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"...
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/forums/showpost.php?p=605754&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?"
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.