Why rebalance in retirement?

[FANOFJESUS]

A few years back my Fido rep ran a few simulations on balancing vs not. In my case, not rebalancing over time gave slightly higher ending balance at the expense of higher volatility. I can't remember what the starting AA was, perhaps it was 60/40 or 75/25. I really can't remember. I do not rebalance and have not ever. With other I have a higher risk tolerance than most and feel I can can survive large fluctuations.

I can see why this would work. Most of the risk in retirement is at the start and then you have a good amount in bonds. Later on if you let the stocks runs up it is not big deal.

 

[mrfeh]

I can see why this would work. Most of the risk in retirement is at the start and then you have a good amount in bonds. Later on if you let the stocks runs up it is not big deal.

Kitces on this subject: https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

The 3 primary options: https://www.morningstar.com/article...o-them-a-key-dilemma-for-your-retirement-plan

Personally, we're planning on sticking w/ 60/40 forever.

 

[chassis]

I not only rebalance, I also have a "glide path" where as our NW rises, I have a lower target equity AA. I have a chart where I record the targets vs. NW, and I have had to extend it several times over the last couple years as we are hitting levels of wealth that I never expected.

@DrRoy why do you do this rebalancing? What is the reason to have a glide path?

 

[ERD50]

Originally Posted by MichaelB View Post
Rebalancing does not lead to higher returns but it can contribute to a reduction in portfolio volatility, and this improves the portfolio survival rate. For many of us that is critical.

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.

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, there are other factors in the rebalance.

I've always considered it to be a wash, so I don't worry too much about it. I have rebalanced a couple times and managed (luck) to hit very near the market lows so the recovery was nice. But I can't count on that, and it might be offset by any stock selling for expenses that I might do to bring the AA back down.

-ERD50

 

[sengsational]

It should be no surprise that simulations of no rebalancing give higher expected returns, as, on average, equities will start to take over and those have a higher average return. But it's risk adjusted return that drives the use of rebalancing.

 

[latexman]

After the next big crash, and, let's say, my 60/40 AA goes to ~ 40/60 like happened in 2020, I'm going to rebalance. And, hopefully, I plan to rebalance and rebalance and rebalance at 5% bands as I ride the recovery.

Are y'all talking about not doing this? And, waiting until withdrawal time?

 

[sengsational]

LM, it takes courage to rebalance in the face of a crash because you're shortening the amount of time you can survive the down turn by selling bonds. I kept my AA, but I imagine it's pretty easy for putting ones head in the sand, and just expressing relief when the market bounces back.

 

[6miths]

I not only rebalance, I also have a "glide path" where as our NW rises, I have a lower target equity AA. I have a chart where I record the targets vs. NW, and I have had to extend it several times over the last couple years as we are hitting levels of wealth that I never expected.

This is an interesting approach. If anything, we are doing the opposite probably related to an idea that came from Phil DeMuth's book 'The Affluent Investor'. My most conservative AA was around the time of retirement and as we age and need less and less money for ourselves, the excess goes into equities as the time horizon becomes much longer - i.e. that of our children and grand-children. Have always been pretty heavy on equities and in our particular time-frame has proved quite lucky.

 

[latexman]

LM, it takes courage to rebalance in the face of a crash because you're shortening the amount of time you can survive the down turn by selling bonds. I kept my AA, but I imagine it's pretty easy for putting ones head in the sand, and just expressing relief when the market bounces back.

Our pensions + SS will be > our expenses eventually, that may be why our cavalier attitude on our investments.

 

[scrabbler1]

Since I ERed 13 years ago, I have been rebalancing mainly in my (rollover) IRA, something I do not yet have unfettered access to. I do this as I age and to lock in gains (on the stocks side) and to gradually lessen my exposure to stocks. I am still just over 40% in stocks, so it isn't like I am going to zero anytime soon.

On the taxable side, I rarely rebalance because that account is designed to generate income to pay my bills, so it has always been more bond-heavy (also around 40% in stocks, coincidentally).

Once I start collecting SS and my frozen company pension in 7-9 years, I will have to revisit the taxable side because I won't need as much income from them. Same for eventual RMDs from the IRA.

 

[targatom2019]

I put 20x yearly expenses in bond/cash and 57x yearly expenses in equities and don't plan to rebalance.

 

[SnowballCamper]

A few thoughts/observations:

In the long run, and on average, a 100% stock allocation gives the greatest return because stocks grow more than other asset classes. So if your goal is to grow as much as possible, you should be 100% stocks. There are two problems with this approach that call for some other asset class.

Since many of us don't have the psychological aptitude to ride out the market downturn without selling, we manage that risk (of selling low) by having an asset allocation that is not 100% stocks. Now, in the face of portfolio decline we have something to do (rebalance) and see that our decline is not as bad as the stock market alone. The act of rebalancing is to buy low and sell high (relative to the last rebalance) and we rightfully feel good about this decision.

The other problem with 100% stock allocation, is when if early retirement years coincide with a market downturn, and we're forced to sell depreciated stocks for essential spending. Having some other asset that hasn't depreciated (at least not as much as stocks) would be better to sell because the loss would be less.

Then as we age, and our nest egg gets spent away, a decline in stock price on a high stock allocation has a larger effect on portfolio value. By increasing the allocation to bonds, later in life, a market price drop in stocks has less impact on portfolio value, hence less chance of running out of money. Of course, we give up the chance of large gains for this stability.

Given all this, it might seem that getting AA right is really important. But it turns out that the particular number doesn't matter much, nor does the frequency of rebalancing. But for the reasons above, I think it is really important to have an AA number and stick to it (or at least stick to a glide path). Failing to do so just means you are a market timer.... Which is fine if that's your thing (its just not my thing).

Here is an article saying the number doesn't matter much https://www.aacalc.com/docs/aa_sensitivity This calculator takes a much broader approach than many by including SS and pension as part of the "bond" portfolio. Worth a read if you haven't considered that (click on the "Home" at the top)...

For rebalancing frequency Kitces talks like it's important, but the first table in his article shows that it doesn't matter much: https://www.kitces.com/blog/best-op...y-time-horizons-vs-tolerance-band-thresholds/

 

[Ready-4-ER-at-14]

Rebalancing while things are on an uptrend seems to go contrary to the idea of reverse scalar investing (sort of trend following if I remember correctly and you add to the winners) also have heard of the term pyramid investing with an uptrend think volume in horizontal bands in a pyramid. Say 4 decreasing amounts entered as a trend continues, then they "rebalance" or leave the investment when it drops. Again market timing just named differently with specific rules. I see benefits and risks regardless which strategy I choose. Obviously number of non corelated investments make any of these ideas even routine rebalancing work better.

 

[brett]

Retired at 58/59. Now in our late 60's.

We read the recommended allocations. Fixed should equal age, etc, 50/50.

The reality is that our allocations have bee made based on a rolling ten year horizon and on market conditions. We have been anywhere from 50 percent to 70 percent equities over that period. We have tended to move more into equities when the markets tanked and the opposite to crystalize gains when the market was high or when currencies were fluctuating to our advantage.

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.

 

[GravitySucks]

I'm not really questioning the pros/cons of maintaining an AA, just how you do it. I'm a newbie at retirement so it just seemed silly to me to do a dedicated, stand alone rebalance in July when I could just let it go until I make my annual withdrawal the following Jan and fix things up then.

I'll rewrite my IPS to just rebalance when I withdraw. I've been mindlessly following my IPS since I wrote it 5 years ago. If I think too much, I do stupid things. "Don't think, Meat, just throw!"

My IPS says to rebalance when the AA is 5% out of wack.
In the 8+ years of retirement the reality has been to rebalance by withdrawal of living expenses, rebalance when I feel it's time (often just 2 or 3% out of wack.), and rebalance to react to a significant market event (e.g. March 2020)
In the event of a huge market drop I won't rebalance to the point it means taking my bonds below expenses untill SS kicks in and a couple years expenses after. I'll have to rethink either going to a permanently more conservative AA or letting things ride at that point.

 

[disneysteve]

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.

 

[Midpack]

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...

 

[sengsational]

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.

 

[DrRoy]

@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.

 

[RunningBum]

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.

 

[MichaelB]

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.

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.

 

[chassis]

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.

 

[OldShooter]

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.

 

[ERD50]

Originally Posted by ERD50 View Post
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.

... 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).

-ERD50

 

[Closet_Gamer]

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.