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Old 09-04-2021, 11:30 AM   #41
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There is one difference. We do not depend on investment spin off to fund our basic retirement living expenses. We might have a different view if our situation was different or if we had a different risk tolerance.
That is a big difference. If your portfolio isn't what is funding your retirement, you can afford to be much more aggressive. In that case, you might be investing to leave a legacy for later generations and you aren't terribly concerned about the next correction.
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Old 09-04-2021, 11:54 AM   #42
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Makes sense if your withdrawals are enough to effectively rebalance, ours aren't enough but it helps.

Same as when I was working and constantly investing new money, I almost never had to rebalance, I just put the new money in the asset class that was under represented.

But I have always considered taxes when faced with an AA imbalance, and often didn't act. Rebalancing always has a tax impact IME...
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Old 09-04-2021, 12:52 PM   #43
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I put 20x yearly expenses in bond/cash and 57x yearly expenses in equities and don't plan to rebalance.
Unless you are 12 years old, you really need to figure out how to spend or give more money.
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Old 09-04-2021, 01:02 PM   #44
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@DrRoy why do you do this rebalancing? What is the reason to have a glide path?
I have, as some say here, won the retirement savings game and am overfunded. I reduce the AA with the rising market to cut future volatility and for peace of mind.
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Old 09-04-2021, 01:34 PM   #45
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If you aren't rebalancing because equities will do better in the long run, why not start with the higher equity allocation to begin with?

In the OP's case, withdrawals from the overweight class is a form of rebalancing.
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Old 09-04-2021, 04:04 PM   #46
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MichaelB, can you say more on the lower volatility = higher survivability point?

Unless one is operating very near the margin of success/failure, not sure when that would happen?

Thanks.
Rebalancing lowers volatility and expected return (but not risk adjusted return). Even at the lower expected return, the decline in volatility can be enough to improve the overall portfolio survival rate. This is Montecarlo analysis. Is it a big difference? Probably not. The higher equity allocation does mean a greater probability of a higher ending balance, so the trade off is clear. And yes, this has greater relevance at the extremes.

Most of the discussions here center around return, which is fine when we are in accumulation mode. When in withdrawal mode, however, portfolio survival is the critical factor. Some of us rely only on portfolio and have no fallback, so this is not trivial for us.

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I'd also like to see some backing for that. As I recall, the various studies were pretty inconclusive regarding portfolio survival rate. Yes, rebalancing would seem to reduce volatility, but some of that comes from selling too early in a rising market, and therefore not sharing in the full gains (I'll take positive volatility any day!), leaving one less prepared for the next drop - which may or may not be fully offset by the lower AA. I don't think we can make the assumption that lower volatility = higher survival rates.
Rebalancing doesn’t seem to reduce volatility, it does. Lots of literature on this by Vanguard, Morningstar, and others. If you don’t think the volatility / survival trade off is real, or aren’t concerned, fine. I am not an expert, just another observer.

To restate, for our portfolio management we can only control two things. Risk and expense. If we define our risk tolerance through asset allocation, rebalancing is how we maintain the level of risk we choose. This is not a “right vs wrong” discussion, it is about how to accomplish an objective.
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Old 09-04-2021, 04:14 PM   #47
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I have, as some say here, won the retirement savings game and am overfunded. I reduce the AA with the rising market to cut future volatility and for peace of mind.
@DrRoy thanks for the reply.
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Old 09-04-2021, 05:38 PM   #48
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Not to provoke arguments, but IMO the idea that volatility is risk is waay oversold.

Consider a nonprofit with an endowment fund, which theoretically has an infinite life. Why should the manager of these funds care about volatility? Historically the market has always recovered from bad times. As a good fiduciary, he/she ought to be 100% in equities and riding the Mr. Market bronco UNLESS there are periodic needs to disburse funds. That is roughly analogous to the SORR problem and is solved by keeping some cash on hand for bad times. To hold cash simply to damp volatility is to take really bad-tasting medicine that doesn't produce an economic benefit to the endowment.
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Old 09-04-2021, 06:51 PM   #49
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I'd also like to see some backing for that. As I recall, the various studies were pretty inconclusive regarding portfolio survival rate. Yes, rebalancing would seem to reduce volatility, but some of that comes from selling too early in a rising market, and therefore not sharing in the full gains (I'll take positive volatility any day!), leaving one less prepared for the next drop - which may or may not be fully offset by the lower AA. I don't think we can make the assumption that lower volatility = higher survival rates.

Rebalancing doesn’t seem reduce volatility, it does. Lots of literature on this by Vanguard, Morningstar, and others. If you don’t think the volatility / survival trade off is real, or aren’t concerned, fine. I am not an expert, just another observer. ....
OK, maybe including "seem" was awkward wording on my part, as I was agreeing with you. Though I'd imagine there are scenarios where it might increase volatility, in a long downturn the rebalancer would have a larger allocation to stocks, and maybe higher volatility?

But that's a rather unimportant side note, my real point is that I don't think it's fair to say that this reduced volatility improves the portfolio survival rate. Yes, in general, reduced volatility (all else being equal) can lessen the impact of SORR. But rebalancing is not an "all else being equal" scenario. It also may lower returns (and in some scenarios, may increase returns). So there's more to it than just reducing volatility. It's more complicated than just lower volatility means improved portfolio survival rate.

At any rate, I'm pretty much agnostic to rebalancing as the studies I've seen (and done) seem pretty inconclusive to me. It might help, it might not (by a little). If someone feels comfortable doing it (or not), then why not? I see no clear downside either way, so whatever floats the boat.

I still rebalance from time to time - not based on any of those studies, but the chart that FIRECalc provides for portfolio survival vs AA. IIRC, pretty flat from ~ 40/60 to 95/5. So I want to stay away from those inflection points and more toward the center, but with a little personal bias towards being aggressive. But approaching 80/20 has me looking, as does approaching 65/35 - pretty wide bands. But that's just me.


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... To restate, for our portfolio management we can only control two things. Risk and expense. If we define our risk tolerance through asset allocation, rebalancing is how we maintain the level of risk we choose. This is not a “right vs wrong” discussion, it is about how to accomplish an objective.
Fine ( though I agree with OldShooter that 'risk' and 'volatility' are not the same thing - if you lower your 'risk/volatility' to near 0 with all cash, your portfolio won't survive for long, and that's the real 'risk' we are concerned with), but that is separate from a statement that rebalancing improves the portfolio survival rate through lower volatility (which is what I questioned).

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Old 09-05-2021, 02:30 AM   #50
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Rebalancing lowers volatility and expected return (but not risk adjusted return). Even at the lower expected return, the decline in volatility can be enough to improve the overall portfolio survival rate. This is Montecarlo analysis. Is it a big difference? Probably not. The higher equity allocation does mean a greater probability of a higher ending balance, so the trade off is clear. And yes, this has greater relevance at the extremes.

Most of the discussions here center around return, which is fine when we are in accumulation mode. When in withdrawal mode, however, portfolio survival is the critical factor. Some of us rely only on portfolio and have no fallback, so this is nit trivial for us.
Thanks. I’m one of those portfolio reliant folks, so valuable to understand.
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Old 09-05-2021, 09:25 AM   #51
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Not sure that it matters much.... first is $1m in a 60/40 with $40k inflation adjusted withdrawals with annual rebalancing, second is same scenario but with no rebalancing.

Similarly, FIRECalc suggests similar levels of success across a broad range of AA.

So while taken together it doesn't seem to matter much, I do support periodic rebalancing.
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Old 09-05-2021, 09:25 AM   #52
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Not to provoke arguments, but IMO the idea that volatility is risk is waay oversold.
Of course you’re provoking an argument. We’ve disagreed in the past on this, nothing has changed, so no need to repeat the same arguments. I’ll move on.
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Old 09-05-2021, 09:39 AM   #53
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Fine ( though I agree with OldShooter that 'risk' and 'volatility' are not the same thing - if you lower your 'risk/volatility' to near 0 with all cash, your portfolio won't survive for long, and that's the real 'risk' we are concerned with), but that is separate from a statement that rebalancing improves the portfolio survival rate through lower volatility (which is what I questioned).

-ERD50
I didn’t say risk and volatility are the same thing and I certainly never suggested reducing volatility to zero. In fact, I haven’t suggested minimizing volatility. That’s a red herring.

Just to summarize, once again, in different words. I think setting an asset allocation target establishes an expected or tolerable level of risk. Allowing an equity allocation to remain above the target level increases portfolio risk and increases volatility. Rebalancing a portfolio reduces risk by returning the allocation to target levels. Increased volatility contributes negatively to portfolio survival. These factors are probably less significant at the core and have greater impact at the extremes.
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Old 09-05-2021, 11:55 AM   #54
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I agree with MichaelB’s viewpoints. I think it’s an individual choice regarding rebalancing approaches. I do it through annual withdrawals. I’m not interested in shooting the lights out (as my reports in the YTD Performance thread will attest) but rather to keep a smooth sailing, steady as she goes behavior for my retirement portfolio.
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Old 09-05-2021, 07:17 PM   #55
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Many here have a very low withdrawal rate (or with pension/SS don't even depend on the portfolio) and wish to maximize their portfolio.

However, as the 2000 crash indicated, "volatility is risk" (in the form of a severe extended market downterm before recovery), at least for those making significant withdrawals before pensions or SS withdrawing, and who are withdrawing at a significant withdrawal rate. Not for those who are withdrawing nothing or less than 1.5/2% from their portfolios either because of low spending/thrift or other sources of $.
However, if you include the 2007 crash, it could have taken as long as 14 years to recover., even not considering withdrawals. I was unaffected largely because I was in accumulation mode and dumping a large % into stocks, until 2005 when I started bringing down my allocation from 90% stocks, although I did bump stock investments then to rebalance back up. For those at WR and at WRs of 2.5% or even 3% or less, this period would be a lot less significant than someone taking 4-5% WR and 80-100% stocks. A further factor is the psychological--will someone at 90% stocks and withdrawing 4% or 5% before SS in, say 8 years, be able to stick to that allocation until recovery at, say, 2012 or 2013? Many here would I guess, based on testimonials. I doubt I would, so a lower stock allocation that might harm my "ultimate" portfolio when I croak or even reduce spending 2-5% doesn't seem the correct goal, at least for me.

I am willing to let my stock allocation creep up as I get closer to SS FWA, although I'll periodically scrape stock gains over 55% allocation for sure, either during the year or during the Jan withdrawal.
And yes, one could work longer, save more and use a lower WR rate to "maximize" the ending portfolio, but this is a ER forum.

I'm attempting to maximize withdrawals and reduce SORR risk in the period over the next 7 years before my and DW's FRA/SS and am not trying to maximize the amount of $ left over when I/DW croak. This is a different goal than many, but one--given SORR risk--both rebalancing and a lower stock allocation lessen the short-term risk, no doubt at the expense of maximizing spending later. particularly "normal" stock return environments. Another fix is a variable withdrawal rate, as others have posted, particularly if you have a large "optional spending" buffer.
In my case, I am holding cash sufficient for the next 3.5 years until my SS FWA and will use bonds/rebalancing for the additional 4 years until DW's FWA. On my FWA and certainly after DW's the risk of SORR considerably diminishes, so at that point I will gradually increase the stock allocation. Could I squeeze out another 1-2% in bond income from cash--yes, but is it worth the trouble with treasuries at 1%?

Until then I usually can rebalance with January withdrawals, although I did shove more into stocks in March/April of 2020 (it seemed a good moment and one when stocks were cheaply valued compared to previous years, and I was prepared to use more cash if it continued to decline).

YMMV, particularly if your goal is to maximize a portfolio for heirs or charity, which are worthy portfolio goals. Unless we run into another 2000/2007 scenario (which I suspect is close to a worse case for the S&P), I doubt it will make much difference, as several have posted. But in one of the bad scenarios--it could make a difference and it is those bad lines at the bottom of the FireCalc chart I worry about; otherwise I would be withdrawing 7% a year.
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Old 09-05-2021, 08:40 PM   #56
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In all things business and investing, I like measurable KPIs. I know many people on this site were/are professional managers, executives and business owners. How many of you don't measure anything in your business, quantitatively? I'll bet not many of you.

So let's be precise about risk. Is it:

- standard deviation of return
- conditional value at risk
- maximum drawdown

Or something else? Let's be specific. Otherwise it's chasing after the wind when risk is not defined. All three of the above are good risk KPIs in my book.
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Old 09-05-2021, 10:41 PM   #57
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Given my post, to me it is a combination of max drawdown, extended over a long period, as my post suggests.

I agree there are other primary risks, including long-term inflation, for example. This VERY MUCH is determined by one's withdrawal rate, portfolio goals, longevity, etc, etc, so I do not suggest that my #1 risk is or should be your #1 risk. SORR risk probably only applies to higher withdrawal rates (>3.5%) and longer times to pension/SS, and only in the bottom 10-20% of the FireCalc curves, so the maximize portfolio posts will in all likelihood turn out to be right (which doesn't bother me).
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Why rebalance in retirement?
Old 09-06-2021, 07:33 AM   #58
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Why rebalance in retirement?

Another risk is Retiree Rigidity, if you will:

“…[T]he key to choosing your own (withdrawal) rate has less to do with the numbers than with your personal flexibility. If as needed you can readily adjust your living expenses, find work to supplement your passive income and/or are willing and able to comfortably relocate to less expensive places, you will have a far more secure retirement no matter what rate you choose. Happier too I’d guess.

If you are locked into certain income needs, unwilling or unable to ever work again and your roots go too deep to ever seek out greener pastures, you’ll need to be much more careful. Personally, I’d work on adjusting those attitudes. But that’s just me.”

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Old 09-06-2021, 09:26 AM   #59
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I started to write this yesterday, but didn't post. We're being awfully vague about risk.

A risk is an adverse future event with it's associated probability.

So, of course, volatility is not risk.

The risk is being forced to sell depreciated securities for essential spending due to a market downturn. The adverse event is the forced selling, and the probability is of the market downturn happening at the same time you have to spend invested $$ to live.

Inflation alone is not risk. The risk is that your essential spending amount exceeds your investment returns (over some finite time period) with the probability determined by both future inflation and the investment returns.

Of course in most cases the probability part of risk is unknown, and therefore a subjective quantity we get to make up.

I just think it would be helpful if, when someone wants to post about a risk, they could be a little bit clearer and identify the adverse event they have in mind along with how probable they think it is.

Ok, my rant is over....sorry to bother you (not really ;-)
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Old 09-06-2021, 12:01 PM   #60
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I started to write this yesterday, but didn't post. We're being awfully vague about risk.

A risk is an adverse future event with it's associated probability.

So, of course, volatility is not risk.

The risk is being forced to sell depreciated securities for essential spending due to a market downturn. The adverse event is the forced selling, and the probability is of the market downturn happening at the same time you have to spend invested $$ to live.

Inflation alone is not risk. The risk is that your essential spending amount exceeds your investment returns (over some finite time period) with the probability determined by both future inflation and the investment returns.

Of course in most cases the probability part of risk is unknown, and therefore a subjective quantity we get to make up.

I just think it would be helpful if, when someone wants to post about a risk, they could be a little bit clearer and identify the adverse event they have in mind along with how probable they think it is.

Ok, my rant is over....sorry to bother you (not really ;-)
@SnowballCamper can you propose a quantified measurement for your view of risk?

You talked about selling in a market downturn. The title of this thread includes the word "rebalance". In your view how are rebalancing and selling in a downturn related?
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