HomerJ wrote: ↑Thu Jul 29, 2021 11:25 am
So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.
I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.
So look at me, I'm not staying the course!
It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.
This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.
For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio
Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.
So now I have $1 million in stocks and $1.1 million in bonds (47/53)
If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.
But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)
Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.
Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly
The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.
If the market drops 30%, I'd be out $300,000 in stocks, but I would have already locked in $200,000 in gains, so I'd still be in great shape for retirement. I can spend from the bond/cash/CDs side until stocks recover. And if the market doesn't crash, I still spend from the bonds side until I'm back to 50/50 (and then spend from whichever side has the most money each year going forward)
I guess I'm crazy conservative, but this sure lets me sleep at night...
Am I wrong in thinking this helps with Sequence of Return risk?
In my example above, locking in $200,000 in gains, instead of just $100,000 from normal rebalancing means I have an extra 1+ year of expenses already locked into cash.
Not because I think a big crash is coming, but because I'm retiring very soon, and that way I have a large buffer even if a crash happens the day after I retire.