Anyone taking money off the table?

[garyt]

Seems to me most smart retirees would hold 3 years worth of expenses in cash, that way you should be able to outlast any market correction before you have to sell into the down market. You can then afford to have a higher % in equities then the normal by your age %.

 

[ziggy29]

Who, me? I have no plans to take any money off the table.

If I did, what would I do with it? If I was any good at market timing, that would be one thing, but the truth is that I am not.

Except that we know what to do when you say "Whee!".....

 

[GrayHare]

Seems to me most smart retirees would hold 3 years worth of expenses in cash, that way you should be able to outlast any market correction before you have to sell into the down market. You can then afford to have a higher % in equities then the normal by your age %.

Those employing a cash bucket strategy need to replenish the cash periodically. It's better to do that after a run up than after a sell off, so now is better for equity sales than two months ago. Of course, perhaps November will be even better than now.

 

[rodi]

Those employing a cash bucket strategy need to replenish the cash periodically. It's better to do that after a run up than after a sell off, so now is better for equity sales than two months ago. Of course, perhaps November will be even better than now.

Most would call it periodic rebalancing. I suppose you can justify it as not market timing if you state that you rebalance when your asset allocation get out of wack.

I do sell off equities periodically - to rebalance... usually when there's been a big run up of stocks triggering my 5% out of band rule.
I also sell off bonds periodically - also to rebalance... for the same reasons. I try to keep my percentage in cash consistent with my asset allocation, as well.

 

[ls99]

Just re-shuffled the deck. Moved all VG 2015 to Wellesley.

 

[nwsteve]

How about this variable as less complicated choice. If you plan to make charitable gifts of stock to meet an annual giving goal, might not now be a good time to make that transfer?
Fewer shares to make a gifting target.
Not earth shaking but still some potential incremental benefit even if you are a "buy and hold" investor.
Nwsteve

 

[ERD50]

Seems to me most smart retirees would hold 3 years worth of expenses in cash, that way you should be able to outlast any market correction before you have to sell into the down market. You can then afford to have a higher % in equities then the normal by your age %.

I'm not sure that it is clear at all that that would be 'smart'.

Holding that cash is a drag on performance. Since markets generally go up over the longer term, and a retiree is also getting much (most?) of their income from dividends, and probably some from pension/SS, the amount of equities that they need to sell each year is small.

So holding cash to avoid the occasional small amount of selling in a down market could do more harm than good.

-ERD50

 

[Fedup]

I'm always under invested in equities because I have more pain when the market drops so I set a low AA for a reason. My husband is 78% in cash and I'm about 40-50% in cash. I don't even plan to use my money until RMD, which is 15 years from now.


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[Markola]

I believe in index funds, staying fully invested, keeping expenses low, and being highly diversified as proven ways to build wealth, and that basic wisdom has served my growing net worth very well for decades. Still, there is a puritanical standard against any market timing among many who invest the "Bogle Way" as I do, which I can't fully agree with. Isn't a Vanguard Target Date Fund that owns the world's economy of stocks and bonds, rebalances those many asset classes constantly, and then gets a little more conservative each year, a form of market timing? In reality, who buys only the S&P 500 or another index and then never adjusts course regardless, as the table would imply we should? In other words, aren't we all guilty market timers, at least at the margins? I'll go first: Hi, I'm Markola, and I'm a market timer.

 

[Totoro]

I'm a market timer and a gambler (individual stock buyer). Welcome to the association of anonymous timers.

We have regular meetings over at LoL's newsletter. Free virtual coffee.

I am largely Bogle, just not exclusively. Probably too youthful to have learned my lesson? We'll see.

 

[pb4uski]

Timely thread because we plan to close on buying a condo in ~30 days and I'm trying to decide whether to sell some mid and small cap funds whose proceeds I plan to use for the condo purchase today or let it ride until we get closer to closing. Whatever I decide, once I pull the trigger I won't look back.

After looking at some charts yesterday afternoon I did decide to take some money off the table to fund the condo purchase as the S&P was within 3% of its all-time highs... so call me a dirty market timer.

The big problem with that is that I had substantial capital gains on those sales so I won't be able to do as much Roth conversion as I would normally do this year but I think that is not a bad problem to have.

 

[target2019]

We are 54.5% equities, as of March 31. Still working and contributing.

I don't look at our AA picture, except at EOM. If I did, it would be tempting to fine-tune the results.

Thinking ahead, I hope to do the same. Set an AA, make it less aggressive each year, and keep monthly totals so I can have perspective.

I think 35% equities is an appropriate target, from what I've seen in in-laws portfolio over the past 10 years. Where they had 20% equities, it did not grow. Where they had 35% or more equities, it grew.

In a few years I will probably need to confront the need to lock in gains. So I am reading this thread with interest.

 

[fourinone]

corrections

People lose more money trying to avoid stock market corrections than they do just going through the correction. Some auto rebalancing goes a long way towards selling high/buying low in a properly diversified portfolio.

 

[jabbahop]

I timed market to tax loss harvest a substantial portion of our taxable portfolio at the beginning of the market to get out of expensive broker recommended funds into vanguard index. Unfortunately I ones being out the 31days to miss much of the recovery. Typical for me and I am done with timing.

I take solace that I went from an average expense ratio of about 1% to less that .2% while paying no capital gains to convert. Hopefully over retirement the lower expense far outpaces the lost gains.


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[marko]

One way to think about this is that if I have a 3% WR and a 60% equity allocation I'm effectively overweight equities relative to my minimum return requirements. The question then becomes: do I want to be overweight equities relative to my needs?

Ok and point taken. But how about that old enemy: inflation? If you adjust your risk to only your WR needs, inflation will eventually eat you up. No?

 

[Gone4Good]

Ok and point taken. But how about that old enemy: inflation? If you adjust your risk to only your WR needs, inflation will eventually eat you up. No?

The returns used in that calculation are real returns (i.e. after inflation). The fixed income return I used of 0.56%, for example, was the yield on Vanguard's Total Bond Market Fund of 2.11% less the 10-yr TIPS breakeven spread (i.e. market inflation expectation) of 1.55%.

 

[marko]

The returns used in that calculation are real returns (i.e. after inflation). The fixed income return I used of 0.56%, for example, was the yield on Vanguard's Total Bond Market Fund of 2.11% less the 10-yr TIPS breakeven spread (i.e. market inflation expectation) of 1.55%.

Got it!

 

[Gone4Good]

Here's one more thought:

A retiree plans to draw 4% for the rest of their life. If equities return 10% annually the retiree is sitting pretty. She doesn't need to beat the market or even keep pace with the market to have a successful retirement plan.

However, if the same retiree faces a much worse equity market, say -3% annually, her plan is heading toward ruin if all she does is earn market returns.

Now it's not possible to know which future we face. But it looks like catching 100% of the potential upside in retirement isn't nearly as important as avoiding the worst of the potential downside.

With that in mind, does it not make sense for retirees to reduce equity allocations after a period of strong returns? And is simply aiming to earn the market return really the right goal?

 

[garyt]

I'm not sure that it is clear at all that that would be 'smart'.

Holding that cash is a drag on performance. Since markets generally go up over the longer term, and a retiree is also getting much (most?) of their income from dividends, and probably some from pension/SS, the amount of equities that they need to sell each year is small.

So holding cash to avoid the occasional small amount of selling in a down market could do more harm than good.

-ERD50

In a sense, we agree. Until this year, I was pretty much 100% invested in equities, since as you say, the trend is up. Now, with retirement looming,and SS still years away for me, I've gone 3 years basic expenses in cash. That's about 10-15% of my money, so I'm still way more weighted in equities then the "experts" recommend. But I'm not worried, because I have 3 years to recover from a down market, should it happen before I have to sell any holdings. To me, that's smart.
Pensions are mostly a thing of the past. Most people going forward are going to have to save what they have for retirement. SS? Who knows what's going to happen there, but I'm willing to bet eventually the full retirement age is going to 70. You're going to need quite the nest egg to receive enough dividends to pay your expenses, and most people don't have that. We've all seen the numbers, most people aren't/can't save for retirement. They will be tapping whatever they have for income.
Now, people on this board are obviously a different breed and probably don't have the problems I've outlined, but we're far from the majority.

 

[ziggy29]

With that in mind, does it not make sense for retirees to reduce equity allocations after a period of strong returns? And is simply aiming to earn the market return really the right goal?

It make some sense, but how do you decide when to pull back, and how much? Unless there is some mechanical strategy that enforces a defined discipline, this becomes subject to human emotions which often torpedo investment returns through the twin portfolio-killers, greed and fear.

When someone does a rebalancing, they are doing this to a small degree, but in most rebalancings you are just restoring to a baseline target AA by selling some of the best performers in order to buy some weaker asset classes, relying on long-term reversion to the mean to goose return a little bit. But how can one adopt (let alone back test) a strategy that has some defined change to asset allocation based on how the market has been doing or based on your assets becoming unbalanced in a certain way?

 

[Gone4Good]

It make some sense, but how do you decide when to pull back, and how much?

Previously I posted my approach to thinking about this. And basically it comes down to allocating for an expected rate of return on your portfolio, which you'd want to be greater than your WR. So based on current market conditions, I came up with the following . . .

Withdrawal Rate		Stock Allocation		Bond Allocation
4%		63%		37%
3%		45%		55%
2%		26%		74%
1%		8%		92%

If I started with a 4% WR and market conditions drive that number down to 3%, I now expect I can hit my target return with a minimum allocation to equities of 45% instead of a minimum of 63%.

It's not scientific. It has an element of subjectivity to it (as will any AA decision). But it has the overwhelming virtue (IMHO) of at least attempting to target the thing I care most about: earning my WR.

In an extreme example, say I have a 3% WR and 30-yr TIPS yield 3%. Do I really still need a 60% equity allocation? I may have reasons to hold that much in equities, but I can more safely secure my 30-year retirement with a much smaller equity allocation given those market conditions.

Perhaps, in that case, I'd want to swing for the fences and hold a lot of equities in the hopes of leaving a larger inheritance. But I could just as easily say I'd rather lock in my WR and accept minimal equity risk to my retirement.

Both are reasonable answers to the same question. But they are questions I'd prefer to actively answer based on current market conditions rather than leaving them on a default setting regardless of what the market is giving me.

 

[ERD50]

People lose more money trying to avoid stock market corrections than they do just going through the correction. Some auto rebalancing goes a long way towards selling high/buying low in a properly diversified portfolio.

Actually, studies show that the upside of auto-rebalancing my be more than offset by the downside. The downside is selling off equities each year during a multi-year bull market.

As you sell off, you have less invested to take advantage of the remaining bull cycle. It might 'feel good', but it does not 'go a long way' towards improving your performance, and may hurt it.

Be careful with those broad brushes, someone may get hurt!

-ERD50

 

[ziggy29]

Actually, studies show that the upside of auto-rebalancing my be more than offset by the downside. The downside is selling off equities each year during a multi-year bull market.

That said it still is a risk reduction tool in that it takes a little money off the table when prices are starting to get high. And as has been said before, maximizing returns isn't the only goal of retirement investing; reducing or minimizing chances of disaster and falling short of your retirement needs is also a consideration.

Sure, you are selling some during a multi-year bull market, but you have also sold some before the eventual correction/bear market/market crash. Whether it's the optimal way to increase returns is debatable, but if you don't perform that rebalance once in a while, your portfolio will, in the long term, become more and more imbalanced with more and more equities at a time when you are probably prudent to ratchet it back a little bit. So if you eventually *do* need to take some equity exposure off the table because of a growing imbalance -- say a 60/40 AA became 80/20 over a decade or two of mostly bull markets -- when do you scale back, how much do you scale back, and what triggers it? That is, to me, one of the main benefits of fixed, *mechanical* rebalancing -- it eliminates the human emotions and constant second guessing yourself about whether you should "sell some now", or wait and hope the bulls keep running.

 

[Gone4Good]

That said it still is a risk reduction tool in that it takes a little money off the table when prices are starting to get high. And as has been said before, maximizing returns isn't the only goal of retirement investing; reducing or minimizing chances of disaster and falling short of your retirement needs is also a consideration.

That's my view.

It's true that when you have a history of consistently rising equity prices holding more equities will result in better returns than holding fewer.

But history is just a guide. And the map isn't the terrain, as they say.

As a retiree it won't terribly bother me if stocks keep going up and up and up. And that's true regardless of how I invested. But in the case where stocks go into a long winter my investment decisions today will have quite a significant impact on how well my retirement plan fares.

There's no law of nature that requires equities to earn a positive rate of return, even over long periods (see Japan). I don't have to expect that to happen in the U.S. to recognize that it could. So I'll store some nuts while the weather is nice in the off chance that when winter comes it lasts longer than we imagined it could.

 

[ERD50]

That said it still is a risk reduction tool in that it takes a little money off the table when prices are starting to get high. And as has been said before, maximizing returns isn't the only goal of retirement investing; reducing or minimizing chances of disaster and falling short of your retirement needs is also a consideration. ...

And that's fine. I'm certainly not arguing against re-balancing, I just think people should realize that there is a potential downside - it's not a panacea. If after reviewing the pros/cons, they decide on a rebalancing approach, I don't see anything wrong with that at all (not that my opinion counts for anything anyway).

But let's also take the case where an initial 70/30 AA choice rose to 90/10 over the years. Sure, the investor will take a deeper decline in a correction, but... if that deeper decline is from a peak they would not have experienced had they remained 70/30, is that a bad thing?

That's the point that almost always gets missed in these AA discussions. The lower AA fans point out the big drops, but often ignore that the drop is from a point that would not have been realized at the lower AA. If you are still higher after that drop, you are better off, no?

Now, if you just can't stomach that volatility (loss aversion being stronger than the benefit of gains in many people), and it might lead you to sleepless nights, or a knee-jerk sell off at the wrong time, then a lower AA is probably appropriate. But it might come at other costs, and these should be taken into account.

-ERD50