Close to retirement - locking in gains with each new market high

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
clip651
Posts: 1582
Joined: Thu Oct 02, 2014 11:02 am

Re: Close to retirement - locking in gains with each new market high

Post by clip651 »

HomerJ wrote: Fri Jul 30, 2021 10:34 am
Yeah, after I retire, I'll pay all bills using cash/CD/bonds money up until I get back to 50/50.

So I'll drop off 50/50 for this year or two before retirement, then slowly get back to 50/50, and then stick there all through retirement.

The plan after I'm back to 50/50, is that every year in retirement, I'd pull from the side that has more money. If stocks went up that year, I'd pull from stocks. If stocks dropped, I'd pull from bonds.
The post above seems like a much simpler way of phrasing what you're doing than your first post on this thread.

Basically, you're adjusting your asset allocation now to be a bit more conservative than 50/50 since your portfolio is a bit bigger (due to recent stock gains) than your goal and you are close to retirement. And if it keeps growing, you'll continue to make it a bit more conservative for a while.

And then after you retire, you'll use your spending to gradually drift you back towards 50/50.

And I'm guessing if stocks perform well enough to take you past 50% stocks at some point, and your spending isn't enough to bring them back down, you'll rebalance to 50/50 at that point. Or I guess you could spend more.

I'm no expert, though I'm very grateful for all I've learned from BH forums and books. But it sounds fine to me to reduce risk for a few years. You know you're giving up potential gains in exchange for reducing risk, and you understand about inflation risks, so you're making the decision with open eyes. Much better to do it now, while stocks are high, than wait until there's a drop and have to grit your teeth through it, wishing you'd reduced risk when you could.
User avatar
cashboy
Posts: 704
Joined: Tue Sep 11, 2018 5:03 pm
Location: USA

Re: Close to retirement - locking in gains with each new market high

Post by cashboy »

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.
I am a couple of years into retirement and have thought about doing the same exact thing.

not a perfect analogy, but in some ways it is like when someone is gambling and they take their 'winnings off the table' and continue to 'play' with the initial amount of money.

But, i reviewed my IPS and felt i was already conservative - 50/50 - and did not want to change my AA to a lower equities position since i had given a lot of thought to reach that 50/50 AA number. so, i just rebalance and think long term.
Last edited by cashboy on Fri Jul 30, 2021 12:37 pm, edited 1 time in total.
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CASH - Canned Beans - Rice - Bottled Water)
tomsense76
Posts: 1428
Joined: Wed Oct 14, 2020 1:52 am

Re: Close to retirement - locking in gains with each new market high

Post by tomsense76 »

HomerJ wrote: Thu Jul 29, 2021 10:34 pm Doing everything in tax-deferred accounts.

I have a decent taxable account, mostly VTSAX that hasn't been touched in years (and I won't touch it until after I retire to minimize taxes), and we downsized our house recently, and all the extra equity from the old house is sitting in cash in taxable.

But I won't touch that taxable account until we actually retire.
Makes sense. That's what I figured. As noted in my earlier comment, don't really see any issue with this.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
marcopolo
Posts: 8411
Joined: Sat Dec 03, 2016 9:22 am

Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

HomerJ wrote: Fri Jul 30, 2021 10:34 am
goingup wrote: Fri Jul 30, 2021 9:58 am HomerJ-
Always enjoy your posts and perspectives.

I think we all have different approaches to looming retirement. Last year (year 2 of retirement) we took the proceeds of a house sale and put 90% in short/intermediate bonds. This was to try to get back to 60/40. It's tough to tamp down those buoyant equities. :wink:

So I get what you're doing. I do think of you as the agnostic 50/50 guy, though. Do you have end goal in mind? Seems like you'd want to return to being a boring Bogleheads stoic. :beer
Yeah, after I retire, I'll pay all bills using cash/CD/bonds money up until I get back to 50/50.

So I'll drop off 50/50 for this year or two before retirement, then slowly get back to 50/50, and then stick there all through retirement.

The plan after I'm back to 50/50, is that every year in retirement, I'd pull from the side that has more money. If stocks went up that year, I'd pull from stocks. If stocks dropped, I'd pull from bonds.
While this is not unreasonable, it only helps (a little) if your timing is just right and a stock crash happens in the narrow window of time during which you have a lower equity allocation. If the crash hits outside that window (statistically more likely since the time window is short), then it actually hurts (a little) because you will go into that crash with less money overall due to having taken your profits off the table during the growth years prior to the crash. So, in a way, it is bit of a market timing bet.

Your moves are small, so not likely to have much impact either way. Just some mental accounting, for little or no benefit. No harm done, but surprised to see you doing it.
Once in a while you get shown the light, in the strangest of places if you look at it right.
garlandwhizzer
Posts: 3562
Joined: Fri Aug 06, 2010 3:42 pm

Re: Close to retirement - locking in gains with each new market high

Post by garlandwhizzer »

50/50 and extra cash on top of that is too conservative for my taste, but that's not the question here. The art of investing is to match the portfolio correctly to the sometimes conflicting inputs of an individuals financial goals on the one hand and risk tolerance on the other. This is not a one size fits all situation but rather choosing the right size that fits the individual. Long term returns are expected to increase with increasing equity exposure but so is portfolio volatility and both short and intermediate term risk. As a conservative investor like HomerJ approaches retirement with US equity markets at or near all time highs, sporting lofty valuations after a vigorous 17 month bull market, it seems reasonable for him to be 50/50 as a base and to modestly overweight that base with safe stable assets to reduce sequence of return risk. His asset base, 2 mil, should be sufficient to fund a long retirement even if invested conservatively.

The winner of the retirement investing game may not be the one who winds up with the highest returns, able to provide all the money he needs to satisfy all his wants during retirement. The winner may instead be the one who sleeps well at night in the depths of a bear market, knowing that his future financial needs, instead of his wants, are secure. The goal is to understand the markets and how they function well, to know yourself well (your goals and risk tolerance), and to structure the portfolio that sets a balance between them that you can realistically live with long term. It is natural and appropriate IMO to gradually reduce portfolio volatility as your time horizon shortens at or near retirement. As your time horizon shortens the impact of sequence of returns risk also increases. HomerJ is IMO a thoughtful conservative investor it seems to me that he has done precisely that in tune with the specifics of his situation.

Garland Whizzer
marcopolo
Posts: 8411
Joined: Sat Dec 03, 2016 9:22 am

Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

garlandwhizzer wrote: Fri Jul 30, 2021 12:43 pm 50/50 and extra cash on top of that is too conservative for my taste, but that's not the question here. The art of investing is to match the portfolio correctly to the sometimes conflicting inputs of an individuals financial goals on the one hand and risk tolerance on the other. This is not a one size fits all situation but rather choosing the right size that fits the individual. Long term returns are expected to increase with increasing equity exposure but so is portfolio volatility and both short and intermediate term risk. As a conservative investor like HomerJ approaches retirement with US equity markets at or near all time highs, sporting lofty valuations after a vigorous 17 month bull market, it seems reasonable for him to be 50/50 as a base and to modestly overweight that base with safe stable assets to reduce sequence of return risk. His asset base, 2 mil, should be sufficient to fund a long retirement even if invested conservatively.

The winner of the retirement investing game may not be the one who winds up with the highest returns, able to provide all the money he needs to satisfy all his wants during retirement. The winner may instead be the one who sleeps well at night in the depths of a bear market, knowing that his future financial needs, instead of his wants, are secure. The goal is to understand the markets and how they function well, to know yourself well (your goals and risk tolerance), and to structure the portfolio that sets a balance between them that you can realistically live with long term. It is natural and appropriate IMO to gradually reduce portfolio volatility as your time horizon shortens at or near retirement. As your time horizon shortens the impact of sequence of returns risk also increases. HomerJ is IMO a thoughtful conservative investor it seems to me that he has done precisely that in tune with the specifics of his situation.

Garland Whizzer
The valuations were quite lofty before the vigorous 17 month bull market. It would have been a losing bet to go conservative then. Who knows if it is the right move now.

HomerJ would be the first person to say one should not be making changes to their portfolio based on perceived valuations, since they are pretty weak predictors of future outcomes (even if they are the best we have).

Also, he is not planning to lower equity exposure as his time horizon gets shorter, he is planning a temporary reduction then back up to his previous target AA. So, that rationale also does not seem to apply.
Once in a while you get shown the light, in the strangest of places if you look at it right.
jebmke
Posts: 25271
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Close to retirement - locking in gains with each new market high

Post by jebmke »

EnjoyIt wrote: Fri Jul 30, 2021 11:26 am
jebmke wrote: Fri Jul 30, 2021 10:04 am
EnjoyIt wrote: Fri Jul 30, 2021 7:53 am
jebmke wrote: Fri Jul 30, 2021 6:46 am
EnjoyIt wrote: Thu Jul 29, 2021 9:23 pm One more year is a tough mistress to break up with.
I solved this by not having “a number”
Was it age? Was it your boss telling you your retired? Was it someone who just bought your business and I formed you that you are done?
I reached a point where I had done everything I wanted to do. I changed jobs (same company) fairly often -- every 3 years or so. I reached a point where the next move would have been largely a re-run. The only move left was the top spot and I had no real desire to do that job. I also finished some things I set out to do 10-years earlier. The time was right. The company didn't want me to leave -- I ended up doing some consulting for them for a couple of years after I retired.
I guess on more year is harder than you mentioned.

We are part time. Let’s see how long that lasts.
The consulting was not really a money issue and wasn't full time. The Chairman of the Board and the CFO were friends of mine and they had specific issues they needed addressed and concluded I was the best person to deal with them. I really did this as a favor to them. I was fully ready to make the break clean.
Stay hydrated; don't sweat the small stuff
User avatar
Wricha
Posts: 1014
Joined: Sun Mar 25, 2012 10:33 am

Re: Close to retirement - locking in gains with each new market high

Post by Wricha »

I did not read thread. If state, please excuse. It seems to me you are creating a modified bucket strategy. Money is money no matter where it is in your portfolio or mind. Rather than sell this years profits and hold this “free” money separate just go right to reducing your AA to something your more comfortable with.
UpperNwGuy
Posts: 9446
Joined: Sun Oct 08, 2017 7:16 pm

Re: Close to retirement - locking in gains with each new market high

Post by UpperNwGuy »

delamer wrote: Fri Jul 30, 2021 9:53 am
UpperNwGuy wrote: Fri Jul 30, 2021 7:47 am Why are so many folk taking issue with OP's travel budget? If the same amount were going to housing, everyone would skip right over it. Let each person make their own life choices. I've been retired for eight years and have chosen to live in a smallish apartment specifically to free up money for lots of travel. The year before the pandemic I made three two-week trips to Europe and several domestic trips to visit family, I support OP's desire to travel. The time to travel is now when you're in your 60s and 70s. It gets harder physically after that. Don't let those early years of retirement go to waste.
Speaking for myself, I wasn’t taking issue with his travel budget.

I was pointing out that there is an important difference (using your situation as an example) between not being able to pay your apartment rent and having to cancel one of your Europe trips, due to a stock market crash. Apartment rent is a necessity; a Europe trip is a nicety.

Now if you’d be willing to move to an even smaller, less expensive apartment in order to preserve your travel funds, that’s your choice. Then make more of your travel expenses a necessity and make more of your apartment rent a nicety, in terms of budget.

Keeping a lot more of your portfolio in cash equivalents in order to pay for 15 years of niceties is a questionable financial choice.
I guess you missed my point completely. I already do live in the smaller, less expensive apartment.

I live in an apartment instead of a house. If I lived in a house, I might not be able to afford to travel, but you wouldn't be telling me that my house is a nicety, not a necessity even though I would be spending the same amount of money.
User avatar
Garco
Posts: 1078
Joined: Wed Jan 23, 2013 1:04 am
Location: U.S.A.

Re: Close to retirement - locking in gains with each new market high

Post by Garco »

The question or problem posed by the OP applies throughout one's working life (and beyond). It's not just as one is approaching retirement in a few years.

However, at this time I'm in my 70's, and I've been retired for more than 5 years. I've stayed with a relatively high equities percentage. Only recently have I cut it to ~60% to lock in some of the long-term gains -- while remaining active in the market. Even so, what I have now is far from being an "age in bonds" portfolio. One could say that I've been lucky; but whether due to wisdom or luck, this means that I've added substantially to my investments and my to estate. I'm considering a further locking in of my gains, with an eye toward providing for the next generation in my family.
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

You're 100% right marco, but I'm not making a bet to optimize gains. I know this method is very likely to make me less.

I've already hit my number, so I'm accepting LESS gains to minimize potential losses. My big worry is a crash this year or next, right as I retire.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
jebmke
Posts: 25271
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Close to retirement - locking in gains with each new market high

Post by jebmke »

HomerJ wrote: Fri Jul 30, 2021 1:35 pm You're 100% right marco, but I'm not making a bet to optimize gains. I know this method is very likely to make me less.
Unfortunately some don't seem to recognize that optimizing gains isn't always the #1 goal.
Stay hydrated; don't sweat the small stuff
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Garco wrote: Fri Jul 30, 2021 1:16 pm The question or problem posed by the OP applies throughout one's working life (and beyond). It's not just as one is approaching retirement in a few years.
I don't think that's true.

I think this is more unique situation because I've hit my number early because of the recent stock run-up, I don't need any more gains, and I would rather lock in the recent gains for the next year or two because of the uncertainty of when I'm going to retire.

If I hadn't hit my number yet or had 5+ years to go until retirement, I would not be doing this.

I'd be staying the course with 50/50 like I did for the past 10 years. Not letting it drift a bit more conservative for just 1-2 years.

Note I'm only doing this with gains.

The plan wasn't to straight go from 50/50 to 45/55. If the market had stayed flat, I'd still be 50/50. But because the market keeps going higher, past my number, I'm treating all the gains as "extra".
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Here's how I'm mentally doing this... (maybe I should have put this in the first post).

My 50/50 allocation of my number is still intact. I haven't changed it at all, in my mind.

But the gains since I hit my number, I've been squirrelling away as cash.

Pure mental accounting, I know. Silly, I know.

But if the market does crash in the next year or two, I'll be happy I did it, and will able to retire anyway without worry because of that buffer.

And if the market doesn't crash in the next year or two, I'll still be happy because my original 50% chunk is still there, and making bank for me... :)

Yes, I'll have less than if I had just stuck with 50/50 for the entire portfolio the entire time.

I recognize this is dumb... It's funny how nice that extra hundred grand plus off to the side feels. And each time I squirrel away another $30k, I feel even better. The human brain (at least mine) is a strange thing.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
delamer
Posts: 17348
Joined: Tue Feb 08, 2011 5:13 pm

Re: Close to retirement - locking in gains with each new market high

Post by delamer »

UpperNwGuy wrote: Fri Jul 30, 2021 1:12 pm
delamer wrote: Fri Jul 30, 2021 9:53 am
UpperNwGuy wrote: Fri Jul 30, 2021 7:47 am Why are so many folk taking issue with OP's travel budget? If the same amount were going to housing, everyone would skip right over it. Let each person make their own life choices. I've been retired for eight years and have chosen to live in a smallish apartment specifically to free up money for lots of travel. The year before the pandemic I made three two-week trips to Europe and several domestic trips to visit family, I support OP's desire to travel. The time to travel is now when you're in your 60s and 70s. It gets harder physically after that. Don't let those early years of retirement go to waste.
Speaking for myself, I wasn’t taking issue with his travel budget.

I was pointing out that there is an important difference (using your situation as an example) between not being able to pay your apartment rent and having to cancel one of your Europe trips, due to a stock market crash. Apartment rent is a necessity; a Europe trip is a nicety.

Now if you’d be willing to move to an even smaller, less expensive apartment in order to preserve your travel funds, that’s your choice. Then make more of your travel expenses a necessity and make more of your apartment rent a nicety, in terms of budget.

Keeping a lot more of your portfolio in cash equivalents in order to pay for 15 years of niceties is a questionable financial choice.
I guess you missed my point completely. I already do live in the smaller, less expensive apartment.

I live in an apartment instead of a house. If I lived in a house, I might not be able to afford to travel, but you wouldn't be telling me that my house is a nicety, not a necessity even though I would be spending the same amount of money.
There’s always an even smaller, even less expensive apartment. That was my point, which you missed.

Someone might absolutely live in a house that is taking up too large a portion of their budget, and thus is a nicety rather than a necessity. And I’d have no hesitancy in telling them that. “House poor” is a classic problem in retirement.

Anyway, the issue on the thread is how many years of expenses the OP should keep in bonds/cash. I stand by my perspective that one factor that should be considered is necessities vs. niceties.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
gmaynardkrebs
Posts: 2337
Joined: Sun Feb 10, 2008 10:48 am

Re: Close to retirement - locking in gains with each new market high

Post by gmaynardkrebs »

HomerJ wrote: Fri Jul 30, 2021 2:03 pm Here's how I'm mentally doing this... (maybe I should have put this in the first post).

My 50/50 allocation of my number is still intact. I haven't changed it at all, in my mind.

But the gains since I hit my number, I've been squirrelling away as cash.

Pure mental accounting, I know. Silly, I know.

But if the market does crash in the next year or two, I'll be happy I did it, and will able to retire anyway without worry because of that buffer.

And if the market doesn't crash in the next year or two, I'll still be happy because my original 50% chunk is still there, and making bank for me... :)

Yes, I'll have less than if I had just stuck with 50/50 for the entire portfolio the entire time.

I recognize this is dumb... It's funny how nice that extra hundred grand plus off to the side feels. And each time I squirrel away another $30k, I feel even better. The human brain (at least mine) is a strange thing.
Now comes the tricky part, convincing the wife. :)
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

gmaynardkrebs wrote: Fri Jul 30, 2021 2:29 pm
HomerJ wrote: Fri Jul 30, 2021 2:03 pm Here's how I'm mentally doing this... (maybe I should have put this in the first post).

My 50/50 allocation of my number is still intact. I haven't changed it at all, in my mind.

But the gains since I hit my number, I've been squirrelling away as cash.

Pure mental accounting, I know. Silly, I know.

But if the market does crash in the next year or two, I'll be happy I did it, and will able to retire anyway without worry because of that buffer.

And if the market doesn't crash in the next year or two, I'll still be happy because my original 50% chunk is still there, and making bank for me... :)

Yes, I'll have less than if I had just stuck with 50/50 for the entire portfolio the entire time.

I recognize this is dumb... It's funny how nice that extra hundred grand plus off to the side feels. And each time I squirrel away another $30k, I feel even better. The human brain (at least mine) is a strange thing.
Now comes the tricky part, convincing the wife. :)
Heh, I'm thinking I put the extra money into a bank account and tell her, this is yours - dedicated vacation money. If I can get the buffer up to $200,000, I imagine she'd be pretty happy with that...
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
UpperNwGuy
Posts: 9446
Joined: Sun Oct 08, 2017 7:16 pm

Re: Close to retirement - locking in gains with each new market high

Post by UpperNwGuy »

delamer wrote: Fri Jul 30, 2021 2:28 pm
UpperNwGuy wrote: Fri Jul 30, 2021 1:12 pm
delamer wrote: Fri Jul 30, 2021 9:53 am
UpperNwGuy wrote: Fri Jul 30, 2021 7:47 am Why are so many folk taking issue with OP's travel budget? If the same amount were going to housing, everyone would skip right over it. Let each person make their own life choices. I've been retired for eight years and have chosen to live in a smallish apartment specifically to free up money for lots of travel. The year before the pandemic I made three two-week trips to Europe and several domestic trips to visit family, I support OP's desire to travel. The time to travel is now when you're in your 60s and 70s. It gets harder physically after that. Don't let those early years of retirement go to waste.
Speaking for myself, I wasn’t taking issue with his travel budget.

I was pointing out that there is an important difference (using your situation as an example) between not being able to pay your apartment rent and having to cancel one of your Europe trips, due to a stock market crash. Apartment rent is a necessity; a Europe trip is a nicety.

Now if you’d be willing to move to an even smaller, less expensive apartment in order to preserve your travel funds, that’s your choice. Then make more of your travel expenses a necessity and make more of your apartment rent a nicety, in terms of budget.

Keeping a lot more of your portfolio in cash equivalents in order to pay for 15 years of niceties is a questionable financial choice.
I guess you missed my point completely. I already do live in the smaller, less expensive apartment.

I live in an apartment instead of a house. If I lived in a house, I might not be able to afford to travel, but you wouldn't be telling me that my house is a nicety, not a necessity even though I would be spending the same amount of money.
There’s always an even smaller, even less expensive apartment. That was my point, which you missed.

Someone might absolutely live in a house that is taking up too large a portion of their budget, and thus is a nicety rather than a necessity. And I’d have no hesitancy in telling them that. “House poor” is a classic problem in retirement.

Anyway, the issue on the thread is how many years of expenses the OP should keep in bonds/cash. I stand by my perspective that one factor that should be considered is necessities vs. niceties.
I see nothing in any of the OP's posts that imply he isn't willing to make that decision if it becomes necessary. I stand by my perspective that people here should be responding to the question that OP asked rather than digging up information from unrelated threads to criticize how he spends the part of his money that he does not invest.
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Close to retirement - locking in gains with each new market high

Post by vanbogle59 »

HomerJ wrote: Fri Jul 30, 2021 2:03 pm I recognize this is dumb... It's funny how nice that extra hundred grand plus off to the side feels.
Not dumb.
For me, there is nothing better in the PERSONAL finance universe than the joy of taking chips off the table.

Over many years, I've built the machine I need to comfortably live the rest of my days: 50/50, 25X, yada yada....
I'm lucky enough to realize now that I have "extra". I get to do with it whatever I want.

That "how nice" feeling was hard-earned and is now much-enjoyed.
:sharebeer
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Close to retirement - locking in gains with each new market high

Post by Grt2bOutdoors »

HomerJ wrote: Thu Jul 29, 2021 8:52 pm
flyingaway wrote: Thu Jul 29, 2021 8:37 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm
flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
A true Bpglehead with 16,937 posts does not retire with 25X. They usually retire with 100X.
Heh... good point...

But I'm a 25x proponent. But here, I am, at 26x, maybe 27x, and still working... :(

I even posted that I would retire when SP500 hit 4000... But I never expected it to hit 4000 so fast, and here it is at 4400, and I'm still working.

Basically I can't convince my wife that we're really okay.
Tell her she needs to go back to work. Then you can afford to put in your retirement papers. Problem solved.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: Close to retirement - locking in gains with each new market high

Post by abc132 »

Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
jebmke
Posts: 25271
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Close to retirement - locking in gains with each new market high

Post by jebmke »

abc132 wrote: Fri Jul 30, 2021 7:01 pm it is how the portfolio behaves that matters.
Sometimes equally important is how the investor behaves.
Stay hydrated; don't sweat the small stuff
curmudgeon
Posts: 2630
Joined: Thu Jun 20, 2013 11:00 pm

Re: Close to retirement - locking in gains with each new market high

Post by curmudgeon »

HomerJ wrote: Fri Jul 30, 2021 2:03 pm Here's how I'm mentally doing this... (maybe I should have put this in the first post).

My 50/50 allocation of my number is still intact. I haven't changed it at all, in my mind.

But the gains since I hit my number, I've been squirrelling away as cash.

Pure mental accounting, I know. Silly, I know.
I've never had much use for asset allocation as the magic number it's often held to be. This is probably because I've got a pretty strong stomach for investing (and my wife is content to leave the investments to me). But I do have a lot of respect for having specific amounts associated to various investing purposes, which can have a somewhat similar effect.

In my case what I've done is to set aside a defined chunk of funds in short-term bonds, CDs, and the like which is roughly sufficient to cover the equivalent of our expected SS benefits (plan to delay claim till age 67/70). This is also enough for a reasonable baseline retirement given a paid-off house, ACA subsidy, and moderate tastes. Everything else is is equities, a bit value/dividend oriented, and the overall effect is a "bond tent", but smoothed based on the expectation of future SS benefits.

What Homer is doing seems similar, but based on the flip side. He's setting a defined block of equity investment, which seems to him sufficient in size to provide long term inflation protection and growth, and setting aside some of the rest for a comfort zone. The one thing he (and I) need to keep in the back of our minds is the loss to inflation under the current Fed regime; ok for a year or two, but it may take a bite over time.
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Close to retirement - locking in gains with each new market high

Post by Escapevelocity »

abc132 wrote: Fri Jul 30, 2021 7:01 pm Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
This is an academically valid argument, but what you’re failing to acknowledge is that Homer is at a very special crossroads that only occurs one time in a lifetime. He needs to prioritize at this particular very special moment from an emotional perspective avoiding a large drop in his total portfolio balance because then the whole one more year bullshit gets stirred up again. I can totallly relate to this. The risk to ones retirement date becomes paramount when wife and his own judgement is questioning whether to take the leap now and like me he REALLY wants to retire on his preferred date.
Wanderingwheelz
Posts: 3125
Joined: Mon Mar 04, 2019 8:52 am

Re: Close to retirement - locking in gains with each new market high

Post by Wanderingwheelz »

HomerJ wrote: Thu Jul 29, 2021 8:52 pm
flyingaway wrote: Thu Jul 29, 2021 8:37 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm
flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
A true Bpglehead with 16,937 posts does not retire with 25X. They usually retire with 100X.
Heh... good point...

But I'm a 25x proponent. But here, I am, at 26x, maybe 27x, and still working... :(

I even posted that I would retire when SP500 hit 4000... But I never expected it to hit 4000 so fast, and here it is at 4400, and I'm still working.

Basically I can't convince my wife that we're really okay.
Before retiring I’d definitely consider investing some money in a flat fee financial planner in the situation you describe in this thread. Unless your wife is 100% confident in your current plan and your ability to navigate whatever financial markets throw at you after your earned income goes to $0, I’d want another person to point a finger at, personally. It doesn’t appear that she is.

I note that in your replies in this thread you use terms like “silly” and “dumb” to describe the rationale behind your decision making as you get things set for retirement. If you’re doing the same thing at home when discussing your financial plan it’s not hard to see why her confidence may not rock solid. Just an observation.

There aren’t any do-overs once you do finally decide to retire early. Do you want to have to sharply cut her travel budget and hear about how you should have just worked until 65 to build a larger nest egg, for example? A flat-fee financial planner would help see that these kinds of conversations don’t happen. It’s risky.. since that person may in fact say it’s best you keep working. But it’s better to know now rather than at some later date.
Being wrong compounds forever.
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: Close to retirement - locking in gains with each new market high

Post by abc132 »

Escapevelocity wrote: Fri Jul 30, 2021 8:00 pm
abc132 wrote: Fri Jul 30, 2021 7:01 pm Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
This is an academically valid argument, but what you’re failing to acknowledge is that Homer is at a very special crossroads that only occurs one time in a lifetime. He needs to prioritize at this particular very special moment from an emotional perspective avoiding a large drop in his total portfolio balance because then the whole one more year bullshit gets stirred up again. I can totallly relate to this. The risk to ones retirement date becomes paramount when wife and his own judgement is questioning whether to take the leap now and like me he REALLY wants to retire on his preferred date.
I tried to explain why altering AA could be a poor decision emotionally - that the even bigger fears while not working could drive ever more conservative AA instead of a return to 50/50. I suggested an alternative that allows taking an action - saving up cash while still working and leaving the portfolio alone at 50/50.

It is a big part of the Boglehead philosophy to write an IPS and to stick to a good-enough plan, and the ability to stick to a plan is far more important than the details of the plan. I would have to look up Homer's past reasons for being 50/50, but if one of them was not having to make a decision then I would say this thread sends off all kinds of warning bells, and some reflection is probably warranted before continuing on this path.
todaysBob
Posts: 167
Joined: Mon Mar 02, 2020 5:39 pm

Re: Close to retirement - locking in gains with each new market high

Post by todaysBob »

What if market goers down 10% instead of going up 10% in your hypothetical $1M scenario? Would you be rebalancing from bonds->stocks?
SR7
Posts: 106
Joined: Fri May 15, 2020 4:06 am
Location: Down Under

Re: Close to retirement - locking in gains with each new market high

Post by SR7 »

I would just like to say Congratulations HomerJ !
You ran a good race, hit your number, and now you are starting to relax a bit and ease your mind. Which is important for enjoying your life.
I studied Physics not Finance, so best to ignore anything I say about money.
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Close to retirement - locking in gains with each new market high

Post by Escapevelocity »

abc132 wrote: Sat Jul 31, 2021 2:23 am
Escapevelocity wrote: Fri Jul 30, 2021 8:00 pm
abc132 wrote: Fri Jul 30, 2021 7:01 pm Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
This is an academically valid argument, but what you’re failing to acknowledge is that Homer is at a very special crossroads that only occurs one time in a lifetime. He needs to prioritize at this particular very special moment from an emotional perspective avoiding a large drop in his total portfolio balance because then the whole one more year bullshit gets stirred up again. I can totallly relate to this. The risk to ones retirement date becomes paramount when wife and his own judgement is questioning whether to take the leap now and like me he REALLY wants to retire on his preferred date.
I tried to explain why altering AA could be a poor decision emotionally - that the even bigger fears while not working could drive ever more conservative AA instead of a return to 50/50. I suggested an alternative that allows taking an action - saving up cash while still working and leaving the portfolio alone at 50/50.

It is a big part of the Boglehead philosophy to write an IPS and to stick to a good-enough plan, and the ability to stick to a plan is far more important than the details of the plan. I would have to look up Homer's past reasons for being 50/50, but if one of them was not having to make a decision then I would say this thread sends off all kinds of warning bells, and some reflection is probably warranted before continuing on this path.
I get all that. Homer has a one time binary decision to make along with his spouse. I submit that he has enough to retire whether 50/50, 40/60 or whatever. Whatever gets him to actually pull the plug on time was worth it in my opinion.
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: Close to retirement - locking in gains with each new market high

Post by abc132 »

Escapevelocity wrote: Sat Jul 31, 2021 5:21 am
I get all that. Homer has a one time binary decision to make along with his spouse. I submit that he has enough to retire whether 50/50, 40/60 or whatever. Whatever gets him to actually pull the plug on time was worth it in my opinion.
I was answering the specific questions of the OP.

- is he better managing risk?
- does this action help with SORR?

The answers are no, which I think he knows based on his comments.

I would agree that if he needs to take some action to pull the plug to go ahead and do so, but that doesn't change the answer to his questions - that he is probably not improving his portfolio through his actions. I suggested looking for something else that might let him feel comfortable retiring - like just saving up cash and leaving the portfolio alone. I wasn't ignoring his emotions, I was encouraging him to look for a better/alternate solution. I haven't heard a response if he is open to any other action, but I would suggest posting here is an indication that he might be. The thread is not actionable if we can't make any other recommendation than the current course, and if we can't address the specific questions of the original post.
Last edited by abc132 on Sat Jul 31, 2021 9:57 am, edited 1 time in total.
EnjoyIt
Posts: 8244
Joined: Sun Dec 29, 2013 7:06 pm

Re: Close to retirement - locking in gains with each new market high

Post by EnjoyIt »

Escapevelocity wrote: Fri Jul 30, 2021 8:00 pm
abc132 wrote: Fri Jul 30, 2021 7:01 pm Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
This is an academically valid argument, but what you’re failing to acknowledge is that Homer is at a very special crossroads that only occurs one time in a lifetime. He needs to prioritize at this particular very special moment from an emotional perspective avoiding a large drop in his total portfolio balance because then the whole one more year bullshit gets stirred up again. I can totallly relate to this. The risk to ones retirement date becomes paramount when wife and his own judgement is questioning whether to take the leap now and like me he REALLY wants to retire on his preferred date.
I think what your saying is really profound. Basically edging on the side of decreasing immediate risk so as to not make a behavioral mistake during that immediate timeframe.

Some may not view one more year as a big deal. Others think it’s a waste of a very precious year in what may be the best health of one’s life.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: Close to retirement - locking in gains with each new market high

Post by abc132 »

EnjoyIt wrote: Sat Jul 31, 2021 9:55 am
Escapevelocity wrote: Fri Jul 30, 2021 8:00 pm
abc132 wrote: Fri Jul 30, 2021 7:01 pm Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
This is an academically valid argument, but what you’re failing to acknowledge is that Homer is at a very special crossroads that only occurs one time in a lifetime. He needs to prioritize at this particular very special moment from an emotional perspective avoiding a large drop in his total portfolio balance because then the whole one more year bullshit gets stirred up again. I can totallly relate to this. The risk to ones retirement date becomes paramount when wife and his own judgement is questioning whether to take the leap now and like me he REALLY wants to retire on his preferred date.
I think what your saying is really profound. Basically edging on the side of decreasing immediate risk so as to not make a behavioral mistake during that immediate timeframe.

Some may not view one more year as a big deal. Others think it’s a waste of a very precious year in what may be the best health of one’s life.
Yes, I just wanted to express the concern for the possibility of a behavioral mistake, but without knowing the other person and how likely this is for them my advice could range from very important to completely unnecessary. I was hoping it would be a helpful line of thought for some readers even if it did not resonate or matter for the OP.
Last edited by abc132 on Sat Jul 31, 2021 10:03 am, edited 1 time in total.
delamer
Posts: 17348
Joined: Tue Feb 08, 2011 5:13 pm

Re: Close to retirement - locking in gains with each new market high

Post by delamer »

EnjoyIt wrote: Sat Jul 31, 2021 9:55 am
Escapevelocity wrote: Fri Jul 30, 2021 8:00 pm
abc132 wrote: Fri Jul 30, 2021 7:01 pm Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
This is an academically valid argument, but what you’re failing to acknowledge is that Homer is at a very special crossroads that only occurs one time in a lifetime. He needs to prioritize at this particular very special moment from an emotional perspective avoiding a large drop in his total portfolio balance because then the whole one more year bullshit gets stirred up again. I can totallly relate to this. The risk to ones retirement date becomes paramount when wife and his own judgement is questioning whether to take the leap now and like me he REALLY wants to retire on his preferred date.
I think what your saying is really profound. Basically edging on the side of decreasing immediate risk so as to not make a behavioral mistake during that immediate timeframe.

Some may not view one more year as a big deal. Others think it’s a waste of a very precious year in what may be the best health of one’s life.
If having one more year of expenses in cash will make him/them comfortable with the decision to retire, then do it.

But I see the additional year of cash as providing a false sense of security.

Is there a period over the last 100 years when having that 13th year of expenses in cash would have saved an investor from going bankrupt? I’m doubtful.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
gunther35
Posts: 8
Joined: Sun Mar 22, 2020 11:25 am

Re: Close to retirement - locking in gains with each new market high

Post by gunther35 »

rockAction wrote: Fri Jul 30, 2021 7:02 am I'm sure rationally you probably know it won't make much difference either way, and barely moves the SORR needle. Personally, for me it was liberating to chuck all the mental accounting stuff and simply stick to an AA that best fits my needs and risk tolerance. It is simpler and reduces the tendency to tinker. I now see mental accounting as more of a distraction than anything, and removes focus from the things that can really make a difference (ability to adjust spending, having enough FI to withstand a prolonged bear market, sticking to a plan, etc).

At 25X, I wouldn't go below 50/50, even heading into retirement. You chose 50/50 for a reason (probably 100 reasons), so I'd recommend staying there and reminding yourself that 50/50 is the ride you signed up for, and that will only change if there is an extremely compelling reason to do so. Just my two cents.
rockAction: Great Post!

HomerJ: Congrats on your approaching retirement! I always enjoy your perspective and insightful posts.

I, too, have reached my number, but actually cutting the cord and retiring completely has been more difficult than I would have thought. :confused
I am also 50/50 and thought about going to 45/55 but using the bogleheads VPW retirement worksheet https://www.bogleheads.org/wiki/Variabl ... withdrawal it doesn't seem to make that much difference.

I can understand the logic to get more conservative when retiring, and maybe a little less conservative a few years after retiring, but since no one knows what stocks will do over the next few years, this action could be detrimental (even though it will probably not make much difference if talking 5% shifts).
The temptation to time the market is tough to resist sometimes, but I will continue trying my best to stay the course with a set AA.

I've also set my retirement date to when I turn 60 (next year) .
I figure the bigger unknown is how many healthy years I have left > if my money will run out?
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

todaysBob wrote: Sat Jul 31, 2021 2:32 am What if market goers down 10% instead of going up 10% in your hypothetical $1M scenario? Would you be rebalancing from bonds->stocks?
Nope.

Just skimming gains off the top.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

abc132 wrote: Sat Jul 31, 2021 9:46 am
Escapevelocity wrote: Sat Jul 31, 2021 5:21 am
I get all that. Homer has a one time binary decision to make along with his spouse. I submit that he has enough to retire whether 50/50, 40/60 or whatever. Whatever gets him to actually pull the plug on time was worth it in my opinion.
I was answering the specific questions of the OP.

- is he better managing risk?
- does this action help with SORR?

The answers are no, which I think he knows based on his comments.

I would agree that if he needs to take some action to pull the plug to go ahead and do so, but that doesn't change the answer to his questions - that he is probably not improving his portfolio through his actions. I suggested looking for something else that might let him feel comfortable retiring - like just saving up cash and leaving the portfolio alone. I wasn't ignoring his emotions, I was encouraging him to look for a better/alternate solution. I haven't heard a response if he is open to any other action, but I would suggest posting here is an indication that he might be. The thread is not actionable if we can't make any other recommendation than the current course, and if we can't address the specific questions of the original post.
Saving up cash is kind of the same thing as what I'm doing... But yeah I could do that I suppose.

I mean, I am actually still saving money, so the original 50/50 portfolio is still growing on both sides as new savings goes in.

But as the stock market continues to rise, I continue to skim the extra market gains off the top of the stock side and move them to cash and keep the original portfolio at 50/50.

Yes, my ACTUAL portfolio, when you include all the cash on the side is slowly going more conservative, like 46/54 by now I think, but I'm tricking myself by ignoring the cash side as part of my portfolio - Trying to get the cash up to 2 years of expenses, which I think will make the retirement decision a lot easier, since I'll just live off that for the first 2 years of retirement, and I won't touch the rest of the portfolio.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Thanks for all the replies, it was good to talk this out.

I do recognize it's just mental accounting.

I mean I talk about living off the first 2 years from extra cash savings, but I already have 2-3 years of CDs (cash) in the original 50/50 portfolio. I was already set to just live off the cash for the first years if a crash happened.

I really should keep it all at 50/50 and say I'm going for 27x (instead of 25x) before retiring because I hit my number earlier than expected.

But this way is fairly easy too... My wife has never believed the Vanguard statements... :) Whenever I get excited, she always says "It's not real money yet, it can always disappear"... And you know, she's somewhat right...

But money in the bank she believes is real, so building up a large cash cushion there might be enough to get her ready for retirement. :)
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
EnjoyIt
Posts: 8244
Joined: Sun Dec 29, 2013 7:06 pm

Re: Close to retirement - locking in gains with each new market high

Post by EnjoyIt »

delamer wrote: Sat Jul 31, 2021 10:02 am
EnjoyIt wrote: Sat Jul 31, 2021 9:55 am
Escapevelocity wrote: Fri Jul 30, 2021 8:00 pm
abc132 wrote: Fri Jul 30, 2021 7:01 pm Rebalancing to 50/50 already locks in gains, and I'm not sure if the idea that something with more bonds is safer is actually true.

I would suggest performing some historical or numerical analysis.

If 45/55 is safer than 50/50, why isn't 40/60 safer, and then 35/65, etc. It is always going to feel safer if you view bonds as safer, but the reality is it is how the portfolio behaves that matters. Consider a portfolio with 10% more value at 50/50 vs the portfolio at 45/55 with 10% less value. Which is safer? It is not as easy as thinking bonds are safe and stocks are risky.

I would be a bigger fan of leaving your portfolio at 50/50 and building up a bigger cash pile with new investments. The reason is that you really limit the damage you can do to your returns. If 50/50 bothers you while working, I hate to think what it will do when you are not earning income and only spending. I think there is a real risk to continue to buy more bonds to the point you harm your portfolio.

What changed about your reasons for using a 50/50 AA? If you were 50/50 to not have to make decisions, you just opened up a real can of worms by putting yourself in control right when sticking to a plan was most important.
This is an academically valid argument, but what you’re failing to acknowledge is that Homer is at a very special crossroads that only occurs one time in a lifetime. He needs to prioritize at this particular very special moment from an emotional perspective avoiding a large drop in his total portfolio balance because then the whole one more year bullshit gets stirred up again. I can totallly relate to this. The risk to ones retirement date becomes paramount when wife and his own judgement is questioning whether to take the leap now and like me he REALLY wants to retire on his preferred date.
I think what your saying is really profound. Basically edging on the side of decreasing immediate risk so as to not make a behavioral mistake during that immediate timeframe.

Some may not view one more year as a big deal. Others think it’s a waste of a very precious year in what may be the best health of one’s life.
If having one more year of expenses in cash will make him/them comfortable with the decision to retire, then do it.

But I see the additional year of cash as providing a false sense of security.

Is there a period over the last 100 years when having that 13th year of expenses in cash would have saved an investor from going bankrupt? I’m doubtful.
This isn’t market risk. It’s psychological or behavioral risk of maybe working one more year unnecessarily. Obviously person dependent though I get the reasoning.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

EnjoyIt wrote: Sat Jul 31, 2021 2:51 pm This isn’t market risk. It’s psychological or behavioral risk of maybe working one more year unnecessarily. Obviously person dependent though I get the reasoning.
Exactly.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Financologist
Posts: 390
Joined: Wed Jan 01, 2020 10:16 pm

Re: Close to retirement - locking in gains with each new market high

Post by Financologist »

The key is you made your number.
Congrats
Financologist
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

I'm not a fan of this approach. It's overly conservative and especially in a low interest rate environment it makes sense to take a bit more equity risk to ensure SORR won't wipe you out. Unexpected inflation is a true killer of your portfolio, and it's a risk I would not like to take going into retirement.

Granted, I don't know the full details of your retirement (age, spending, SWR, etc), but on the face of it sacrifices short term risks for the very real long term risks of being cash/bond heavy, which could be disastrous.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
User avatar
canadianbacon
Posts: 676
Joined: Sun Nov 10, 2019 9:04 pm

Re: Close to retirement - locking in gains with each new market high

Post by canadianbacon »

HomerJ wrote: Fri Jul 30, 2021 2:39 pm My 50/50 allocation of my number is still intact. I haven't changed it at all, in my mind.

But the gains since I hit my number, I've been squirrelling away as cash.

Pure mental accounting, I know. Silly, I know.

But if the market does crash in the next year or two, I'll be happy I did it, and will able to retire anyway without worry because of that buffer.
ERN has written about a strategy where you put two years of expenses into cash, but only draw it down if the market falls a certain amount (e.g. 20%). I believe he found it increased survivorship rate.

So it may be worth considering modifying your strategy to keep the bucket intact and live off your portfolio 50/50 as you ultimately plan to do, and then save the bucket for a rainy year.
Bulls make money, bears make money, pigs get slaughtered.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Close to retirement - locking in gains with each new market high

Post by 000 »

HomerJ wrote: Thu Jul 29, 2021 10:29 pm
000 wrote: Thu Jul 29, 2021 10:10 pm Have you considered the possibility that the stock gains could be phantom asset inflation?
If that's true, then moving those gains from stocks to bonds/cash turns phantom asset inflation into real gains, right?
No, I was thinking more like a case where the inflation hadn't yet shown up in the consumer goods you buy.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Close to retirement - locking in gains with each new market high

Post by Marseille07 »

canadianbacon wrote: Sat Jul 31, 2021 8:00 pm ERN has written about a strategy where you put two years of expenses into cash, but only draw it down if the market falls a certain amount (e.g. 20%). I believe he found it increased survivorship rate.

So it may be worth considering modifying your strategy to keep the bucket intact and live off your portfolio 50/50 as you ultimately plan to do, and then save the bucket for a rainy year.
Imo there's no need to create custom rules like 2 years or 20%.

If you don't rebalance, this automatically happens when you withdraw. Say you want 50/50 but equities crashed and now 40/60, you simply withdraw from the fixed income side.
sfnerd
Posts: 348
Joined: Tue Apr 08, 2014 1:16 am

Re: Close to retirement - locking in gains with each new market high

Post by sfnerd »

You'll be fine regardless, but aren't you worried that you'll lose spending power due to inflation over time?

50/50 is quite conservative, and lower than this starts to break the 4% SWR for more than 30 year horizons. I realize that you'll be lower than 4%, so you'll be fine, but it seems risky to me. Not "eating rice and beans" risky, but less luxuries risky.

Personally I'm I higher equities (85% at the moment, probably 80 at retirement) because most of my spending is highly discretionary, and I'll be at 33x+ of max spending, so I can take a lot of risk and feel OK about it. However I feel like 60/40 would be the lowest I'd go at 30x or lower, since the SWR work from ERN and others tends to show that below that you start to take more risk from inflation, bond underperformance, etc.
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Close to retirement - locking in gains with each new market high

Post by Marseille07 »

Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Close to retirement - locking in gains with each new market high

Post by Marseille07 »

Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
The coupon rate is low, but they're fine so long as the yields stay low. And we're already seeing a puzzling phenomenon where CPI printed +5.4% and 10Y crashed from 1.4% to 1.2%. For whatever reason, everyone is buying bonds despite them returning nothing.
User avatar
Topic Author
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
You've got it backwards.

Long-term it will likely be fine. Short-term would be risky if I was 90/10 stocks/bonds... but short-term is less risky because I have so much in bonds/cash.

Yes, bonds are returning nothing in the short-term, but no one knows what interest rates will be in 5-10-15 years.

Yes, equities are projecting smaller returns in the short-term (if you believe in valuations theory), but the long-term will likely be higher.

That's the history of the market. That's valuations theory as well. If you believe in valuations and expected returns, then low returns over the next 10 years will predict higher returns over the following 10 years.

So having a solid chunk of money in cash/bonds/CDs means I'll be fine even the market crashes in the next few years. Because I'll have plenty to spend while waiting for stocks to recover.

Inflation is a real danger, yes. But I've built up my ibonds to be 10% of my fixed-income side, and I can adjust if we start seeing sustained higher inflation. The Fed will raise interest rates if inflation gets too out of control, which will certainly help cash, and short-term bond funds

Intermediate bond funds would get hurt in the short-run with rising interest rates, but do better in the long-run.

I don't need equities to do well in the short-run. That's the whole point of having so much in cash and fixed income.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Post Reply