Rebalancing necessary??

[Telly]

I may not be the brightest bulb in the financial chandelier, but I came away with a different read than some of the responses here.

From the tables in the paper, the "some cases" in the statement

Quote:
In fact, in some cases, rebalancing increases the number of shortfalls.
are not cases you would be practicing anyways (high withdrawal rates, low percentage allocated to equities.

In those cases with equities >= 40% of assets and withdrawal rate 5% or less, rebalancing ALWAYS had the lowest failure rate (see Table 1).

That is true ONLY for Table 1, the Bootstrap Simulation. Table 3, the results of the Temporal (Historical) Order are quite different!

The table were sure interesting. I noticed that at (my present) 60% stocks, the failure rate after thirty years at 5% withdrawal rate was only 20% for a rebalanced portfolio, and also only 20% for a portfolio that wasn't rebalanced but had bonds withdrawn first.

Hmm. Well, gee. I'm always so skeptical.

Ditto my comment above. See Table 3. I personally put more weight to the Temporal (Historical) Order simulation. The Bootstrap Simulation uses real returns for a year, but the return "year" is selected by random number. So the Bootstrapping Simulation can create extremely brutal sequences of yearly returns, if I am understanding that methodology correctly.

Wow, this is amazing research! Let me make sure I get this correct.

so we know that in the past that equities have outperformed other asset classes. so if we leave the equities in place and draw other asset classes when we know the equities outperformed then the portfolio will last longer? Man, I hope they didn't get paid too much to figure this out!

Rebalancing is primarily about reducing the standard deviations of returns, not maximizing them. If maximizing returns were the only goal we would invest 100% of the portfolio in the asset class with the highest expected return.

I don't see that the goal of the study was specifically to maximize returns over time, but rather to see if rebalancing indeed had a marked positive effect on not depleting the fund over the specified 30 year period. They DO say that the resultant residual, if one exists, will be much greater by NOT rebalancing. But I did not think that that was the thrust of the study.

I think the authors well covered the increasing stock-tilt of the portfolio if for example the Bonds-First withdrawal method is used.
The investor will have to have discipline, both not to get scared, change methodology and sell off in a down-market, and also not get crazy and start spending money like water if the portfolio starts to look huge at some point in the future. It all relates back to sticking to the original inflation-adjusted withdrawal percentage, and sticking to the method.

It seems to me that if one has a 60/40 portfolio, for example, and funds retirement with the Bonds first, there will be many years for the stocks to grow unhindered by withdrawals. So many $ in stocks, that when it comes to selling some off for each later year of retirement, even if the stocks take a market hit, the pool of stock is so large that there are many $-worth left to keep growing in the future. They say this same thing in the study.

I think it is an interesting concept, and I like seeing alternative research, rather than the same-old same-old. It wasn't so many years ago that the pundits and correct-thinkers of the day were advising withdrawals of 7 or 8% were fine!!!

 

[clifp]

It seems to me that if one has a 60/40 portfolio, for example, and funds retirement with the Bonds first, there will be many years for the stocks to grow unhindered by withdrawals. So many $ in stocks, that when it comes to selling some off for each later year of retirement, even if the stocks take a market hit, the pool of stock is so large that there are many $-worth left to keep growing in the future. They say this same thing in the study.

I think it is an interesting concept, and I like seeing alternative research, rather than the same-old same-old. It wasn't so many years ago that the pundits and correct-thinkers of the day were advising withdrawals of 7 or 8% were fine
Telly

You raise some good points. What I and I think Saluki, were reacting to was taking a known historical fact "stocks have higher returns than bonds"
running a bunch of simulations and then coming up with the conclusion, sell bonds first.

I am agnostic about the benefits of rebalancing, and I am quite confident that people who insist that one AA strategy is best are deluding themselves.

Still taking the authors research and applying it to a real life situation I think would be dangerous. Imagine that a 62 year old retires with a 60/40 equity/bond mix and continuously liquidities his bond portfolio. Sometime right around 80 years of age his bond portfolio is exhausted. He has a roughly 10 year planning horizon at the same time he is potentially facing huge expenses for nursing homes. Speigel in Stocks for the long run, says that for a 10 year period a lowest risk ultraconservative portfolio has 40/60%, while a conservative portfolio is 60/40 and risky portfolio is 103% stocks.

Now lets say that his initial $1 million portfolio is worth $2 million (in real dollar) all in equities. He can go to a dreary assisted living facility that cost $40K (matching his initial withdrawal) or a very nice one costing $120K/year, but seemingly affordable with $2 million in assets at his age. All but the most disciplined investors and/or fanatic LBYMer would choice the nice one, but with a 100% stock portfolio this very well could be a disaster.

Even if a more balanced withdrawal had lead to a smaller portfolio say 1.6 million but with a 50/50 mix, I think he would be better off because of the sleep factor.

 

[saluki9]

I don't mean to speak for Clifp (but I will anyway)

I think the points we are trying to make are

1. You don't need to have a PhD to realize that stocks have had better returns than bonds. Therefor it should not be a suprise that the equity heavy portfolios tend to survive longer

2. Like a lot of research it doesn't have much of a basis in reality. I work with a lot of people in the later years and the LAST thing they want is a portfolio that has a higher equity concentration as they get older.

 

[unclemick]

Heh heh heh - I repeat some earlier posts not necessarily from this thread: Chickenheartedness rough theorywise

a. Theoretical purity is not one of my strongpoints. I believe in handgenades - aka retired with emphasis on retired so I don't need no stinking numbers(kill zone is 25 times expenses give or take).

b. My ER sit. is such that Target 2015 hits at around 70 1/2 which is ok with me AND the IRS(that pesky RMD).

c. If my Norwegian widow stocks (15% mad money) do well - I'll have the pretty-est headstone in the graveyard(single. no heirs) and nobody's gonna give a pitcher of warm spit.

Damp the SD and party on dudes. Bon Temps Rolliere.

Wonder if St Pete will be impressed!

heh heh heh - Anybody with a copy of Bogle's first book, 1994 can find the papers agruments already covered sans the numbers - with slightly different nouns and adjectives.

 

[Hillbilly]

I don't mean to speak for Clifp (but I will anyway)

I think the points we are trying to make are

1. You don't need to have a PhD to realize that stocks have had better returns than bonds. Therefor it should not be a suprise that the equity heavy portfolios tend to survive longer

2. Like a lot of research it doesn't have much of a basis in reality. I work with a lot of people in the later years and the LAST thing they want is a portfolio that has a higher equity concentration as they get older.

Very well said. Your #1 observation was my mine too. Your #2 observation is why it went into the "round file".

 

[rmark]

Age weighting the 60/40 market weight portfolio, such as bond % = age, reduces the late life stock allocation needed to offset lower returns due to volatility. This results in a lower initial withdrawal rate, though the increased early life stock allocation should result in a higher portfolio value at retirement, leaving expected spending about the same.

 

[mathjak107]

I try not to look but it was tough watching the losers I bought keep on losing. I had 3 straight years (2000 - 2002) when I was selling winners (bond funds) to buy losers (stock funds).

But it all came good in the end, and I never went back and thought about how I could have done better if I had held the winners much longer.

by winners you mean like lucent , or maybe cisco or enron ....

problem is todays winners can turn to big loosers in a heart beat.

trees dont grow to the sky and rebalancing regardless of what you think may happen is the prudent way to protect yourself.

no one ever went broke taking a profit but be a little piggie eeeking out every last gain and your sure to get slaughtered.

 

[mathjak107]

i can see not rebalancing when your younger and have more years. in fact i was always 100% stock right up to about 3 years ago. ill be 55 with early er insight. as i got closer to having the amount of a nest egg that was my goal i was able to take some money off the table in stocks.

the wild swings of sometimes 20,000 in a day was toooooooo wild for my blood at this point. besides i almost won the game so why keep playing at that intensity. now i found a mix that gives me my targeted growth , key word targeted growth, not get as much as you can growth and much lower daily swings. as my comfort zone allocation shifts ill siphon off more stock to bring it back in line. if we drop ill buy more.

point is im no longer after every bit of gain and growing richer, at this point of my life im more interested in not growing poorer and not biting my nails from the wild swings. i need about 7% average growth to make my plan work.

 

[jIMOh]

Even within 100% equity portfolios, there is room to rebalance.

rebalance between domestic and foreign
rebalance between large, mid and small caps
rebalance between growth and value.

the purpose of rebalancing is to cash in profits.

A person needs to know ahead of time their rebalancing strategy. I rebalance twice per year. June 1 I adjust contribution percentages to keep allocation in line. Dec 1 I reset contribtions to normal, and then buy/sell as needed to rebalance tax favored accounts.

 

[kcowan]

Did I say this before?

Warren B thinks rebalancing is insane: "You mean I sell my winners and invest in losers!" and I am starting to rethink.

We bought AAPL at $13 and had sold 75% by the time it got to $78. Now it is $125...the difference is $51,000.00 and counting for the profits we passed up. Such is the cost of "peace of mind".

 

[jIMOh]

if rebalancing is making a person second guess, my thought is they are taking on too much risk.

I am 99% equity and 1% bonds. The 1% position was created June 1, in a gradual move toward adding a 10% bond position. Selling 1% every 6 months to get there.

I rebalance among my 74% domestic and 25% international equity holdings 2X per year.

If you second guess selling the winners and are kicking yourself for "what if" I kept it and made the other 66% gain, I would ask what you would have done had you not sold and took a large than 66% loss.

selling winners is locking in gains. That is a good thing. Read the thread, staying the course. Next rebalance is Dec 1, regardless of market behavior, I know I am selling 1% again (unless bonds go on a tear and my 1% now becomes a 2% position).

 

[mathjak107]

THE IDEA OF REBALANCING IS NOT TO BUY LOSERS . its to buy future winners. its to buy asset classes that havent had their day in the sun in a while , while selling some assets that have had a healthy run. for as we all know especially if we held those winning tech stocks in 1999 . TREES DONT GROW TO THE SKY.

 

[mathjak107]

Did I say this before?

Warren B thinks rebalancing is insane: "You mean I sell my winners and invest in losers!" and I am starting to rethink.

We bought AAPL at $13 and had sold 75% by the time it got to $78. Now it is $125...the difference is $51,000.00 and counting for the profits we passed up. Such is the cost of "peace of mind".

would you be saying the same thing about LUCENT OR CISCO?

 

[kcowan]

would you be saying the same thing about LUCENT OR CISCO?

I am talking about investment choices not mindless moving of assets. Of course, any hold has to be justified. PEs rule!

Also going against the herd. That is a good thing! Volatility is troubling. But rebalancers always want to quote the losers. I bought Nortel at $0.85 and sold at $1.65 but never held it any other time. I knew the management and didn't trust them. But even they were worth more than $.85!

The only telcos I hold are AMX and TEF. AMX has been fabulous and TEF has been disappointing. CSCO could become a value play but they have to prove they can make the transition from business to consumer driven technology.