Author Topic: Coping with Market Timing in Decumulation  (Read 1428 times)

PhilB

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Coping with Market Timing in Decumulation
« on: July 16, 2020, 08:25:18 AM »
Apologies if this has already been done to death (if so then links appreciated!) but I would love any guidance you lovely people have on the timing of stock sales post FIRE.  I managed my first sale okay last November, but things have all gotten a bit more interesting since then!

I'm not after any magic formula for how and when one should sell - although it would be lovely if there was one!  I'm more interested in how people cope mentally with the fear of getting their timing wrong and selling low.  Do you accept the higher transaction costs of selling every month / quarter or just do one withdrawal per year?  Do you do it on a fixed date regardless of the market position?  Do you try and hold on longer if the valuations are low?  Do you sell early if valuations are high?

Intellectually I know that I have no way of successfully and consistently timing the market.  How do I help my lizard brain come to terms with that?

seattlecyclone

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Re: Coping with Market Timing in Decumulation
« Reply #1 on: July 16, 2020, 10:46:07 AM »
Do you accept the higher transaction costs of selling every month / quarter or just do one withdrawal per year?

What transaction costs? Please tell me your mutual funds don't have trading commissions. It's 2020.

Quote
Do you do it on a fixed date regardless of the market position?  Do you try and hold on longer if the valuations are low?  Do you sell early if valuations are high?

I don't do a big sum once a year. I think if I did, I might actually be worried about getting the best possible price. Like...if I need to pull $50k out of the markets to pay our bills for the next year, and the market went up 1% the day after I sold, that's missing out on $500. That's not nothing! But if I instead sell $4,000 per month, a 1% gain the next day means I missed out on $40. No big deal. You win some, you lose some.

For health insurance purposes I try to hit a particular income target each month, so I'm going to be making some transactions regardless. Sometimes all the proceeds go into the checking account to pay current bills, other times I end up harvesting gains and reinvesting most of it. I try to keep our checking account between $5-10k.

G-dog

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Re: Coping with Market Timing in Decumulation
« Reply #2 on: July 16, 2020, 10:53:50 AM »
Lizard brains donít listen to logic.  They listen to emotion.

And - I will have to start decumulating soon as well.

I recommend looking back to Dr. Doom (LivingAFI) drawdown series. Link to first in the series: https://livingafi.com/2014/05/09/drawdown-part-1-the-basics/

J Collins may have something too - but nothing immediately comes to mind.

You can do this!

PhilB

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Re: Coping with Market Timing in Decumulation
« Reply #3 on: July 16, 2020, 11:05:55 AM »
@seattlecyclone it isn't 2020 in the UK!  At least not if you are drawing funds out from a pension wrapper unfortunately. 

There isn't any requirement to get the correct monthly income here, only annual income matters so I can take it all out at once if that makes sense otherwise eg to minimise fees.  You are right though that the costs are small compared to the size of the possible fluctuations which does push me towards a little-and-often approach.

@G-dog I will definitely have a read of that - I've really enjoyed what I have read of Dr Doom.

G-dog

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Re: Coping with Market Timing in Decumulation
« Reply #4 on: July 16, 2020, 11:23:54 AM »
@seattlecyclone it isn't 2020 in the UK!  At least not if you are drawing funds out from a pension wrapper unfortunately. 

There isn't any requirement to get the correct monthly income here, only annual income matters so I can take it all out at once if that makes sense otherwise eg to minimise fees.  You are right though that the costs are small compared to the size of the possible fluctuations which does push me towards a little-and-often approach.

@G-dog I will definitely have a read of that - I've really enjoyed what I have read of Dr Doom.

Dr. Doom is US specific, but your question is about the psychology, not the technicalities.  Though he is factoring in technicalities.  Mostly, it may come down to the same as accumulation phase - have a plan, stick to it, review plan on a infrequent but regular basis (or ad box in response to big shifts like tax laws, etc.).  I think the comfort is in relying on the plan built during non-emotional times.

secondcor521

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Re: Coping with Market Timing in Decumulation
« Reply #5 on: July 16, 2020, 01:38:24 PM »
Some people I know on another forum sell once a year in January, put the proceeds in a money market or savings account, then have scheduled transfers to checking to recreate a paycheck-like situation.

I don't like to have that much money sitting around in cash, so what I do is just refill my checking from my savings when I need to, and refill my savings from my taxable investment account whenever it gets low.  I usually do 3 months of expenses at a time.  I could refill monthly but that feels too "fiddly" for me.  Since I have non-portfolio income, that "3 months of expenses" can end up lasting six to nine months or more.

I refill whenever needed.  The one concession I do make to timing and amounts is to look at my cash needs at the end of the year in light of my tax situation.  Whatever LTCG I generate ends up reducing the amount of Roth conversions I can make, and I Roth convert up to a certain AGI each year.  So I make sure I have enough cash on hand to get me through the end of the year, then do the Roth conversion.  I wouldn't want to overshoot my AGI target if I needed more cash in December and had to generate more LTCG to get it.

Since I sell frequently and plan to keep doing so for the next thirty years, I don't worry about the short term market fluctuations.  I expect I will win some and I will lose some and it will average out in the end.

With Vanguard mutual funds and no hurry to transfer the money, I pay $0 in transaction costs.  It sounds like your UK pension situation has fees.  I'd probably look into seeing if there is a way to get rid of those fees.  In the US sometimes that means rolling an employer plan into an IRA; I'm not sure if there's something comparable across the pond.

PhilB

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Re: Coping with Market Timing in Decumulation
« Reply #6 on: July 16, 2020, 02:08:45 PM »
Unfortunately the fees are pretty well unavoidable in the UK.  Certain providers do away with transaction fees by charging a hefty %age fee on the investments held (which can still be the best deal with smaller amounts), but those who charge flat fees (cheaper for big balances) also charge dealing fees and drawdown fees. 

Drawdown is clearly somewhat complex for them to administer -  Vanguard have launched a pension in the UK, but currently you can only use it in the accumulation phase and would have to transfer out before you could withdraw anything!  Hopefully they will change that soon, but probably not soon enough for me :(

Mr. Green

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Re: Coping with Market Timing in Decumulation
« Reply #7 on: July 16, 2020, 09:19:54 PM »
We sell quarterly, if needed, to prevent emotion from entering into the picture. The quarterly amount is small enough that it doesn't feel like a big deal selling in a down market.

PhilB

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Re: Coping with Market Timing in Decumulation
« Reply #8 on: July 18, 2020, 02:34:48 AM »
The Dr Doom posts and various things they linked to were indeed fascinating.  I found it interesting that his approach was very much the kind of thing that had been appealing to me ie having a formula that says if markets are above budget do x, if they are below then do y in the hope they'll go up before you sell.  It was very good for me to see in black and white that the studies show this doesn't work.  Hear that Lizard?

@Mr. Green quarterly sounds like a good compromise.


Mr. Green

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Re: Coping with Market Timing in Decumulation
« Reply #9 on: July 18, 2020, 04:36:44 PM »
The Dr Doom posts and various things they linked to were indeed fascinating.  I found it interesting that his approach was very much the kind of thing that had been appealing to me ie having a formula that says if markets are above budget do x, if they are below then do y in the hope they'll go up before you sell.  It was very good for me to see in black and white that the studies show this doesn't work.  Hear that Lizard?

@Mr. Green quarterly sounds like a good compromise.
We wanted a system that required no thought and no emotion. For us, our Target spending is 40k a year, so 10k a quarter. With a total portfolio value over 1M, 10k withdrawal even when things are down, doesn't feel significant. And that's important for me because I don't want to find myself thinking I could wait a bit and hope prices go up or maybe I should withdraw early because things may get worse.

It's also worth mentioning that recessions tend to be short, and by selling quarterly it's highly likely you'll make all your trading either on the way down or back up. If you win the lottery of bad luck and make one quarter's sale at the bottom, then it's just one time. I don't think we've ever had a bottom that hung around for 3 months. So realizing that makes it easier psychologically because most of the selling is happening in between the top and bottom.

Wintergreen78

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Re: Coping with Market Timing in Decumulation
« Reply #10 on: July 26, 2020, 10:24:30 PM »
The Dr Doom posts and various things they linked to were indeed fascinating.  I found it interesting that his approach was very much the kind of thing that had been appealing to me ie having a formula that says if markets are above budget do x, if they are below then do y in the hope they'll go up before you sell.  It was very good for me to see in black and white that the studies show this doesn't work.  Hear that Lizard?

@Mr. Green quarterly sounds like a good compromise.
We wanted a system that required no thought and no emotion. For us, our Target spending is 40k a year, so 10k a quarter. With a total portfolio value over 1M, 10k withdrawal even when things are down, doesn't feel significant. And that's important for me because I don't want to find myself thinking I could wait a bit and hope prices go up or maybe I should withdraw early because things may get worse.

It's also worth mentioning that recessions tend to be short, and by selling quarterly it's highly likely you'll make all your trading either on the way down or back up. If you win the lottery of bad luck and make one quarter's sale at the bottom, then it's just one time. I don't think we've ever had a bottom that hung around for 3 months. So realizing that makes it easier psychologically because most of the selling is happening in between the top and bottom.

This is almost exactly what I do. I keep at least 6 months expenses in cash checking/saving, then each quarter sell from whichever asset is over my target allocation to top up my cash. No thinking required.

soccerluvof4

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Re: Coping with Market Timing in Decumulation
« Reply #11 on: July 30, 2020, 05:36:56 AM »
I probably pay a little more attention then most around here (at least from comments people make about looking at there portfolios) to my portfolio as its part of my daily regiment and I have about a 1% fun trading account. All that adds up to is I make my withdrawals mostly once a month preferably on an up day! :-) . Occasionally IF I feel we are lofty I well take more than one withdrawal in a month and just keep track to where I am for the year. I do have a larger cash position on hand than what usually is recommended on these forums for being Fire'd but that is a choice I made.

habaneroNorway

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Re: Coping with Market Timing in Decumulation
« Reply #12 on: July 30, 2020, 05:53:14 AM »
Given the underlying assumption that markets go up over time a strategy of selling a big chunk early every year will have a worse expeted outcome than selling on a quarterly or a monthly basis. This is essentially the same argument as "time in market" is what matters the most in the long run.

I've not given this a lot of thought, but the only obvious reason I can see for not doing something similar is that by selling early at a time you might reduce the risk of having to sell after markets tank.

rmorris50

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Re: Coping with Market Timing in Decumulation
« Reply #13 on: August 01, 2020, 08:42:26 AM »
The Dr Doom posts and various things they linked to were indeed fascinating.  I found it interesting that his approach was very much the kind of thing that had been appealing to me ie having a formula that says if markets are above budget do x, if they are below then do y in the hope they'll go up before you sell.  It was very good for me to see in black and white that the studies show this doesn't work.  Hear that Lizard?

@Mr. Green quarterly sounds like a good compromise.
We wanted a system that required no thought and no emotion. For us, our Target spending is 40k a year, so 10k a quarter. With a total portfolio value over 1M, 10k withdrawal even when things are down, doesn't feel significant. And that's important for me because I don't want to find myself thinking I could wait a bit and hope prices go up or maybe I should withdraw early because things may get worse.

It's also worth mentioning that recessions tend to be short, and by selling quarterly it's highly likely you'll make all your trading either on the way down or back up. If you win the lottery of bad luck and make one quarter's sale at the bottom, then it's just one time. I don't think we've ever had a bottom that hung around for 3 months. So realizing that makes it easier psychologically because most of the selling is happening in between the top and bottom.

This is almost exactly what I do. I keep at least 6 months expenses in cash checking/saving, then each quarter sell from whichever asset is over my target allocation to top up my cash. No thinking required.

One of the most useful posts I've read in a long time. I like the quarterly selling approach. My thought was to to keep a couple years of cash and keep the rest invested in the markets, and just replenish when cash is lower and markets are up. But a quarterly selling approach seems very straightforward and doesn't require much thinking, and spreads out the risk.

Mr. Green

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Re: Coping with Market Timing in Decumulation
« Reply #14 on: August 03, 2020, 04:33:07 PM »
The Dr Doom posts and various things they linked to were indeed fascinating.  I found it interesting that his approach was very much the kind of thing that had been appealing to me ie having a formula that says if markets are above budget do x, if they are below then do y in the hope they'll go up before you sell.  It was very good for me to see in black and white that the studies show this doesn't work.  Hear that Lizard?

@Mr. Green quarterly sounds like a good compromise.
We wanted a system that required no thought and no emotion. For us, our Target spending is 40k a year, so 10k a quarter. With a total portfolio value over 1M, 10k withdrawal even when things are down, doesn't feel significant. And that's important for me because I don't want to find myself thinking I could wait a bit and hope prices go up or maybe I should withdraw early because things may get worse.

It's also worth mentioning that recessions tend to be short, and by selling quarterly it's highly likely you'll make all your trading either on the way down or back up. If you win the lottery of bad luck and make one quarter's sale at the bottom, then it's just one time. I don't think we've ever had a bottom that hung around for 3 months. So realizing that makes it easier psychologically because most of the selling is happening in between the top and bottom.

This is almost exactly what I do. I keep at least 6 months expenses in cash checking/saving, then each quarter sell from whichever asset is over my target allocation to top up my cash. No thinking required.

One of the most useful posts I've read in a long time. I like the quarterly selling approach. My thought was to to keep a couple years of cash and keep the rest invested in the markets, and just replenish when cash is lower and markets are up. But a quarterly selling approach seems very straightforward and doesn't require much thinking, and spreads out the risk.
The other psychological benefit we we're striving for is comfort in quarterly selling to the point we didn't feel like we needed several years of cash, which is a drag on the portfolio. We can't always sell bonds in down market, but the difference in return on bonds vs cash is significant long term. Were we not considering a property purchase right now, the concept of selling quarterly leaves me comfortable enough to have an 80/20 stocks/bonds portfolio and not need extra cash lying around.