Reevaluating your AA?

[HadEnuff]

Ok, so ONCE in the history of the S&P 500 it double-cratered and took a decade to recover on a real basis. I'm not sure what to make of that... anomaly?

I suppose we can all make what we want of it, but it may be important to note that that one time in history came after an unprecedented Bull, much like the last decade.

What I choose to make of it is a hole I stepped in once, and would prefer not to step in again, or if I must step in it again, I have chosen to be less exposed to the negative consequences.

 

[donheff]

No. You're doing it all wrong! That's not how this works. That's not how any of this works!

Rebalance if anything, buy more stocks.


-ERD50

+1 My thought exactly. If you have a high equity allocation and find a big dip alarming that is precisely NOT the time to reallocate to lower equities. Wait until a recovery and then change your allocation.

 

[bobandsherry]

5-31-2000 the S&P 500 was at 1420, 12-31-2002 it hit 879, a 38% drop,

9-28-2007 it hit 1526, and on 2-27-09 it was at 735, a 52% drop.

From that 5-31-2000 level of 1420, it took roughly 12 years to regain that level without having since dropped back below.

OK - I guess over the pretty extended time period you found the isolated troughs. But how did the bond funds also react during this time? How much better would someone have been if they were 50/50 vs. 80/20?

But to put things into perspective, let's compare the past 10 years of a bond index (Vanguards Total Bond Market Index - VBMFX) to the Vanguard 500 fund (VFINX). Vanguards Total Bond Market Index (VBMFX) the 10 year return has been 3.47%. The Vanguard 500 index fund (VFINX) has returned 14.17% over that same 10 year period. Those invested in VBMFX over the past 10 years would have seen their balances grow from $10,000 to $14,060. Those invested in VFINX would have seen their same $10,000 grow to $37,633. So even with a 40% haircut those invested in equities are ahead of the game so to speak vs investment in bonds.

 

[GravitySucks]

if we had a 40% drop in your equities portion, and a decade to recover, would you be alright?

That was the question I asked myself, which prompted me to change it a touch.

Probably.
Not quite that extreme, but I reran the Fidelity retirement planner in the extremely low performing setting it takes about another 18% bite out of my 60/40 portfolio next year, another 5% or so in 2020, then goes sideways another 5 or 6 years. On top of this recent realife drop I guestimate that would be more than a 40% equity drop.
Says I could still leave my then late 60s yr old kids a small inheritance.

 

[jazz4cash]

+1 My thought exactly. If you have a high equity allocation and find a big dip alarming that is precisely NOT the time to reallocate to lower equities. Wait until a recovery and then change your allocation.

If you can’t sleep because you fear an even bigger drop, waiting for a rebound only extends your anxiety. More likely it’s due to overestimating ones risk tolerance. I think making rational mid course revisions to relieve the anxiety is fine. Anxiety is not healthy. Not a problem for me (so far).

 

[easysurfer]

OK - I guess over the pretty extended time period you found the isolated troughs. But how did the bond funds also react during this time? How much better would someone have been if they were 50/50 vs. 80/20?

.... So even with a 40% haircut those invested in equities are ahead of the game so to speak vs investment in bonds.

I agree that over an extended time, returns will favor equities. Question would you be willing to stomach a possible 40% haircut at this stage of your life?

BTW ... nice graphs to explain the picture.

 

[bobandsherry]

I agree that over an extended time, returns will favor equities. Question would you be willing to stomach a possible 40% haircut at this stage of your life?

No longer a discussion of can one stomach 40% haircut. Based on the S&P high of 2914 on 8/29, and with it at 2500 now, that's already 14% haircut realized, so now the question is can one stomach an additional 26%, right?

 

[easysurfer]

No longer a discussion of can one stomach 40% haircut. Based on the S&P high of 2914 on 8/29, and with it at 2500 now, that's already 14% haircut realized, so now the question is can one stomach an additional 26%, right?

I remember reading a favorite money book years ago discussing this very topic. The author said over the long term, with many years ahead, numerically the best allocation is 100% in equities. But the question again is about will power to handle the haircuts when they happen.

 

[HadEnuff]

OK - I guess over the pretty extended time period you found the isolated troughs. But how did the bond funds also react during this time? How much better would someone have been if they were 50/50 vs. 80/20?

But to put things into perspective, let's compare the past 10 years of a bond index (Vanguards Total Bond Market Index - VBMFX) to the Vanguard 500 fund (VFINX). Vanguards Total Bond Market Index (VBMFX) the 10 year return has been 3.47%. The Vanguard 500 index fund (VFINX) has returned 14.17% over that same 10 year period. Those invested in VBMFX over the past 10 years would have seen their balances grow from $10,000 to $14,060. Those invested in VFINX would have seen their same $10,000 grow to $37,633. So even with a 40% haircut those invested in equities are ahead of the game so to speak vs investment in bonds.

Well we can certainly agree that the last decade was a wonderful time to be invested in equities vs. bonds. But what if that wonderful heady run-up has put you right where you need to be to consider retirement, and indeed you do so.

Now, can you afford the drop and a long ride out to recovery? That is why, in my first post on this thread I said "I think it all depends on your age, and your WR, or if you aren't withdrawing, your timeline before you do."

I see it as a sequence of returns risk issue.

My dad retired in '89. The last 7 years of his working life, and the first decade of his retirement coincided with an unprecedented Bull. He was over allocated in equities, figuring his 2 year cushion would let him ride out a bear. But it took 10 years (factoring dividends and inflation). As it turned out, they had purchased a condo on the beach, and that appreciated wildly in those 10 years so he was able to use that money to live his life out nicely. But had it not been for the real estate bonanza he pretty much fell into accidentally, it would have been a different story.

 

[HadEnuff]

I remember reading a favorite money book years ago discussing this very topic. The author said over the long term, with many years ahead, numerically the best allocation is 100% in equities. But the question again is about will power to handle the haircuts when they happen.

and I think that assumes you don't need to liquidate those assets along the way for living expenses. I know folks who have millions they do not need to use for living expenses, and they are 100% in equities, for future generations. That makes some sense, historically, since they have an infinite timeline for recovery.

 

[bobandsherry]

Well we can certainly agree that the last decade was a wonderful time to be invested in equities vs. bonds. But what if that wonderful heady run-up has put you right where you need to be to consider retirement, and indeed you do so.

Now, can you afford the drop and a long ride out to recovery? That is why, in my first post on this thread I said "I think it all depends on your age, and your WR, or if you aren't withdrawing, your timeline before you do."

I see it as a sequence of returns risk issue.

My dad retired in '89. The last 7 years of his working life, and the first decade of his retirement coincided with an unprecedented Bull. He was over allocated in equities, figuring his 2 year cushion would let him ride out a bear. But it took 10 years (factoring dividends and inflation). As it turned out, they had purchased a condo on the beach, and that appreciated wildly in those 10 years so he was able to use that money to live his life out nicely. But had it not been for the real estate bonanza he pretty much fell into accidentally, it would have been a different story.

All that is well and good, but you haven't provided any information that shows how much a person who was 50/50 (or chose whatever AA you want) was better off than the person who was 80/20 during that same time. Did the 30 basis point difference really make that much of a difference, and how soon was that bypassed by someone who had the 80/20 AA? So absent of that I don't know if there's much to discuss.

 

[daylatedollarshort]

We're still mainly investing using matching strategies with a low enough AA in stocks to not give us heart burn over any market drops. We would have a maximum 3.33% safe withdrawal rate keeping up with inflation alone (100 / 30 years= 3.33%), plus TIPS real rates after CPI inflation are around 1% right now. We don't plan to spend that much anyway so those returns are good enough for us and avoid any market angst.

 

[gayl]

Single, DBP = 100% of expenses
Slowly moving from 95% equity to 72% stocks / 28% fixed income since retiring for good (?) 1/30/18
Don't count cash / home equity / slush fund / not drawing SSA

Getting cold feet. Had planned on selling another 43k equities to stick into tax free munis but rethinking. Maybe the market will correct AA for me

Not going to jump into "equities VS bonds" "index VS active trading VS options."

 

[HadEnuff]

All that is well and good, but you haven't provided any information that shows how much a person who was 50/50 (or chose whatever AA you want) was better off than the person who was 80/20 during that same time. Did the 30 basis point difference really make that much of a difference, and how soon was that bypassed by someone who had the 80/20 AA? So absent of that I don't know if there's much to discuss.

I suppose that if 20/80, or 30/40/10 is no better than 80/20 in a time such as I've described, then it would make the most sense to just go 100% equities.
Wouldn't that be the obvious conclusion?

 

[NYEXPAT]

Yes, I am looking hard at reallocating to more stocks. I was very conservative when I retired, and have been easing back into the market at dips. I am currently at 40%, and I am thinking of going to 50%. That leaves me some head room for higher stock allocation if 2019 continues down, and we hit a recession some have said is inevitable. Eventually, I hope to get to around 70%, and then leave it alone.

I would be listening to those people and not the others!

 

[48Fire]

I would be listening to those people and not the others!

Haha, thanks for the advice I bumped up to 46% today. Looks like this market may be heading down further, but just my guess of course. I will keep jumping in deeper as it does

 

[HadEnuff]

All that is well and good, but you haven't provided any information that shows how much a person who was 50/50 (or chose whatever AA you want) was better off than the person who was 80/20 during that same time. Did the 30 basis point difference really make that much of a difference, and how soon was that bypassed by someone who had the 80/20 AA? So absent of that I don't know if there's much to discuss.

So, This is what I've found.

A graph that shows that in 1997, 10 year treasuries were yielding around 6%, and over the decade or so it took for equity prices to rebound to pre-crash prices, the overall bond market went through a decline in yields, so I assume that while it was paying 6%, the face value would have increased.

According to a graph showing the S&P Dividend Yield, for that decade it was averaging under 2%.

Here are the links to those graphs:S&P 500 Dividend Yield

http://4.bp.blogspot.com/-wzAFfFWHL...Gyn0h7yvf0/s1600/10-yr+Treasury+yields+25.jpg

I tried to post the actual graphs, but I'm too dense to figure out how to do it. Sorry.

I think it shows that any dollars thus invested would do better for that decade than left in equities for the crash. Probably even better if you cashed in that bond after a bit of a tumble and then reinvested it in the market for some of the upswing, which is one of the big advantages of not being too strong in your equities AA, I would think.http://www.early-retirement.org/forums/attachment.php?attachmentid=30247&stc=1&d=1545428058

I wouldn't know how to quantify that.

edit: I tried to edit this post to include the graphs but I only made it worse. sorry.

 

[bobandsherry]

So, This is what I've found.

A graph that shows that in 1997, 10 year treasuries were yielding around 6%, and over the decade or so it took for equity prices to rebound to pre-crash prices, the overall bond market went through a decline in yields, so I assume that while it was paying 6%, the face value would have increased.

According to a graph showing the S&P Dividend Yield, for that decade it was averaging under 2%.

Here are the links to those graphs:S&P 500 Dividend Yield

http://4.bp.blogspot.com/-wzAFfFWHL...Gyn0h7yvf0/s1600/10-yr+Treasury+yields+25.jpg

I tried to post the actual graphs, but I'm too dense to figure out how to do it. Sorry.

I think it shows that any dollars thus invested would do better for that decade than left in equities for the crash. Probably even better if you cashed in that bond after a bit of a tumble and then reinvested it in the market for some of the upswing, which is one of the big advantages of not being too strong in your equities AA, I would think.http://www.early-retirement.org/forums/attachment.php?attachmentid=30247&stc=1&d=1545428058

I wouldn't know how to quantify that.

edit: I tried to edit this post to include the graphs but I only made it worse. sorry.

Here's a graph that compares the S&P to Vanguard Bond fund (as I used before). It shows that during the period you chose as the starting point (2000 high of S&P) that the bond fund outperformed. Applying a split in AA you'd have to blend the two, so truth is somewhere between the two.

However it's really you cherry picking a date. And as you mentioned it was a period of dropping rates that fueled the bond funds returns. That def is not the case as we move forward from this drop in the S&P so I would highly doubt we'll follow this pattern for return on that portfolio. But YMMV.

However, not cherry picking dates, but looking over a broad period of years, I've attached graphs that show comparison of 5 year, 15 years and 25 years. Look at the difference in those returns, being more heavily invested in the equities would give someone a lot of dry gun powder to weather a strong downturn.

While past history won't predict the future, it does show that consistently the S&P has outperformed the bond fund. Look at the 2 year chart, you'll see that the Bond fund hasn't even kept up with inflation, up 3.5% over the 2 years.

So given current rate environment you can probably figure that won't improve either in the next 5 years.

I'm in it for the long haul, and history has shown there's a sizable difference in the two. But everyone needs to do what they think is right for them to sleep at night. If the S&P doesn't bounce back then there are other problems we'll probably need to be worrying about.

 

[HadEnuff]

bobandsherry, yes, I see your point. It looks to me from the top graph that it took over 16 years for the S&P to catch back up to the bond fund, with two steep plummets at approximately the two year, and eight year out points.

My original point was to make sure that one's portfolio (and lifestyle) could survive such an event. I was specifically targeting the mindset that "if I have enough cash for 2 years I'm good" and reminding folks that the market doesn't always correct in such a short period of time.
In fact, I suggested that depending upon where you are in life, and what your WR is, you might want to ask yourself what would happen to your situation if we had a 40% drop that took a decade to recover from.
That's when I got challenged to "cherry pick" a time when that ever happened. It wasn't hard to find, since I lived it as an accumulator (a blessing for me) and saw what happened to my Dad's ( a distributor) portfolio. The difference in how it effected my plans, and how it could have effected his, is IMO, a classic lesson in why it's important to factor in your age, your WR, and how long it will be before you will be taking your distributions.
My suggestion is really aimed at those retiring much younger than I did, looking at many more decades of living off of their nut, and not understanding that a scenario such as I "cherry picked" could occur, and suggesting that they consider how their AA would perform while taking distributions from it.

You make the point that the bond performance during the time period I picked was aided by an unprecedented drop in rates that seems unlikely to be repeated at this point given the low current rates,and I will acknowledge that. Counter to that point, I'd point out that current stock valuations are perhaps just as unprecedented, and may be just as unlikely to perform as they have in the last decade, anytime very soon.

The other factor we are leaving out of the equation is the poorest longterm performer of all, cold cash. But it sure would be nice to have some handy when bonds and equities are not performing well.

I have no doubt that if one can hold off long enough without having to sell their equities at the bottom, in order to pay their bills, equities will outperform bonds, and cash.

 

[audreyh1]

My portfolio is screaming rebalance right now - between a combination of dropping equities and capital gains distributions paid out over the past few weeks.

I will be rebalancing soon anyway as I usually do so near Jan 1.

 

[pb4uski]

.... My original point was to make sure that one's portfolio (and lifestyle) could survive such an event. I was specifically targeting the mindset that "if I have enough cash for 2 years I'm good" and reminding folks that the market doesn't always correct in such a short period of time. ....

In fact, I suggested that depending upon where you are in life, and what your WR is, you might want to ask yourself what would happen to your situation if we had a 40% drop that took a decade to recover from.....

But at the same time, the hypothetical retiree that retired in January 2000 with a 4% withdrawal rate and a 60/40 portfolio rebalanced annually is still doing good, despite some nervous moments along the way.

https://www.portfoliovisualizer.com...&allocation2_1=40&symbol3=VGTSX&symbol4=VIPSX

 

[HadEnuff]

But at the same time, the hypothetical retiree that retired in January 2000 with a 4% withdrawal rate and a 60/40 portfolio rebalanced annually is still doing good, despite some nervous moments along the way.

https://www.portfoliovisualizer.com...&allocation2_1=40&symbol3=VGTSX&symbol4=VIPSX

Was our hypothetical retiree withdrawing4% of the original million every year (40K), or 4% of the existing balance every year?

and would you want to put yourself in a position where you needed the kind of bull market we've had for the last decade to pull this off?

edit: and BTW, the 60-40 is not the AA I would question. My calculators don't give me much of a spread between 60-40, and 30-70. My words of caution were meant for the folks staking their long term survival on "a couple of years" of bonds or cash to ride out a correction, which I'd assume might be more like 80-20 or 90-10.

 

[Dtail]

Was our hypothetical retiree withdrawing4% of the original million every year (40K), or 4% of the existing balance every year?

and would you want to put yourself in a position where you needed the kind of bull market we've had for the last decade to pull this off?

edit: and BTW, the 60-40 is not the AA I would question. My calculators don't give me much of a spread between 60-40, and 30-70. My words of caution were meant for the folks staking their long term survival on "a couple of years" of bonds or cash to ride out a correction, which I'd assume might be more like 80-20 or 90-10.

I'm guessing it is of the original balance using the standard Trinity study concept.
Yes, one had to have the huge bull market, but the flip side is how many retirees had to face 2 bear markets in 10 years and an upcoming 3rd one in a total of 20 years?
Thus both sides of the analysis equation come into play.

 

[audreyh1]

Was our hypothetical retiree withdrawing4% of the original million every year (40K), or 4% of the existing balance every year?

and would you want to put yourself in a position where you needed the kind of bull market we've had for the last decade to pull this off?

edit: and BTW, the 60-40 is not the AA I would question. My calculators don't give me much of a spread between 60-40, and 30-70. My words of caution were meant for the folks staking their long term survival on "a couple of years" of bonds or cash to ride out a correction, which I'd assume might be more like 80-20 or 90-10.

Annual withdrawal is inflation adjusted from initial portfolio withdrawal.

That link was doing monthly withdrawals, but you can set it to $40K annual and it shows the portfolio about breaking even in nominal terms, which means it’s way behind in real terms - down ~40% in real terms just above $600K if you click on inflation adjusted for the graph. So a 4% inflation adjusted withdrawal = ~6.67% WR rate today.

But that is far from running out yet.

 

[pb4uski]

Was our hypothetical retiree withdrawing4% of the original million every year (40K), or 4% of the existing balance every year?

and would you want to put yourself in a position where you needed the kind of bull market we've had for the last decade to pull this off? ...

On the first part, $3,333/month ($40k per year) adjusted for inflation, so increasing withdrawals to preserve $40k of spending power in Jan 2000.... I'm not sure if the inflation adjustments are monthly or annual, I presume annual, but I don't think that it makes much difference.

The hypothetical retiree wasn't putting themselves in any particular position to rely on a bull market unless they had some crystal ball... they just happened to retire in Jan 2000 and based on conventional wisdom selected a 60/40 AA and 4% WR. In retrospect, they retired at a particularly bad time... but they had no way of knowing that.