"Sequence of Return Risk" Side Discussion - I can't believe I am thinking this [Panic and Survival 2008-09]

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doobiedoo
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"Sequence of Return Risk" Side Discussion - I can't believe I am thinking this [Panic and Survival 2008-09]

Post by doobiedoo »

[Moved into a new thread from: I can't believe I am thinking this [Panic and Survival 2008-09] --admin LadyGeek]

I was somewhat surprised to see no one identify Sheepdog's base problem in this thread by name.
The base problem is called "Sequence of Return Risk" [sometimes abbreviated as SORR].
Maybe that term wasn't coined yet in 2008.

To Sheepdog's credit, he succinctly identified the base problem.
Sheepdog wrote: Tue Oct 14, 2008 10:25 am ..
I had tread on thin ice by selling a mixture EVERY month for expenses since my cash account was depleted a few years ago. I was selling each month sometimes at high, like last year, but recently, like on the first of September and October, selling on lower NAVs. I was selling a constant percentage of stocks and bonds monthly from traditional IRAs and Roth IRAs...a mixture to keep from paying more than $1000 annually for federal income taxes. That was like dollar cost averaging in reverse. I did not want to sell more than I had to while things looked rosy. That worked until the valuations dropped.
With dollar cost averaging [DCA], you get to buy more shares when prices go down, which works great when prices recover in the long term.
But with reverse DCA, you have to SELL MORE SHARES to get the same dollar amount to spend. That is like a downward spiral and can lead to a catastrophic "running out of money" scenario.

And Sheepdog came up with solutions.
Sheepdog wrote: Fri Oct 10, 2008 1:32 pm ..
This is what I did and why. If I had followed the advice of many here, and sometimes myself, I would have kept 3 to 5 years of normal annual distribution for expenses in cash so that when times like this occur, I would not have to sell. I had mostly depleted my cash account last year. I had not kept it up. I just could not expect a 1929 type drop, not today.... So, I exchanged 3 years of our normal annual needs from my stock and bond funds to money market. This amount is 20% of our present IRA stock and bond investments.
..
Sheepdog wrote: Sat May 28, 2016 12:42 am ..
[have] 1.5 years of equivalent normal distributions in the short term investment grade bond fund available when needed and about 1 year of normal distributions in 5 year 3% CDs which I should not now need for expenses (except for maybe a new auto when they mature in Jan. 2019) because I purchased in 2012 and 2013 SPIAs from the "cash" accounts which along with SS are covering all of our normal annual spending. That is great for us, especially, my lady's future well-being if I become incapacitated. We are all set.
Sheepdog wrote: Tue Oct 14, 2008 10:25 am It is often advised that we should not invest in riskier investments what we will need within five years. Invest for the long term. .. When things get better in the next three years, I WILL sell more to get the five year cushion.
Sheepdog implemented what is called a "bucket" strategy today.
Some posters suggested other solutions such as dividend investing [e.g. from "Retired at 48"].

The "stay the course" mantra is usually right.
But if the car you are in is on autopilot and headed for a cliff, sometimes the car will stop or turn before it gets to the cliff. But maybe it won't. It is a survival instinct to grab the wheel and turn the car.
And it takes objective judgement to know when the car is headed for a cliff or not.
Marseille07
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

If I had followed the advice of many here, and sometimes myself, I would have kept 3 to 5 years of normal annual distribution for expenses in cash so that when times like this occur, I would not have to sell.
It's interesting this advice got lost 14 years later. I don't see many advising this today.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by sailaway »

Marseille07 wrote: Mon Nov 28, 2022 2:41 pm
If I had followed the advice of many here, and sometimes myself, I would have kept 3 to 5 years of normal annual distribution for expenses in cash so that when times like this occur, I would not have to sell.
It's interesting this advice got lost 14 years later. I don't see many advising this today.
Everything from zero to ten years is constantly debated. If I had held that much cash for the last 14 years, I would be in much worse shape than occasionally having to sell when markets are low.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

sailaway wrote: Mon Nov 28, 2022 2:51 pm Everything from zero to ten years is constantly debated. If I had held that much cash for the last 14 years, I would be in much worse shape than occasionally having to sell when markets are low.
I don't see much debate over this topic these days, as many posters seem to only hold stocks and bonds, maybe 3~6 months of expenses in cash.

I do agree that 3~5 years is probably too much. I just find it interesting this was advised back in the day, assuming Sheepdog's observation was accurate.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by jebmke »

Marseille07 wrote: Mon Nov 28, 2022 3:09 pm
sailaway wrote: Mon Nov 28, 2022 2:51 pm Everything from zero to ten years is constantly debated. If I had held that much cash for the last 14 years, I would be in much worse shape than occasionally having to sell when markets are low.
I don't see much debate over this topic these days, as many posters seem to only hold stocks and bonds, maybe 3~6 months of expenses in cash.

I do agree that 3~5 years is probably too much. I just find it interesting this was advised back in the day, assuming Sheepdog's observation was accurate.
I don't recall exactly how the price of bonds fluctuated during this period. I retired in December, 2007. I was selling bonds and buying stock through 2008-09 (along with spending some of the bond proceeds to cover expenses). There was a short period when the debt markets trembled a bit but the FED moved in pretty quickly. Tips were hit hard but that was a unique situation and a unique buying opportunity.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

jebmke wrote: Mon Nov 28, 2022 3:16 pm I don't recall exactly how the price of bonds fluctuated during this period. I retired in December, 2007. I was selling bonds and buying stock through 2008-09 (along with spending some of the bond proceeds to cover expenses). There was a short period when the debt markets trembled a bit but the FED moved in pretty quickly. Tips were hit hard but that was a unique situation and a unique buying opportunity.
Bonds did well as the Fed opened the discount window. Come to think of it, I'm not really sure why Sheepdog was panicking over the lack of cash holdings - he should have been able to sell bonds and buy equities like you were doing.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by patrick »

Marseille07 wrote: Mon Nov 28, 2022 2:41 pm
If I had followed the advice of many here, and sometimes myself, I would have kept 3 to 5 years of normal annual distribution for expenses in cash so that when times like this occur, I would not have to sell.
It's interesting this advice got lost 14 years later. I don't see many advising this today.
For 2008 that advice was not needed. You could have sold bonds instead of selling stocks.

For 2022 even cash had a significant loss after accounting for inflation, even if it was the least worst major option.

Of course neither 2008 nor 2022 is the worst case scenario. Stocks did much worse in 1929. Inflation was worse in the 1970s. I'm not sure whether nominal bond losses were worse at any time in living memory (cumulative real losses from 1940-1981 were much worse, but I'm not sure if there were comparable losses in a short period, or comparable losses in nominal terms), but it is still possible for worse bond returns to occur in the future.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by jebmke »

patrick wrote: Mon Nov 28, 2022 3:20 pm For 2022 even cash had a significant loss after accounting for inflation, even if it was the least worst major option.
Inflation affects all assets equally (except maybe tips but even there, real rates drove tips values down). Cash would have been better with prior knowledge.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by retiredjg »

Marseille07 wrote: Mon Nov 28, 2022 2:41 pm
If I had followed the advice of many here, and sometimes myself, I would have kept 3 to 5 years of normal annual distribution for expenses in cash so that when times like this occur, I would not have to sell.
It's interesting this advice got lost 14 years later. I don't see many advising this today.
It does not get discussed or debated much. Some people still do it though. And some people use "buckets" which is just a modification of the same idea. And some people keep a lifetime's amount of expenses in cash/bonds and invest the rest of the portfolio in stocks (sometimes called a liability matching portfolio)....also a modification of the same idea.

So it may be discussed/suggested more than you realize.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

Marseille07 wrote: Mon Nov 28, 2022 2:41 pm
If I had followed the advice of many here, and sometimes myself, I would have kept 3 to 5 years of normal annual distribution for expenses in cash so that when times like this occur, I would not have to sell.
It's interesting this advice got lost 14 years later. I don't see many advising this today.
I see plenty of posters here holding X years in cash. Plenty have talked about 3-5 year CD ladders.

Personally I have a very hard time following such a plan. I hate holding so much cash. Sure, a few months in expenses can be reasonable, but for me, years is overkill. One particular problem I have with cash is to decide when to use it and when to replenish it as well as how to replenish it.

As an example, let us assume that a retired investor who has $1 million, spending $40k per year and sitting on 3 years of the $1 million in cash on January 1, 2022. That is $120k in cash. I would assume since the market crashed in the beginning of this year, this investor would start using their cash for their expenses. At what point does this investor stop using their cash bucket and go back to selling bonds and stocks? Do they wait for their equities to reach their peak value? Do they wait for their entire portfolio to recover? Or, do they start now since it may be that we are starting to recover now?

Then, at what point does this retired investor replenish their cash position? Let us say it takes a total of 2 years to recover and their cash position is now less than 1 year of expenses thanks to inflation. Does this investor sell bonds and equities to rebuild back to 3 years? Do they do it in one big sale or do they do it over a few months or even years? What about the tax consequences of moving a position to cash. I find this cash cushion rebuilding process fraught with real time decision making and emotions both of which I strongly believe should not be a part of any investment strategy.

Personally, I prefer to use my 70/30 portfolio as my cash reserve and I have learned that I do not mind selling a bit from my portfolio even when it is down. Something I had to do this year. Also, my portfolio was built over many years. By not keeping X years of my portfolio in cash, my portfolio is larger than it would have been otherwise making the decision to sell a portion of my assets at a loss much more tolerable.

The Sheepdog story is very interesting because Sheepdog's biggest error in my opinion is that he did not rebalance on the way up and grew emotionally attached to the ever growing increase in portfolio size that the few years prior to the Great Financial Crises created. It reminds me of the old saying, that I will paraphrase. "If you don't rebalance on the way up, the market will eventually do it for you." That is what happened to sheepdog who got spooked and finally rebalanced at a loss.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

deleted
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Triple digit golfer »

Marseille07 wrote: Mon Nov 28, 2022 4:51 pm
EnjoyIt wrote: Mon Nov 28, 2022 4:32 pm I see plenty of posters here holding X years in cash. Plenty have talked about 3-5 year CD ladders.

Personally I have a very hard time following such a plan. I hate holding so much cash. Sure, a few months in expenses can be reasonable, but for me, years is overkill. One particular problem I have with cash is to decide when to use it and when to replenish it as well as how to replenish it.

As an example, let us assume that a retired investor who has $1 million, spending $40k per year and sitting on 3 years of the $1 million in cash on January 1, 2022. That is $120k in cash. I would assume since the market crashed in the beginning of this year, this investor would start using their cash for their expenses. At what point does this investor stop using their cash bucket and go back to selling bonds and stocks? Do they wait for their equities to reach their peak value? Do they wait for their entire portfolio to recover? Or, do they start now since it may be that we are starting to recover now?

Then, at what point does this retired investor replenish their cash position? Let us say it takes a total of 2 years to recover and their cash position is now less than 1 year of expenses thanks to inflation. Does this investor sell bonds and equities to rebuild back to 3 years? Do they do it in one big sale or do they do it over a few months or even years? What about the tax consequences of moving a position to cash. I find this cash cushion rebuilding process fraught with real time decision making and emotions both of which I strongly believe should not be a part of any investment strategy.

Personally, I prefer to use my 70/30 portfolio as my cash reserve and I have learned that I do not mind selling a bit from my portfolio even when it is down. Something I had to do this year. Also, my portfolio was built over many years. By not keeping X years of my portfolio in cash, my portfolio is larger than it would have been otherwise making the decision to sell a portion of my assets at a loss much more tolerable.

The Sheepdog story is very interesting because Sheepdog's biggest error in my opinion is that he did not rebalance on the way up and grew emotionally attached to the ever growing increase in portfolio size that the few years prior to the Great Financial Crises created. It reminds me of the old saying, that I will paraphrase. "If you don't rebalance on the way up, the market will eventually do it for you." That is what happened to sheepdog who got spooked and finally rebalanced at a loss.
Rebalancing seems straightforward to me.

In the example you cited, if all they have are stocks and 120K in cash, then naturally they have 880K/120K or 88/12.

Let's say stocks go down by 50%, then they have 440K/120K or 79/21. In this case they'd keep spending down cash until they reach 88/12, then start selling whichever is overweight.
That's not the case because he was talking about keeping $120k in cash, not 12%. It happened to be 12%, but the desired amount was $120k, not 12%.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

Triple digit golfer wrote: Mon Nov 28, 2022 5:35 pm That's not the case because he was talking about keeping $120k in cash, not 12%. It happened to be 12%, but the desired amount was $120k, not 12%.
He didn't say he has to keep 120K in cash. The example cited was that a hypothetical retiree *has* 120K when they retired, then proceeded to ask how they would go about spending it down and replenish during a crash.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Triple digit golfer »

Marseille07 wrote: Mon Nov 28, 2022 5:48 pm
Triple digit golfer wrote: Mon Nov 28, 2022 5:35 pm That's not the case because he was talking about keeping $120k in cash, not 12%. It happened to be 12%, but the desired amount was $120k, not 12%.
He didn't say he has to keep 120K in cash. The example cited was that a hypothetical retiree *has* 120K when they retired, then proceeded to ask how they would go about spending it down and replenish during a crash.
He was talking about years in cash. He said 3 years. The context was holding X years in cash.

Let's wait for him to chime in and clarify, but it's pretty clear.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

deleted as the poster above isn't making any point.
Last edited by Marseille07 on Tue Nov 29, 2022 12:18 am, edited 1 time in total.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Ben Mathew »

Triple digit golfer wrote: Mon Nov 28, 2022 5:54 pm Let's wait for him to chime in and clarify
Unfortunately, Sheepdog is no longer with us:

viewtopic.php?t=391218
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Abalyon »

It's always interesting to go back and Google what happened on this day. The Dow went down 7% in a single day, which is interesting because the Dow right now is down, what, 8% right now? The Dow is pretty meaningless, but it pays an important lesson this time around. Diversification in sectors is really paying dividends bear market, but in 08-09, there was obviously nowhere to hide. Hopefully this will teach retail to not go all in on hot sectors that have outperformed in the past (like tech with QQQ this time around).

https://money.cnn.com/2008/10/09/market ... s_newyork/
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Triple digit golfer »

Ben Mathew wrote: Mon Nov 28, 2022 6:24 pm
Triple digit golfer wrote: Mon Nov 28, 2022 5:54 pm Let's wait for him to chime in and clarify
Unfortunately, Sheepdog is no longer with us:

viewtopic.php?t=391218
Thanks - I'm aware. I meant wait for EnjoyIt to chime in.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

Triple digit golfer wrote: Mon Nov 28, 2022 5:54 pm
Marseille07 wrote: Mon Nov 28, 2022 5:48 pm
Triple digit golfer wrote: Mon Nov 28, 2022 5:35 pm That's not the case because he was talking about keeping $120k in cash, not 12%. It happened to be 12%, but the desired amount was $120k, not 12%.
He didn't say he has to keep 120K in cash. The example cited was that a hypothetical retiree *has* 120K when they retired, then proceeded to ask how they would go about spending it down and replenish during a crash.
He was talking about years in cash. He said 3 years. The context was holding X years in cash.

Let's wait for him to chime in and clarify, but it's pretty clear.
That is correct. I was talking three years of expenses in cash. I was using the standard of 25 access portfolio with a 4% withdrawal. I was trying to use simple numbers which is why I use a $1 million portfolio and $40,000 yearly expenses which equals $120,000 in cash if that is three years.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by MarkRoulo »

Marseille07 wrote: Mon Nov 28, 2022 3:19 pm
jebmke wrote: Mon Nov 28, 2022 3:16 pm I don't recall exactly how the price of bonds fluctuated during this period. I retired in December, 2007. I was selling bonds and buying stock through 2008-09 (along with spending some of the bond proceeds to cover expenses). There was a short period when the debt markets trembled a bit but the FED moved in pretty quickly. Tips were hit hard but that was a unique situation and a unique buying opportunity.
Bonds did well as the Fed opened the discount window. Come to think of it, I'm not really sure why Sheepdog was panicking over the lack of cash holdings - he should have been able to sell bonds and buy equities like you were doing.
Maybe because the day he posted, the S&P 500 dropped 7.62%. The day prior it was down 1.13%. The days before that (in reverse order) down 5.74%, 3.85%, 1.35%, 4.03% and 0.45%. Between the opening price of 1,164.17 on Oct 1 and the closing price of 1,005.25 on Oct 9th, the S&P 500 lost about 14% of its value.

The high for the S&P 500 up until them was 1,565.15, so a 35% drop with no end in sight.

Also, going from memory the news was all about the financial system collapsing and the US entering Great Depression 2.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Stinky »

MarkRoulo wrote: Tue Nov 29, 2022 9:01 am
Marseille07 wrote: Mon Nov 28, 2022 3:19 pm
jebmke wrote: Mon Nov 28, 2022 3:16 pm I don't recall exactly how the price of bonds fluctuated during this period. I retired in December, 2007. I was selling bonds and buying stock through 2008-09 (along with spending some of the bond proceeds to cover expenses). There was a short period when the debt markets trembled a bit but the FED moved in pretty quickly. Tips were hit hard but that was a unique situation and a unique buying opportunity.
Bonds did well as the Fed opened the discount window. Come to think of it, I'm not really sure why Sheepdog was panicking over the lack of cash holdings - he should have been able to sell bonds and buy equities like you were doing.
Maybe because the day he posted, the S&P 500 dropped 7.62%. The day prior it was down 1.13%. The days before that (in reverse order) down 5.74%, 3.85%, 1.35%, 4.03% and 0.45%. Between the opening price of 1,164.17 on Oct 1 and the closing price of 1,005.25 on Oct 9th, the S&P 500 lost about 14% of its value.

The high for the S&P 500 up until them was 1,565.15, so a 35% drop with no end in sight.

Also, going from memory the news was all about the financial system collapsing and the US entering Great Depression 2.
Meanwhile, Lehman had collapsed on 9/15/08, less than a month before the first post in this thread. AIG was on the brink. Banks were collapsing right and left.

Those were certainly dark days. I remember them well.
Last edited by Stinky on Tue Nov 29, 2022 9:58 am, edited 1 time in total.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by jeffyscott »

I went back to some of the early posts to get some idea how the "problem" developed and I think this one provides a good summary of that and the course correction:
Sheepdog wrote: Tue Oct 14, 2008 10:25 am It is often advised that we should not invest in riskier investments what we will need within five years. Invest for the long term. What I did last week was sell a mixture of stocks and bonds to re-create a fund for cash needs for three years. I did not sell enough to get to five years because I did not want to sell more at the bottom. When things get better in the next three years, I WILL sell more to get the five year cushion.

I had tread on thin ice by selling a mixture EVERY month for expenses since my cash account was depleted a few years ago. I was selling each month sometimes at high, like last year, but recently, like on the first of September and October, selling on lower NAVs. I was selling a constant percentage of stocks and bonds monthly from traditional IRAs and Roth IRAs...a mixture to keep from paying more than $1000 annually for federal income taxes. That was like dollar cost averaging in reverse. I did not want to sell more than I had to while things looked rosy. That worked until the valuations dropped.

I will add this caveat. Twenty percent of my holdings are in I Bonds now. When I purchased them originally in 2000 - 2003 I planned on these being my cash account. I thought I would sell one or more every month as needed. I did sell my 1.0 and 1.6 % fixed bonds, but refuse to sell my 3.0 to 3.6% fixed ones, presently earning an up-to safe 8.53%. They became long term investments after all. That is when my "cash" account disappeared.

This can be a lesson for retirees or near retirees, invest for the long term, but keep cash accounts for expenses so you do not HAVE TO sell at low. The cash account can be cash or a laddered CDs. Replenish those accounts as you use them by selling long term investments at higher investment valuations.
Jim
One thing that occurs to me is that when the I-bonds became long term holdings, it may have made sense to move a portion of longer term bond holdings to a money market or short term bonds to offset that.

Another is that, even though it may not seem that way when living through times like 2008-09 or even this year with the bond collapse, holding a bond fund or a couple of them, with the appropriate duration(s) is reportedly equivalent to holding whatever mix of bond funds, laddered CDs, and cash that one may choose to hold: viewtopic.php?t=318412

MarkRoulo wrote: Tue Nov 29, 2022 9:01 amAlso, going from memory the news was all about the financial system collapsing and the US entering Great Depression 2.
That was the real issue back then, nothing seemed really safe. It was all about fear that this was the end of the economy as we had known it.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

EnjoyIt wrote: Tue Nov 29, 2022 6:17 am That is correct. I was talking three years of expenses in cash. I was using the standard of 25 access portfolio with a 4% withdrawal. I was trying to use simple numbers which is why I use a $1 million portfolio and $40,000 yearly expenses which equals $120,000 in cash if that is three years.
That was not your question.

No one was disputing 120K was 40K * 3 years. Please clarify if you meant to ask if the 120K in cash should be kept at 120K during a crash, or you asked how the cash should be spent & replenished during a crash.
Last edited by Marseille07 on Tue Nov 29, 2022 10:29 am, edited 2 times in total.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

MarkRoulo wrote: Tue Nov 29, 2022 9:01 am Maybe because the day he posted, the S&P 500 dropped 7.62%. The day prior it was down 1.13%. The days before that (in reverse order) down 5.74%, 3.85%, 1.35%, 4.03% and 0.45%. Between the opening price of 1,164.17 on Oct 1 and the closing price of 1,005.25 on Oct 9th, the S&P 500 lost about 14% of its value.

The high for the S&P 500 up until them was 1,565.15, so a 35% drop with no end in sight.

Also, going from memory the news was all about the financial system collapsing and the US entering Great Depression 2.
You're probably correct. Bonds eventually came to the rescue but it wasn't right away.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by rich126 »

Marseille07 wrote: Tue Nov 29, 2022 10:11 am
MarkRoulo wrote: Tue Nov 29, 2022 9:01 am Maybe because the day he posted, the S&P 500 dropped 7.62%. The day prior it was down 1.13%. The days before that (in reverse order) down 5.74%, 3.85%, 1.35%, 4.03% and 0.45%. Between the opening price of 1,164.17 on Oct 1 and the closing price of 1,005.25 on Oct 9th, the S&P 500 lost about 14% of its value.

The high for the S&P 500 up until them was 1,565.15, so a 35% drop with no end in sight.

Also, going from memory the news was all about the financial system collapsing and the US entering Great Depression 2.
You're probably correct. Bonds eventually came to the rescue but it wasn't right away.
It was pretty rough on real estate although with real estate you don't have to sell unless you lose your job. I was living in Scottsdale and the Phoenix area was decimated with foreclosures. Some streets had foreclosure signs on about 3/4 of the properties. My house dropped over 50% from peak to bottom and others saw much steeper drops. As someone getting ready to retire seeing a drop of 30%+ in a portfolio would not be good.

RIP Sheepdog.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by MarkRoulo »

rich126 wrote: Tue Nov 29, 2022 4:19 pm
Marseille07 wrote: Tue Nov 29, 2022 10:11 am
MarkRoulo wrote: Tue Nov 29, 2022 9:01 am Maybe because the day he posted, the S&P 500 dropped 7.62%. The day prior it was down 1.13%. The days before that (in reverse order) down 5.74%, 3.85%, 1.35%, 4.03% and 0.45%. Between the opening price of 1,164.17 on Oct 1 and the closing price of 1,005.25 on Oct 9th, the S&P 500 lost about 14% of its value.

The high for the S&P 500 up until them was 1,565.15, so a 35% drop with no end in sight.

Also, going from memory the news was all about the financial system collapsing and the US entering Great Depression 2.
You're probably correct. Bonds eventually came to the rescue but it wasn't right away.
It was pretty rough on real estate although with real estate you don't have to sell unless you lose your job. I was living in Scottsdale and the Phoenix area was decimated with foreclosures. Some streets had foreclosure signs on about 3/4 of the properties. My house dropped over 50% from peak to bottom and others saw much steeper drops. As someone getting ready to retire seeing a drop of 30%+ in a portfolio would not be good.

RIP Sheepdog.
As seems to be common with real estate the results were local and varied wildly.

In the SF Bay Area (so Silicon Valley area) you could draw a north-south line with roughly Mountain View/Sunnyvale/Los Gatos/Cupertino to the west and Milpitas/Gilroy/Morgan Hill/Fremont to the east. House value on the west side of the line dropped maybe 10%. House values on the east side of the line dropped closer to 50%.

My guess is that lots of the country didn't see the drop in home values, but also didn't see the insane run-ups leading to 2008.

Everyone saw the same S&P 500 drop (though some were more exposed to stocks than others). The real estate crash or not seems to have been local.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

Marseille07 wrote: Tue Nov 29, 2022 10:09 am
EnjoyIt wrote: Tue Nov 29, 2022 6:17 am That is correct. I was talking three years of expenses in cash. I was using the standard of 25 access portfolio with a 4% withdrawal. I was trying to use simple numbers which is why I use a $1 million portfolio and $40,000 yearly expenses which equals $120,000 in cash if that is three years.
That was not your question.

No one was disputing 120K was 40K * 3 years. Please clarify if you meant to ask if the 120K in cash should be kept at 120K during a crash, or you asked how the cash should be spent & replenished during a crash.
Sorry for the confusion. I am having difficulty of understanding when to spend the cash cushion and when/how and how fast to replenish it.

For example, in early 2022 the market started on a downward trend. But this trend accused after significant gains. When would someone start spending down the cash and not sell investments. After all, most of those investments should still be gains even in March and April even though the market was down significantly for the year.

On a similar note, going back to the Great Financial Crisis as an example, one would likely have had to use their cash reserves for about 2-3 years. At what point would the investor start to replenish those reserves? How would they do it? Would they do it in one big sale of assets or would they do it slowly over the years? What would be the trigger for those actions? If the plan is to replenish over several years, what would happen in 2014/2015 when the market went down again? Would cash be used again before the reserves were even replenished?

Again, I find the cash pile strategy to be fraught with emotion and real time decision making which does not belong in an investment strategy.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by abuss368 »

Sheepdog wrote: Thu Oct 09, 2008 6:09 pm I have been retired for 10 years. I am one who has said over and over again. Stay the course. Look for the long term. Yeah, sure. That's fine until today. Today did it. I am just starting to be scared so that I won't tell my wife what happened today...stocks down...bonds down...I'm down. Our retirement funds are sucking down the drain. I lost today alone a year's worth of normal distributions for expenses. I keep thinking tomorrow will be a turn around. I have said that for 30 days.
I am 25% capitulating tomorrow, maybe 50% to money markets....maybe all.

This is not me. I will see tomorrow.
Jim
Hi Sheepdog -

This post helped many Bogleheads during the inevitable market pullbacks.

Your posts were always kind, informative, and very helpful.

Will miss you.

Rest in peace kind sir.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

EnjoyIt wrote: Tue Nov 29, 2022 9:29 pm Sorry for the confusion. I am having difficulty of understanding when to spend the cash cushion and when/how and how fast to replenish it.

For example, in early 2022 the market started on a downward trend. But this trend accused after significant gains. When would someone start spending down the cash and not sell investments. After all, most of those investments should still be gains even in March and April even though the market was down significantly for the year.

On a similar note, going back to the Great Financial Crisis as an example, one would likely have had to use their cash reserves for about 2-3 years. At what point would the investor start to replenish those reserves? How would they do it? Would they do it in one big sale of assets or would they do it slowly over the years? What would be the trigger for those actions? If the plan is to replenish over several years, what would happen in 2014/2015 when the market went down again? Would cash be used again before the reserves were even replenished?

Again, I find the cash pile strategy to be fraught with emotion and real time decision making which does not belong in an investment strategy.
Thanks for your clarification. I think your original example was a 1M portfolio, of which 880K in equities and 120K in cash.

If you don't mind spending down the cash allocation during a crash, you can treat your allocation as 88/12 and let it drive your funding decision. Your allocation is necessarily above or below 88/12, and you can always sell the overweight asset, whichever it is.

If you must maintain 120K in cash no matter what, then your options are limited; as you pretty much need to sell equities to top off 120K as best as you can.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by 2pedals »

Sheepdog made very thought provoking comments here about risk and how the great recession influenced his decisions. Also much later after the shock he also purchased SPIAs. This post in a different thread talked about how he paid for things in retirement. It seemed to me he didn't have enough cash flow and liquidity so it made him very uncomfortable when the market was dropping. He repeatedly said don't invest money that you will need in 3 years. Understandably, it appears that he had a very strong adversion to selling equity in a bear market.
Sheepdog wrote: Thu Oct 21, 2021 2:44 pm In retirement, most of my expenses are covered by SS and SPIAs. However, I do usually will withdraw from other assets, but not usually stock containing assets.
I keep at least 3 years of "safe" assets available so that I do not have to sell any stock containing mutual funds for at least 3 years during a downturn. (I learned that in 2008-09.) For me, that "safe" money is mostly in money market funds and a little bit of short term investment grade bond fund.

I should not have to sell any stock containing assets for 3 to 5 years.

Woof Woof
Last edited by 2pedals on Wed Nov 30, 2022 6:36 pm, edited 1 time in total.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Harry Livermore »

This epic and honest thread from yesteryear was one of the first ones I read on Bogleheads.
RIP Sheepdog. Your posts were always enjoyable to read because of the honest humanity behind them. Of course, posts from the big brains here are always terrific, and the breadth of knowledge here is astounding in the aggregate. But Sheepdog always seemed to nail the human side of a subject... not always confident that his was the right way.
Cheers
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

Marseille07 wrote: Tue Nov 29, 2022 10:23 pm
EnjoyIt wrote: Tue Nov 29, 2022 9:29 pm Sorry for the confusion. I am having difficulty of understanding when to spend the cash cushion and when/how and how fast to replenish it.

For example, in early 2022 the market started on a downward trend. But this trend accused after significant gains. When would someone start spending down the cash and not sell investments. After all, most of those investments should still be gains even in March and April even though the market was down significantly for the year.

On a similar note, going back to the Great Financial Crisis as an example, one would likely have had to use their cash reserves for about 2-3 years. At what point would the investor start to replenish those reserves? How would they do it? Would they do it in one big sale of assets or would they do it slowly over the years? What would be the trigger for those actions? If the plan is to replenish over several years, what would happen in 2014/2015 when the market went down again? Would cash be used again before the reserves were even replenished?

Again, I find the cash pile strategy to be fraught with emotion and real time decision making which does not belong in an investment strategy.
Thanks for your clarification. I think your original example was a 1M portfolio, of which 880K in equities and 120K in cash.

If you don't mind spending down the cash allocation during a crash, you can treat your allocation as 88/12 and let it drive your funding decision. Your allocation is necessarily above or below 88/12, and you can always sell the overweight asset, whichever it is.

If you must maintain 120K in cash no matter what, then your options are limited; as you pretty much need to sell equities to top off 120K as best as you can.
Which again makes holding a 3-5 year cash reserve not such a simple to execute proposition.
Even if I was 70/30 on the 880k and 120k in cash.

I still don’t see how to execute spending the cash and when/how to replenish.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Triple digit golfer »

EnjoyIt wrote: Thu Dec 01, 2022 8:42 pm
Marseille07 wrote: Tue Nov 29, 2022 10:23 pm
EnjoyIt wrote: Tue Nov 29, 2022 9:29 pm Sorry for the confusion. I am having difficulty of understanding when to spend the cash cushion and when/how and how fast to replenish it.

For example, in early 2022 the market started on a downward trend. But this trend accused after significant gains. When would someone start spending down the cash and not sell investments. After all, most of those investments should still be gains even in March and April even though the market was down significantly for the year.

On a similar note, going back to the Great Financial Crisis as an example, one would likely have had to use their cash reserves for about 2-3 years. At what point would the investor start to replenish those reserves? How would they do it? Would they do it in one big sale of assets or would they do it slowly over the years? What would be the trigger for those actions? If the plan is to replenish over several years, what would happen in 2014/2015 when the market went down again? Would cash be used again before the reserves were even replenished?

Again, I find the cash pile strategy to be fraught with emotion and real time decision making which does not belong in an investment strategy.
Thanks for your clarification. I think your original example was a 1M portfolio, of which 880K in equities and 120K in cash.

If you don't mind spending down the cash allocation during a crash, you can treat your allocation as 88/12 and let it drive your funding decision. Your allocation is necessarily above or below 88/12, and you can always sell the overweight asset, whichever it is.

If you must maintain 120K in cash no matter what, then your options are limited; as you pretty much need to sell equities to top off 120K as best as you can.
Which again makes holding a 3-5 year cash reserve not such a simple to execute proposition.
Even if I was 70/30 on the 880k and 120k in cash.

I still don’t see how to execute spending the cash and when/how to replenish.
That's why I don't like the idea of a fixed dollar amount in cash. If you sell stocks or bonds to replenish, then you could have just sold them in the first place, thereby negating the need for the cash. If you don't replenish or take a long time to replenish, then you're not holding your desired allocation.

It's really about comfort more than practicality once the portfolio is a relatively large.

I prefer a percentage allocation, such as 80% stocks, 10% bonds, 10% cash/guaranteed rate investments. Maintain it no matter what. Yes, this means if you're in balance, you'll pull 80%.of whatever money you need for your particular emergency from stocks. Makes perfect sense. Why would one's asset allocation change after a large expense? That is illogical. Imagine you lose your job and deplete your emergency fund. Whew, sure glad I had that cash, now I'm unemployed in a crappy job market during a recession and have no cash. What sense does it make to hold a MORE aggressive allocation in that situation than previously?

Fixed percentage allocation all the way. It's the only thing that makes sense to me.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by tesuzuki2002 »

matti wrote: Thu Feb 24, 2022 10:26 am
burritoLover wrote: Thu Feb 24, 2022 10:21 am
matti wrote: Thu Feb 24, 2022 10:14 am
burritoLover wrote: Thu Feb 24, 2022 9:03 am It is really simple - multiply your equity holdings by 0.5 (or 0.3 if you don't have a broadly diversified equity holdings) and add that to your bond amount and imagine you see that in the upcoming months. How would you react? Photoshop or white-out the value on an actual brokerage balance page - make it real in context and imagine that it is actually happening - that you are opening or looking at that page after a downturn. Live the experience like it is real. Does that make you nervous and wanting to do something? If so, you need to reduce the risk of your portfolio.
Thanks for sharing this. I'm an accumulator with an 80/20 portfolio and I like to look at this site:
https://advisors.vanguard.com/VGApp/iip ... RiskReturn

It shows the worst and best years for a range of portfolios. For me, the worst year was -35%. I can handle that. Of course, there could be worse years ahead.
Another thing is that people hear -35% and think they can handle that because they don't put it in context of the value of their portfolio. So, imagine you have a $1,000,000 portfolio and then you look at the statement and it now shows $650,000. I like doing this with an actual statement - makes it more real.
Yes, as you suggest, I do it with my statements so it seems more "real." I don't have $1M yet, however!
Yeah... when you put it in real terms it sinks in. I was down earlier this year about 3.5x my annual salary and that sucks... Since then I've bounced back... but I'm still down more than I Want to work to make up. I've gotten to a point where I can accept $100k fluctuations to my portfolio.. However, when they approach $500-600K that's a lot.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

EnjoyIt wrote: Thu Dec 01, 2022 8:42 pm Which again makes holding a 3-5 year cash reserve not such a simple to execute proposition.
Even if I was 70/30 on the 880k and 120k in cash.

I still don’t see how to execute spending the cash and when/how to replenish.
You pay expenses out of the cash bucket but refill from the stock/bond side whenever you can.

Conceptually this is no different than maintaining a %-based allocation such as 70/30.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by marcopolo »

Marseille07 wrote: Thu Dec 01, 2022 9:33 pm
EnjoyIt wrote: Thu Dec 01, 2022 8:42 pm Which again makes holding a 3-5 year cash reserve not such a simple to execute proposition.
Even if I was 70/30 on the 880k and 120k in cash.

I still don’t see how to execute spending the cash and when/how to replenish.
You pay expenses out of the cash bucket but refill from the stock/bond side whenever you can.

Conceptually this is no different than maintaining a %-based allocation such as 70/30.
What does "whenever you can" mean?

Spending from cash bucket and then selling your portfolio to refill the cash bucket is no different than spending from the portfolio.
It seems like a reasonable approach, but i don't think it has any benefit, and probably reduces spendable dollars.

Do you have any studies that show keeping a cash bucket improves outcomes in any way?
I don't find developing a withdrawal plan on such "gut feels" very satisfying.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

marcopolo wrote: Thu Dec 01, 2022 9:46 pm What does "whenever you can" mean?

Spending from cash bucket and then selling your portfolio to refill the cash bucket is no different than spending from the portfolio.
It seems like a reasonable approach, but i don't think it has any benefit, and probably reduces spendable dollars.
Whenever you can means they can use whatever withdrawal method they plan to use. I didn't specify any because they didn't mention any, but this is not based on gut feels. Think of something like the 4% SWR rule but it doesn't have to be that.

I'm also not talking about benefit or improving outcomes. I'm just discussing how they might go about maintaining a cash bucket as they inquired how to do so.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by marcopolo »

Marseille07 wrote: Thu Dec 01, 2022 10:18 pm
marcopolo wrote: Thu Dec 01, 2022 9:46 pm What does "whenever you can" mean?

Spending from cash bucket and then selling your portfolio to refill the cash bucket is no different than spending from the portfolio.
It seems like a reasonable approach, but i don't think it has any benefit, and probably reduces spendable dollars.
Whenever you can means they can use whatever withdrawal method they plan to use. I didn't specify any because they didn't mention any, but this is not based on gut feels. Think of something like the 4% SWR rule but it doesn't have to be that.

I'm also not talking about benefit or improving outcomes. I'm just discussing how they might go about maintaining a cash bucket as they inquired how to do so.
That's the problem with bucketing.
It sounds enticing. But, then you have to actually define how you would refill the buckets.
That is when it becomes noticeable that it just adds complexity without providing any real benefit.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by 2pedals »

It seems to me that some folks like Sheepdog need to know they have $x amount that is safe from market swings. For example, if I have an extra 30k in cash/MM isn't optimum but it helps me sleep well at night. If I get a 10k lumpy expense and buy my wife a special gift, I am okay and don't have to rush to the Fidelity app or computer and make a sell/transfer today and interrupt my retirement trip. Smartphones have made it easier for the younger generation to do this before they go to bed or while they are waiting for the next uber ride. I can deal with it whenever I get around to it, it just takes the older generation longer to do so. I think some folks need $x>$30 values. Also, logging in daily could be shocking to some that are only used to getting statements in the mail quarterly most of their life. In a few years, people will probably have everything automated and Alexa will be able to handle everything and we will wonder what the fuss is all about.
Last edited by 2pedals on Fri Dec 02, 2022 10:28 am, edited 1 time in total.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

Marseille07 wrote: Thu Dec 01, 2022 10:18 pm
marcopolo wrote: Thu Dec 01, 2022 9:46 pm What does "whenever you can" mean?

Spending from cash bucket and then selling your portfolio to refill the cash bucket is no different than spending from the portfolio.
It seems like a reasonable approach, but i don't think it has any benefit, and probably reduces spendable dollars.
Whenever you can means they can use whatever withdrawal method they plan to use. I didn't specify any because they didn't mention any, but this is not based on gut feels. Think of something like the 4% SWR rule but it doesn't have to be that.

I'm also not talking about benefit or improving outcomes. I'm just discussing how they might go about maintaining a cash bucket as they inquired how to do so.
But that’s the point “whenever you can” is meaningless. Once you put it into real terms, this is something very difficult to accomplish especially without using gut feeling and emotions. Both of those do not belong in any investing strategy.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

EnjoyIt wrote: Fri Dec 02, 2022 12:21 am But that’s the point “whenever you can” is meaningless. Once you put it into real terms, this is something very difficult to accomplish especially without using gut feeling and emotions. Both of those do not belong in any investing strategy.
I don't comprehend why you think you can maintain 70/30 no problem, but suddenly using gut feeling and emotions when you maintain a 120K cash bucket. Instead of percentages, you rebalance on a fixed dollar amount - that's pretty much the only difference.

If you can operate 4% SWR on 70/30 then you can operate 4% SWR on a $X/120K portfolio in a similar manner.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by doobiedoo »

EnjoyIt wrote: Fri Dec 02, 2022 12:21 am
Marseille07 wrote: Thu Dec 01, 2022 10:18 pm
marcopolo wrote: Thu Dec 01, 2022 9:46 pm What does "whenever you can" mean?

Spending from cash bucket and then selling your portfolio to refill the cash bucket is no different than spending from the portfolio.
It seems like a reasonable approach, but i don't think it has any benefit, and probably reduces spendable dollars.
Whenever you can means they can use whatever withdrawal method they plan to use. I didn't specify any because they didn't mention any, but this is not based on gut feels. Think of something like the 4% SWR rule but it doesn't have to be that.

I'm also not talking about benefit or improving outcomes. I'm just discussing how they might go about maintaining a cash bucket as they inquired how to do so.
But that’s the point “whenever you can” is meaningless. Once you put it into real terms, this is something very difficult to accomplish especially without using gut feeling and emotions. Both of those do not belong in any investing strategy.
Most bucket strategies use dividends and capital gains distributions [from both stock and bonds] to refill the cash bucket.
If more cash is needed to refill the bucket and stocks had an up year, then stocks are sold to replenish the cash bucket as necessary. If stocks had a down year, stocks are not sold and the cash bucket is not full. Of course, if your cash bucket is not big enough, e.g. <2 years, then you can easily run out of cash. But rarely does the overall stock market have 3 successive down years.

The whole point of the bucket strategy is to avoid selling stocks in down years.

Here is Christine Benz's Morningstar bucket strategy.
https://www.morningstar.com/articles/84 ... -portfolio
and
https://www.forbes.com/sites/investor/2 ... e41b7f755d
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

doobiedoo wrote: Fri Dec 02, 2022 1:49 am
EnjoyIt wrote: Fri Dec 02, 2022 12:21 am
Marseille07 wrote: Thu Dec 01, 2022 10:18 pm
marcopolo wrote: Thu Dec 01, 2022 9:46 pm What does "whenever you can" mean?

Spending from cash bucket and then selling your portfolio to refill the cash bucket is no different than spending from the portfolio.
It seems like a reasonable approach, but i don't think it has any benefit, and probably reduces spendable dollars.
Whenever you can means they can use whatever withdrawal method they plan to use. I didn't specify any because they didn't mention any, but this is not based on gut feels. Think of something like the 4% SWR rule but it doesn't have to be that.

I'm also not talking about benefit or improving outcomes. I'm just discussing how they might go about maintaining a cash bucket as they inquired how to do so.
But that’s the point “whenever you can” is meaningless. Once you put it into real terms, this is something very difficult to accomplish especially without using gut feeling and emotions. Both of those do not belong in any investing strategy.
Most bucket strategies use dividends and capital gains distributions [from both stock and bonds] to refill the cash bucket.
If more cash is needed to refill the bucket and stocks had an up year, then stocks are sold to replenish the cash bucket as necessary. If stocks had a down year, stocks are not sold and the cash bucket is not full. Of course, if your cash bucket is not big enough, e.g. <2 years, then you can easily run out of cash. But rarely does the overall stock market have 3 successive down years.

The whole point of the bucket strategy is to avoid selling stocks in down years.

Here is Christine Benz's Morningstar bucket strategy.
https://www.morningstar.com/articles/84 ... -portfolio
and
https://www.forbes.com/sites/investor/2 ... e41b7f755d
It sounds great on paper but when you take it into practice like in 2009 the strategy starts to disintegrate. Market is down for a few years. Dividends are not enough to cover spending and the cash reserve falls apart. By 2014 the market is down again and you never have enough to recover. Might as well just keep a reasonable asset allocation and rebalance as you hit your rebalancing bands.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by MarkRoulo »

2pedals wrote: Thu Dec 01, 2022 10:42 pm It seems to me that some folks like Sheepdog need to know they have $x amount that is safe from market swings. For example, if I have an extra 30k in cash/MM isn't optimum but it helps me sleep well at night. If I get a 10k lumpy expense and buy my wife a special gift, I am okay and don't have to rush to the Fidelity app or computer and make a sell/transfer today and interrupt my retirement trip. Smartphones have made it easier for the younger generation to do this before they go to bed or while they are waiting for the next uber ride. I can deal with it whenever I get around to it, it just takes the older generation longer to do so. I think some folks need $x>$30 values. Also, logging in daily could be shocking to some that are only used to getting statements in the mail quarterly most of their life. In a few years, people will probably have everything automated and Alexa will be able to handle everything and we will wonder what the fuss is all about.
"Need" is maybe a bit strong, but *I* find that cash makes it easier to sleep at night. I don't think Sheepdog and I are alone here :-)

And the cash is not just because of potential market drops.

If I get really unhappy at work it is easier [for me!] to quit without a new job lined up if I have cash in the bank. Partially because nothing is changing except the (stressful) quitting without the new job lined up. I am not selling stocks/bonds to make rent and pay for groceries. I keep writing checks (or using my credit card or whatever) as usual.

If my wife loses her job one day after we close on our first house in a VHCOL area, cash in the bank, again, means we don't need to make any other changes while sorting out the job situation.

And, of course, if the stock market drops 50% (or more!) in 18 months the cash serves as a cushion. And is reassuring in case my wife or I get to participate in the unemployment that sometimes accompanies bad financial news. One doesn't want to be trying to build up a cash cushion in case of layoffs AFTER the stock market has dropped 50%.

It is quite possible that in the future folks will manage their finances as one big pot with one number and feel no need to have a cash cushion. But note that most people already do this, just without the stocks and bonds. That's kinda what "living paycheck to paycheck" is, right? Minimal investments and no cash cushion to speak of? So we may be talking only about 10% - 20% of the population that might see a change with automation anyway.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

EnjoyIt wrote: Fri Dec 02, 2022 10:16 am It sounds great on paper but when you take it into practice like in 2009 the strategy starts to disintegrate. Market is down for a few years. Dividends are not enough to cover spending and the cash reserve falls apart. By 2014 the market is down again and you never have enough to recover. Might as well just keep a reasonable asset allocation and rebalance as you hit your rebalancing bands.
You earlier said your scenario wants to keep the 120K cash bucket refilled.

But let's say you now discuss that you want to spend down the cash bucket during a downturn. It still doesn't disintegrate; all you do is to keep spending from the cash bucket whenever we have a red year (I'm just crafting a simple rule here, it doesn't have to be this). Now, your cash bucket depletes if we go red for 3 straight years, but you also didn't sell a single share during this time. That's the value of having a cash bucket.
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Exchme »

First, let’s acknowledge the power of the writing of dearly departed Sheepdog who made us feel his thoughts and fears so vividly that we are still discussing it 14 years later.

As to bucket strategies, I began my journey thinking buckets were a great idea. Then I read here that it doesn’t work out relative to just holding your preferred asset allocation. So I decided to build a model. After all, the best way to learn something is to teach it and the best student for this kind of thing is a computer. That would take the hand waving phrase “spend cash when the market is down” and turn it into rules and of course the model would track the opportunity cost of holding all that cash instead of something with a positive long term yield.

I had to figure out:
-How big should the bucket be?

-How do I define when to start using the bucket - What % down and what benchmark (all time high, last 12 months, some kind of rolling average). Is there a deadband or is even $1 below enough to start spending only from the bucket?

-Do I spend exclusively from the bucket when “bucket time” is signaled or is it a function, when I spend a bigger percentage from the bucket as the market drops?

-What is the “all clear” signal to start refilling – (all time high, last 12 months, market above a moving average)

-How fast do I refill? If market go slightly above the refill trigger, do I immediately sell up to several years’ worth of stocks/bond for cash or is it more gradual.? If gradual, what is the function?

-Do I rebalance between stocks and bonds in addition to the bucketing?

Of course, because of all those free parameters, there were innumerable possibilities that are not tested in the literature, but my attempts were eye-opening to me. I used annual data, I rebalanced the stock/ bond portion and then either held a cash bucket or did not. I tried various combinations of rules of when and how fast to use and refill the bucket. While the buckets were not disastrous, neither were they helpful in the long term. They were consistently slightly worse in the historical long term holding for the maximum, median and minimum than just holding my allocation.

In the short run, any particular strategy might be better or worse than holding the preferred allocation. You want to refill your bucket immediately after reaching a new high – fine, but then in 1982 you miss out on the big bull market. You want to refill it slowly? Then 1937 or 2007 bites where the markets only recovered briefly before falling hard again. Every set of rules had eras where it would have improved outcomes and other times it would have made things worse. After a while, I realized there was nothing here but lucky or unlucky outcomes.

So there may be a psychological "sleep well at night" factor, but financially, I couldn't see any free lunches.
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jeffyscott
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by jeffyscott »

Since I have an adequate cash spigot (pension and eventually SS), I don't need a bucket. But what about just having a cash allocation that you only rebalance into, not out of? So you have, say, 10% cash, 40% bond, and 50% stocks. If stocks or bonds are above target, spend from whichever is above. If neither is, spend cash. When allocations are off by 5% :?: and spending is not going to bring them back in line, rebalance between stocks, bonds, and cash, except no trading out of cash.

Alternatively a dollar target for cash could perhaps be used, instead of a percentage. But I am not sure how to structure the rebalancing in that case.
EnjoyIt
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Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

Marseille07 wrote: Fri Dec 02, 2022 10:53 am
EnjoyIt wrote: Fri Dec 02, 2022 10:16 am It sounds great on paper but when you take it into practice like in 2009 the strategy starts to disintegrate. Market is down for a few years. Dividends are not enough to cover spending and the cash reserve falls apart. By 2014 the market is down again and you never have enough to recover. Might as well just keep a reasonable asset allocation and rebalance as you hit your rebalancing bands.
You earlier said your scenario wants to keep the 120K cash bucket refilled.

But let's say you now discuss that you want to spend down the cash bucket during a downturn. It still doesn't disintegrate; all you do is to keep spending from the cash bucket whenever we have a red year (I'm just crafting a simple rule here, it doesn't have to be this). Now, your cash bucket depletes if we go red for 3 straight years, but you also didn't sell a single share during this time. That's the value of having a cash bucket.
Spending it is the easy part. But then how and when do you replenish it? Do you do it when the market reaches its peak again? Do you do it in one big sale or do you do it over several years? What about the tax consequence of rebuilding the tax cushion in large chunks? It’s not so simple.

Just run a 2009 scenario and you will see how complicated it becomes in 2012, 2014, 2015. If you need 3 years in cash to be comfortable, it may take several years to get there and you won’t be comfortable. That is unless you sell all at once when the market corrects itself. But then you will pay way more in capital gains tax than you need to.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by EnjoyIt »

Exchme wrote: Fri Dec 02, 2022 12:53 pm First, let’s acknowledge the power of the writing of dearly departed Sheepdog who made us feel his thoughts and fears so vividly that we are still discussing it 14 years later.

As to bucket strategies, I began my journey thinking buckets were a great idea. Then I read here that it doesn’t work out relative to just holding your preferred asset allocation. So I decided to build a model. After all, the best way to learn something is to teach it and the best student for this kind of thing is a computer. That would take the hand waving phrase “spend cash when the market is down” and turn it into rules and of course the model would track the opportunity cost of holding all that cash instead of something with a positive long term yield.

I had to figure out:
-How big should the bucket be?

-How do I define when to start using the bucket - What % down and what benchmark (all time high, last 12 months, some kind of rolling average). Is there a deadband or is even $1 below enough to start spending only from the bucket?

-Do I spend exclusively from the bucket when “bucket time” is signaled or is it a function, when I spend a bigger percentage from the bucket as the market drops?

-What is the “all clear” signal to start refilling – (all time high, last 12 months, market above a moving average)

-How fast do I refill? If market go slightly above the refill trigger, do I immediately sell up to several years’ worth of stocks/bond for cash or is it more gradual.? If gradual, what is the function?

-Do I rebalance between stocks and bonds in addition to the bucketing?

Of course, because of all those free parameters, there were innumerable possibilities that are not tested in the literature, but my attempts were eye-opening to me. I used annual data, I rebalanced the stock/ bond portion and then either held a cash bucket or did not. I tried various combinations of rules of when and how fast to use and refill the bucket. While the buckets were not disastrous, neither were they helpful in the long term. They were consistently slightly worse in the historical long term holding for the maximum, median and minimum than just holding my allocation.

In the short run, any particular strategy might be better or worse than holding the preferred allocation. You want to refill your bucket immediately after reaching a new high – fine, but then in 1982 you miss out on the big bull market. You want to refill it slowly? Then 1937 or 2007 bites where the markets only recovered briefly before falling hard again. Every set of rules had eras where it would have improved outcomes and other times it would have made things worse. After a while, I realized there was nothing here but lucky or unlucky outcomes.

So there may be a psychological "sleep well at night" factor, but financially, I couldn't see any free lunches.
Thanks for running such an intricate analysis. Did you take the consequence of capital gains tax on replenishing the bucket on one fell swoop?
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: I can't believe I am thinking this [Panic and Survival 2008-09]

Post by Marseille07 »

EnjoyIt wrote: Fri Dec 02, 2022 2:08 pm Spending it is the easy part. But then how and when do you replenish it? Do you do it when the market reaches its peak again? Do you do it in one big sale or do you do it over several years? What about the tax consequence of rebuilding the tax cushion in large chunks? It’s not so simple.

Just run a 2009 scenario and you will see how complicated it becomes in 2012, 2014, 2015. If you need 3 years in cash to be comfortable, it may take several years to get there and you won’t be comfortable. That is unless you sell all at once when the market corrects itself. But then you will pay way more in capital gains tax than you need to.
If you'd spend down the cash bucket after a red year (this is just a sample rule), naturally you'd be selling equities / bonds after a green year to replenish the cash bucket.

And no, the point of the cash bucket isn't to feel comfortable. In fact, such a goal is contradicting because if you need 3 years to feel comfortable then you shouldn't be spending down the cash bucket even during a downturn. This is why I asked you earlier if the cash bucket is to be refilled or to be spent down during a downturn.
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