know in the past, if I didn't have a large HELOC that I know I could feed my family for 10 years, I might have done something really stupid and regret later on.


I have a HELOC but I assume the bank will freeze it if things are like 2008-9. I don't expect we will see another crunch like that but I figure it will only help if I draw on it before things blow up.
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Old 05-22-2017, 02:47 PM   #26
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I have a HELOC but I assume the bank will freeze it if things are like 2008-9. I don't expect we will see another crunch like that but I figure it will only help if I draw on it before things blow up.
Mine was not freeze. It was finally closed because they claimed I didn't use it, true, I had a zero balance for a long time. But it does give you more options. I also had another credit card which gives me large credit line, like $50k at 8-9% from a credit union, so that also helped with managing cash flow, I only had to pay interest, but I also closed that account because I had not been using it for years.
Maybe look at credit union credit card line, I think PenFed gives me a large credit line with my credit card at 9-10%, if you worry about HELOC.
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Old 05-22-2017, 03:06 PM   #27
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Rather than cash, I keep 3-4 years worth of expenses in Wellesley for that very reason. It still has the potential to drop during a market crisis but historically has not done so as much or for as long as many other funds.
I use yet another tool in lieu of cash reserves: HELOC and Margin line of credit on my after-tax brokerage account. Between those two, I will be able to ride out 4+ years, if needed.
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Old 05-22-2017, 03:13 PM   #28
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I have a HELOC but I assume the bank will freeze it if things are like 2008-9. I don't expect we will see another crunch like that but I figure it will only help if I draw on it before things blow up.
While they COULD freeze it, its pretty unlikely that they WILL (mine didn't in 08). That said, it probably depends on what bank, LTV, terms, etc. In the unlikely event that the bank DOES freeze the line, I also have a margin account for my FIDO brokerage. Terms are not very good, but we are talking "emergency" here (I do realize that margin availability decreases when the underlying equities drop, but it would still provide a pretty good cash cushion for me, if push came to shove).
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Old 05-22-2017, 03:52 PM   #29
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Sunset +1 That is exactly what I have. I think it's a total of 15+ CDs and I treat it as part of my bond allocation. At 2.25% it's not far off bond fund yield with no underlying risk.


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+2. I count CDs over 24 months as bonds in my AA. As they mature I fill the missing CD ladder rungs. This thread made me realize I need to give more thought to rebalancing but I'm hoping it won't lead to changes in my strategy.
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Old 05-22-2017, 04:04 PM   #30
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But this is exactly the opposite of what happens when you follow the general plan of selecting an AA and rebalancing when it gets out of whack. It simply doesn't work like that.



If you have a 70/30 AA for example, first, you are getting divs that will make up most of your WR, so that cuts the amount you ever need to sell. Second, if stocks are down, rebalancing tells you to sell from your fixed income to rebalance, not from the equities. You would go a very, very long time before you ever sell stocks in a down market.



I just covered it here as well:



http://www.early-retirement.org/foru...ml#post1883602



-ERD50


I don't quite understand. If you have a nice stockpile of cash/bonds to carry you through a downturn, you can continue to reinvest dividends in a down market, hence you can buy equities low, essentially rebalancing. Why isn't this approach a good one?
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Old 05-22-2017, 04:59 PM   #31
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I don't quite understand. If you have a nice stockpile of cash/bonds to carry you through a downturn, you can continue to reinvest dividends in a down market, hence you can buy equities low, essentially rebalancing. Why isn't this approach a good one?
Because it sounds like a shell game?

If your expenses are equal to or greater than your dividends, why would you reinvest the dividends, and then sell some to buy stocks? If you want to double down on stocks, or if you just need to re-balance to get back to your AA, then sell some bonds and buy stocks, but why change the dividends from normally just going to your checking account (or savings, or MM fund or something)?

Let's say you budget for $50,000 year from your portfolio, and it pays out $40,000 in divs/gains. Take the extra $10,000 from wherever you are over-weighted. If you are still out of balance, buy/sell as needed. If you auto-reinvest, the decisions are made for you.

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Old 05-22-2017, 05:05 PM   #32
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It is a very interesting discussion. What seems fairly clear is that the "conservative" portion of your bond portfolio can substitute for a cash "bucket" to act as a cushion against a large market decline, so you do not have to ell equities in a down market to fund living expenses.

Stated differently, your "safe" type money will likely also have tiers: Cash, CD's, ST bonds, Intermediate bonds, etc. If you put less in cash, you can put more in higher earning bonds.

But it is all just risk-reward. As you move out risk-wise you are accepting greater risk of loss, in exchange for the possibility of greater income. And you can continue to make that argument to justify ever higher risk, till you are at 100% equities, if desired.

I am not yet retired and am still constructing my bond portfolio. One conclusion for me is i probably want to continue to reduce cash as short to mid-term actively managed bond funds seem worth the risk.

I know margin debt or HELOC can also be a back stop but due to cost that would be a less likely source of funds for me in a sharp market downturn.

More like a plan C. But that is just me.
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Old 05-22-2017, 08:11 PM   #33
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Some of this concern about a drop are much-ado about nothing. I recall a thread where I outlined a more modest drop of 15% at once that persists for 4 years and then recovers. If you rebalance, then the impact is modest.

http://www.early-retirement.org/foru...ml#post1847572

Quote:
I think you probably are making it too hard.

Let's say we have a 15% contraction that lasts 4 years and then comes back and let's say today I have $1,000,000 that is 60/40 and my WR is 3.5%, or $35k a year. To make the numbers simple, I assume no income and level withdrawals... just a 15% dive in year 1 and a 15% recovery in year 4, $35k withdrawals each year and annual rebalancing.

0 At inception: $600,000 in stocks, $400,000 in bonds, $1,000,000 total 60/40 AA
One year later: $510,000 in stocks, $365,000 in bonds, $875,000 total 58/42 AA
1 After rebalancing: $525,000 in stocks, $350,000 in bonds, $875,000 total 60/40 AA
Another year later: $525,000 in stocks, $315,000 in bonds, $840,000 total 63/37 AA
2 After rebalancing: $504,000 in stocks, $336,000 in bonds, $840,000 total 60/40 AA
Another year later: $504,000 in stocks, $301,000 in bonds, $805,000 total 63/37 AA
3 After rebalancing: $483,000 in stocks, $322,000 in bonds, $805,000 total 60/40 AA
Recovery year: $555,000 in stocks, $287,000 in bonds, $842,000 total 66/34 AA
4 After rebalancing: $505,000 in stocks, $337,000 in bonds, $842,000 total 60/40 AA

OTOH, if there was no downturn and no recovery after 4 years of withdrawals one would have $860,000 ($1,000,000 - $35 * 4 years), only $18,000 more than the downturn/recovery alternative. $842,000 is only 2.1% less than the $860,000, so no biggie.
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Old 05-22-2017, 08:48 PM   #34
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+1
The value of being liquid when the paycheck stops can not be overestimated. Also suggest looking at your asset allocation as well to ensure you can ride out any declines without selling equities in a down market to support yourself.
I don't get this. Whats the difference if you sold equities in a down market (even if it is at a loss) or used the cash you never used to buy the in the first place. Its all the same money.
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Old 05-22-2017, 10:54 PM   #35
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+1
The value of being liquid when the paycheck stops can not be overestimated. Also suggest looking at your asset allocation as well to ensure you can ride out any declines without selling equities in a down market to support yourself.



I don't get this. Whats the difference if you sold equities in a down market (even if it is at a loss) or used the cash you never used to buy the in the first place. Its all the same money.
----------------------
yes, all the same money, until it becomes real.......

Learned a bit from Oct. 1987, 2000-2001, and 2008-09. When the next big decline comes, I prefer to keep my equity holdings intact, believing they will come back as they always have. Don't intend to be a slave to a rigid allocation formula on the downside, but like to stay close to it on the upside to limit overall exposure.

Pulling $30,000 from a million dollar portfolio (3%) looks easy in the abstract. Try taking that same $30,000 from a $600,000 portfolio a few years later, and do the same for several years while the market recovers. That's why I think reserves and allocation are important.

Having enough absolute $ in bonds/cash to get me through 7-ish years lets the equities ride, and is a cornerstone of my plan. From what I've seen, that's enough time for the market to recover. I'm playing a long game and don't want to come up short.

Am I leaving money on the table? Theoretically, maybe. I have obligations over the next ~10 years in addition to providing for myself beyond that, and this approach gives me confidence I can meet them.
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Old 05-22-2017, 11:27 PM   #36
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Originally Posted by FlaGator
+1
The value of being liquid when the paycheck stops can not be overestimated. Also suggest looking at your asset allocation as well to ensure you can ride out any declines without selling equities in a down market to support yourself.



I don't get this. Whats the difference if you sold equities in a down market (even if it is at a loss) or used the cash you never used to buy the in the first place. Its all the same money.
----------------------
yes, all the same money, until it becomes real.......

Learned a bit from Oct. 1987, 2000-2001, and 2008-09. When the next big decline comes, I prefer to keep my equity holdings intact, believing they will come back as they always have. Don't intend to be a slave to a rigid allocation formula on the downside, but like to stay close to it on the upside to limit overall exposure.

Pulling $30,000 from a million dollar portfolio (3%) looks easy in the abstract. Try taking that same $30,000 from a $600,000 portfolio a few years later, and do the same for several years while the market recovers. That's why I think reserves and allocation are important.

Having enough absolute $ in bonds/cash to get me through 7-ish years lets the equities ride, and is a cornerstone of my plan. From what I've seen, that's enough time for the market to recover. I'm playing a long game and don't want to come up short.

Am I leaving money on the table? Theoretically, maybe. I have obligations over the next ~10 years in addition to providing for myself beyond that, and this approach gives me confidence I can meet them.

Everyday what your stuff is valued at can be converted to real money. If you $20 stock is now $15 you lost $5 whether you sell it or hold it. Selling is only a tax consequence the money is the same as having $15 in your wallet.
My perception.
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Old 05-23-2017, 09:42 AM   #37
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Everyday what your stuff is valued at can be converted to real money. If you $20 stock is now $15 you lost $5 whether you sell it or hold it. Selling is only a tax consequence the money is the same as having $15 in your wallet.
My perception.
And that's the way accountants view it, too--"mark to market."
But for a retiree, IMO it makes sense to fixate on daily/monthly portfolio balance numbers only if you are at risk of needing to liquidate the entire portfolio in a very short time period (i.e. this year). Otherwise, a smoothed average and the overall trend is a lot more important.
If I'm not going to sell something today, then its value today is not important.
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Old 05-23-2017, 02:30 PM   #38
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Everyday what your stuff is valued at can be converted to real money. If you $20 stock is now $15 you lost $5 whether you sell it or hold it. Selling is only a tax consequence the money is the same as having $15 in your wallet.
My perception.


Another thing is when you sell the stock you've also lost the future dividend income from that stock. Sure some stocks will cut dividends in a squeeze but usually only as a last resort. Owning a diverse portfolio will limit impact of dividend cuts. It comes down to whether I think the stock will recover value on a reasonable timeframe.
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Old 05-24-2017, 07:03 AM   #39
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Cash Calculation

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Yeah, well ...... I ran some numbers in a spreadsheet.
And it doesn't work.

https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls

There's two problems. One is, if you spend from your 2-year cash bucket in a declining market, what do you do when your cash bucket is empty and now you HAVE to sell stocks when they are deeply down? Suddenly, you wish that you had sold 10% down a year ago instead of having to sell today at 30% down.

The other is, you need to have a way to refill the cash bucket when the crisis is over. Everybody just does a handwaving explanation, but when you run actual hard numbers, nothing works.
I don't use the cash bucket for small dips, it would have to have dropped more than 10%. Also, I don't use cash, I consider short term bonds as my cash bucket.
I probably refill only after the market has reached it's previous level, and would use other bond/balance funds.
From your SS 1970s era, what really kills you is inflation of the SWR, if you can control your withdrawl inflation rate (via 95% rule, etc), then you can improve your success rate. The cash bucket can kinda of do that, if you restrict spending so your CB actually lasts the 2-7 years you planned.
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