Again thanks! I need a bit more help understanding the theory that if equities are down say 30% or more this would not be seen as an opportunity to rebalance out of bonds and buy stocks. Is it because you would be liquidating your safety net against RDCA to do so? Perhaps you could sell stocks when the market is doing well and keep excess bonds above the safety net to take advantage of future buying opportunities. Also as SS and RMDs phase in, might one feel increasingly comfortable rebalancing out of bonds? I think resisting rebalancing for 4 years would be tough, especially if rebalancing into beaten-down equities!The basic idea of holding a mix of a money market and short-term bonds in one’s fixed income mix during distribution is a strategy to minimize the potential impact of reverse dollar cost averaging (RDCA) by maintaining sufficient liquidity in one’s portfolio.
One other rule that he suggests that I did not mention relates to how often you rebalance your portfolio during distribution vs. during accumulation. Many of us are used to having a IPS that states when you rebalance using something like a 5/25 rule. During distribution, if you rebalance too often, this has the same effect as withdrawing periodically from equities with a short time delay. He suggests if the withdrawal rate is 5% or less it is better to rebalance once every 4-years at the end of the US Presidential election year.
In an accumulation portfolio the important thing is the volatility of returns. Rebalancing during accumulation is there to contain the volatility of returns. In a distribution portfolio, the important thing is the sequence of returns. The purpose of rebalancing during distribution is to minimize the effect of bad sequence of returns.
In a distribution portfolio, RDCA works exactly the opposite of Dollar Cost Averaging (DCA) worked during our accumulation periods. During distribution, investments are sold periodically to provide income. During a bear market, you must sell more shares at a lower price to maintain the same income stream. Even though markets may recover subsequently, your loss is permanent. That is because the shares that you sold are no longer part of your portfolio and cannot participate in the market recovery.
Mr. Otar believes that an average retiree can expect to endure between 3 to 5 bear markets during their retirement. If income is withdrawn from fluctuating equity assets, a significant portion of the portfolio life may be lost due to RDCA.
This is why he advocates the role of a money market, short term bonds, intermediate bonds, and the withdrawal and rebalancing rules. He is clear that these approaches minimize RDCA due to cyclical bear markets, but not sequence of return risk nor inflation risks. Holding large amounts of cash in a buy-and-hold accumulation portfolio will allow you to sleep better but the portfolio will likely run out of money sooner (so there is a balance here).
Statistics: Posted by hcs77135 — Tue Mar 12, 2024 6:34 pm — Replies 39 — Views 3933