Author Topic: Profit taking only post-FIRE?  (Read 1392 times)

Harrisdr

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Profit taking only post-FIRE?
« on: August 09, 2017, 11:03:38 AM »
So I'm clearly no investment maven, but here's an honest query on the following scenario.  We have a balanced portfolio' 75/25 equities, with a heavier weight on international stocks than domestic.  Given all the uncertainty politically and economically, I'm looking for a withdrawal strategy that will allow us to leave the portfolio capital alone, and just take the profit opportunistically.

Total portfolio: approx $1m with a 10% profit this year to date, so $1.1m.  Current cash=$275k+ in high interest account.  With other assets (paid off real estate, etc), the net worth is about $2m.

Ultimately, we will settle into about 60-70k per year in expenses.  I understand I'm losing to inflation and lost opportunity by keeping a large cash reserve, but why couldn't I just ride out the down market, living on the accumulated cash account, while taking profits when the present themselves.  That is taking $75k-$100k of this year's profits off the table now, so I've made the year's income in August.  If the market goes up, we start 2018 with a higher noncash balance.  If the market drops, we wait (even if it takes a few years) before touching it until it is again positive. 

Easy decision making, sell above $1m balance, and hold at or below. 

Mr. Green

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Re: Profit taking only post-FIRE?
« Reply #1 on: August 09, 2017, 03:22:49 PM »
If you pull your profit every time the market is up you lose the power of compounding. Your overall returns will be substantially lower over the long-term than if you left the money invested. Also, your expenses are higher than what a 4% withdrawal rate would allow for so depending on the sequence of returns over the next 10 years you may find your liquid assets being drawn down at a faster pace than gain can replace them, putting you on an accelerated path to an exhausted portfolio. You might be okay but it would be something to keep an eye on.
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CptCool

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Re: Profit taking only post-FIRE?
« Reply #2 on: August 10, 2017, 07:48:05 AM »
This is one of those cases where some quick backtesting can come in handy. At first thought, it seems like a reasonable plan. However, when you actually test it out using real-world numbers of the past, you'll see it just isn't as powerful as you think it is.

RyanAtTanagra

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Re: Profit taking only post-FIRE?
« Reply #3 on: August 10, 2017, 08:22:14 AM »
There's a common misconception that holding cash reserves will help you ride out market downturns which should improve your chances of portfolio success.  It makes sense on the surface, however if you run the numbers, having cash lowers your chances of success.  This is because, most of the time, the market goes up, and had that cash been put to use, you would have been able to take advantage of it, but it's sitting there doing nothing.  It's a huge opportunity cost.

If having a big cash reserve helps you sleep better at night, that's fine, but please understand it's making you more prone to failure not less.

snowdog

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Re: Profit taking only post-FIRE?
« Reply #4 on: August 11, 2017, 07:48:30 AM »
There's a common misconception that holding cash reserves will help you ride out market downturns which should improve your chances of portfolio success.  It makes sense on the surface, however if you run the numbers, having cash lowers your chances of success.  This is because, most of the time, the market goes up, and had that cash been put to use, you would have been able to take advantage of it, but it's sitting there doing nothing.  It's a huge opportunity cost.

If having a big cash reserve helps you sleep better at night, that's fine, but please understand it's making you more prone to failure not less.


This is only true if you did automatic rebalancing every year.  however, If you start with a set mix, say 80/20 equities to bonds/cash, which equates to x years of expenses....say 4 years, then only replenish when the market is up, and when the market is down you deplete the cash reserves and avoid selling in a down market, your actual cash reserves at points will get close to zero.  When the market recovers you begin to replenish your reserves.  If you actually back cast this discretionary re-balancing methodology, your overall cash/bond reserves will equate to less than the target 20% and thus provide increased returns due to the forced higher allocation to equities during downturns.  This is basically just a simplified bucket approach. 
     

RyanAtTanagra

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Re: Profit taking only post-FIRE?
« Reply #5 on: August 11, 2017, 07:58:46 AM »
There's a common misconception that holding cash reserves will help you ride out market downturns which should improve your chances of portfolio success.  It makes sense on the surface, however if you run the numbers, having cash lowers your chances of success.  This is because, most of the time, the market goes up, and had that cash been put to use, you would have been able to take advantage of it, but it's sitting there doing nothing.  It's a huge opportunity cost.

If having a big cash reserve helps you sleep better at night, that's fine, but please understand it's making you more prone to failure not less.


This is only true if you did automatic rebalancing every year.  however, If you start with a set mix, say 80/20 equities to bonds/cash, which equates to x years of expenses....say 4 years, then only replenish when the market is up, and when the market is down you deplete the cash reserves and avoid selling in a down market, your actual cash reserves at points will get close to zero.  When the market recovers you begin to replenish your reserves.  If you actually back cast this discretionary re-balancing methodology, your overall cash/bond reserves will equate to less than the target 20% and thus provide increased returns due to the forced higher allocation to equities during downturns.  This is basically just a simplified bucket approach. 
   

That doesn't change the issue of most of the time 20% of your assets sitting there doing nothing while the market is going up.  Cash is an opportunity cost.  Run it on cfiresim.  Even telling it to not rebalance annually, it lowers your success rate from 96% to 92% by having 20% in cash instead of bonds.

snowdog

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Re: Profit taking only post-FIRE?
« Reply #6 on: August 11, 2017, 08:13:25 AM »
There's a common misconception that holding cash reserves will help you ride out market downturns which should improve your chances of portfolio success.  It makes sense on the surface, however if you run the numbers, having cash lowers your chances of success.  This is because, most of the time, the market goes up, and had that cash been put to use, you would have been able to take advantage of it, but it's sitting there doing nothing.  It's a huge opportunity cost.

If having a big cash reserve helps you sleep better at night, that's fine, but please understand it's making you more prone to failure not less.


This is only true if you did automatic rebalancing every year.  however, If you start with a set mix, say 80/20 equities to bonds/cash, which equates to x years of expenses....say 4 years, then only replenish when the market is up, and when the market is down you deplete the cash reserves and avoid selling in a down market, your actual cash reserves at points will get close to zero.  When the market recovers you begin to replenish your reserves.  If you actually back cast this discretionary re-balancing methodology, your overall cash/bond reserves will equate to less than the target 20% and thus provide increased returns due to the forced higher allocation to equities during downturns.  This is basically just a simplified bucket approach. 
   

That doesn't change the issue of most of the time 20% of your assets sitting there doing nothing while the market is going up.  Cash is an opportunity cost.  Run it on cfiresim.  Even telling it to not rebalance annually, it lowers your success rate from 96% to 92% by having 20% in cash instead of bonds.

To clarify I use cash and short term bonds as 1 bucket with no int. or long term bonds.  One also  needs to consider that while that cash/st bonds are sitting there while the market is going up, they are also sitting there holding their value while stocks are getting hammered in a downturn.  While not FI during 2000-02 and 2008-09, I continued to plow money in and watch my portfolio shrink.  So glad I did and also  I could not imagine having to sell equities at 40% + discount just to pay the bills.  That scenario is not acceptable.   

RyanAtTanagra

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Re: Profit taking only post-FIRE?
« Reply #7 on: August 11, 2017, 08:20:54 AM »
One also  needs to consider that while that cash/st bonds are sitting there while the market is going up, they are also sitting there holding their value while stocks are getting hammered in a downturn.

But that's the point.  Most of the time the market's going up.   While your cash is sitting there doing nothing.

So glad I did and also  I could not imagine having to sell equities at 40% + discount just to pay the bills.  That scenario is not acceptable.

We all have to do what helps us sleep at night, just understand you're lowering your success rate in doing so.  I keep one years worth of expenses in cash because I'm more comfortable doing so, but I know it lowers my success rate, so it's not something I would tell someone else to do if they're worried about portfolio failure.