There was no assumption of delaying rebalancing due to market conditions in my down-shift from 100/0 during working years to 70/30 in semi-retirement. The reasoning for such a delay whiffs of market timing, which is usually not productive (more likely to be harmful since you have to time both the exit and the re-entry successfully and will likely be worse off than if you just stayed the course).Often, folks on this forum will write something like - "I'm at 90/10 right now, aim to retire at age 65, and therefore plan to shift to 60/40 five years before that to mitigate against a downturn right at retirement". That makes sense at the surface, but what about if there is a market downturn right before the pre-planned rebalancing? Is there an unstated assumption of delaying rebalancing in that scenario until suitable market conditions within that five year buffer (i.e. that time period is selected such as to be adequately long enough for a high chance of recovery)?
I don't see any downsides/blind spots to this approach; it's very similar to how a target date fund (TDF) would work, which perhaps might be easier for you if managing the "small continuous adjustments along the way" is not something you find enjoyable as a hobby.My simplistic approach has been to draw a straight line between the current asset allocation and the future goal, and make small continuous adjustments along the way - so far, with how new contributions are invested, with the goal of staying close to the glidepath line and avoiding / minimizing any rebalancing that would have tax consequences. What are the downsides / blind spots I might not have considered with this strategy?
The constant slope you've chosen, like a TDF, likely gives you the "sleep well at night factor," but the real test will be "a market downturn right before" retirement. If that happens how will you react? The right answer is you'll do nothing different, but some investors are most susceptible to behavioral errors when: a) they think the current time-window is more important than any past or future time-window (e.g., right before W-2 income goes away); and b) significant market gyrations are happening now during this "more important" time-window.
The notion that some point in time is more important than another seems largely driven by fear that a bad event and/or decision at that one moment will absolutely ruin all your 30+ years of retirement contributions & investing. That's probably exacerbated by people looking at their balance on the single day they retire and thinking "well, this is what I get to take 4% from." Given that there is still volatility, even in a 40/60 portfolio, it's likely better to look at a smooth exponential curve-fit of your balance over the last five years and use the line-fit value at your retirement date, not the actual balance which could be significantly above or below the "average" due to recent market bear/bull movement that is noise to be ignored.
This hypothetical investor had $6,861K on their retirement date (thick solid black), but the smooth fit of the median would have been $4,904K (dotted black), which might be a better target to start a 30 year constant dollar withdrawal strategy. Of course, if your assets are large enough that a 4% draw includes a significant discretionary portion of your expenses, then using constant percentage or VPW strategies are likely superior to constant dollar. Such alternate withdrawal methods adapt to market conditions, which is the very thing causing the fear of ruin in the first place.
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Statistics: Posted by bonesly — Mon Aug 12, 2024 12:16 pm — Replies 5 — Views 256
