Author Topic: 2018 FIRE cohort  (Read 340365 times)

SwordGuy

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Re: 2018 FIRE cohort
« Reply #750 on: November 22, 2017, 09:19:13 AM »
TL,DR: I am scared about taking the leap, so I made a 9 point list!

Your plan sounds more than reasonable. You are going to be just fine. Congrats!

Agreed!

We have a multi-point plan, too!

Lots of padding in the budget.
Social Security, Rental House income, and Farm income will cover most of our expenses. 
If we pay off the mortgage early, it will cover all our budget.
Selling a house now so we have several years of cash on hand to increase rental property income or live on without selling stocks.
Flipping another house to raise capital and/or pay off mortgage.
And some other projects we'll do for fun that may bring in income, too.


Aegishjalmur

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Re: 2018 FIRE cohort
« Reply #751 on: November 22, 2017, 09:55:25 AM »
So it looks more and more likely that 2018 cohort will be retiring at the top of the market.  I was really hoping for a downturn during 2017 but I don't think my wish will be granted :-)

How are you all feeling about the market situation and the potential for a correction happening immediately after we FIRE?

Well, as discussed farther up thread, many of us here are cowards who were doing OMY.  A potential downturn was definitely part of the mental calculus for why we did that versus pulling the plug sooner. Personally, we will have cash on hand from selling the house and be able to take some time before drawing on the investments to allow the market to recover. Of course, if we do get a decent dip, the temptation will be to try to cut our expenses as much as possible so we can put more of the remaining cash into the market at a lower than current price and reap the benefit when market starts climbing again.

TartanTallulah

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Re: 2018 FIRE cohort
« Reply #752 on: November 22, 2017, 10:06:15 PM »
So it looks more and more likely that 2018 cohort will be retiring at the top of the market.  I was really hoping for a downturn during 2017 but I don't think my wish will be granted :-)

How are you all feeling about the market situation and the potential for a correction happening immediately after we FIRE?

Relatively relaxed, because the bones of my retirement income will be a DB pension which will rise with inflation, and I'll have enough cash to allow me to leave my SIPP and S&S ISA untouched for a few years.

Fresh Bread

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Re: 2018 FIRE cohort
« Reply #753 on: November 23, 2017, 12:50:55 AM »
I've always suspected that luck has played a massive part in my ability to retire early, but today I got some fairly solid numbers that have really grounded me.

I bought a house in the UK when I was very young in 1998, worth 39,950 pounds. By some freak of the economy, it was one of the few times it was cheaper to buy than rent and I was sick of sharing with randoms. In 2007 I sold that house for 125k.

We were living in Aus by then and put that money into an apartment. We paid off the very small mortgage quickly and a few years ago and for various reasons couldn't stand to live in the apartment anymore so bought a house and rented out the apt as we didn't think it would sell for a good price right then (due to those reasons!)

The value of the apartment close to doubled in 10 yrs (we just sold it). However the house in the UK is only worth about 10% more than I sold it for 10yrs ago.

Total and utter luck in moving money from a property market that crashed in 2008 to a rapidly growing one that barely stuttered in 2008.

The only actual financial decision we've made is selling the apartment at what we think was the peak of the market before what we think will be a flat few years and putting into other investments. The return out of property is very much higher. I have these forums to thank for that.

Kudos to people that have slogged and invested, I feel like a total fraud!

Monkey Uncle

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Re: 2018 FIRE cohort
« Reply #754 on: November 23, 2017, 04:21:54 AM »
So it looks more and more likely that 2018 cohort will be retiring at the top of the market.  I was really hoping for a downturn during 2017 but I don't think my wish will be granted :-)

How are you all feeling about the market situation and the potential for a correction happening immediately after we FIRE?

First off, no one really knows how close to the top we are (see: "top is in" thread).  I remember when the '87 crash happened, and then again with the early 90's recession, a lot of people thought the economy was going to hell in a handbasket and that the good times were over.  After all, the bull market was nearly a decade old.  Turned out we had almost a decade to go before it ended.

Now before everyone starts sputtering about the current ridiculous CAPE, complacent VIX, transition from easy money to tight money, and all the other parallels to 1929, 1966, 2000, 2007, etc., let me say that I agree that history, on average, is not on our side, and I think it is wise for 2018 FIREees to be cautious. Therefore, I've worked 12 - 18 months past basic FI, such that I could spend about $10k/yr more than my basic spending level without running out of money, even if another Great Depression or stagflation episode were to occur.  Even so, it is possible that something worse than any of those historical calamities could happen, or that my spending estimate turns out to be wrong, so I'm also open to the idea of earning some part-time income if the need arises.

So yes, I'm being cautious just in case the worst happens, with the knowledge that the most likely outcome is that I'll need to figure out how to get rid of a bunch of money when I'm old and feeble.

Mrbeardedbigbucks

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Re: 2018 FIRE cohort
« Reply #755 on: November 23, 2017, 08:12:29 AM »
I'm on the 2018 cohort list and share the same concerns about sequence of returns. Like others, my plan is to have 2-3 years of cash and laddered cd/bonds. I'm also planning on starting with only 50% equities and gradually increase over time (glide path approach), although that's not set in stone.

I have a very simple question but can't seem to find a definitive answer.  At what point should you deploy your cash? Would you start cash withdrawals immediately after retirement until it's close to being depleted?

I read a lot about people saying they will withdraw on their cash in bad years but since the market returns are always looking backward, how do you know we'll have a bad year until it actually happens?

I'm still in the process of figuring out my withdrawal strategy from my assets. If anyone can help with the above question or link me to an existing thread I'd greatly appreciate.

NinetyFour

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Re: 2018 FIRE cohort
« Reply #756 on: November 23, 2017, 08:21:12 AM »
I am going to make sure I have about 3 years worth of $$ for living expenses in conservative investments.  But I will leave the bulk of it in equity index funds.  The next few years should be very interesting!

happy

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Re: 2018 FIRE cohort
« Reply #757 on: November 25, 2017, 09:11:47 PM »
I have 5 years cash, in my super fund which I will use first. Conservative, yes I know, but at my age I can't afford to rebuild if the big drop arrives.

rpr

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Re: 2018 FIRE cohort
« Reply #758 on: November 25, 2017, 09:56:22 PM »
I still have a ways to go before FIRE but had a question for those who keep segregated buckets of cash for X years. It seems to me that if I  looked at all of your financial assets including this cash, isn't it equivalent to having a more conservative asset allocation (due to lower risk tolerance).

What happens if the market drop continues till all of your cash/bonds is exhausted. At this time, wouldn't you have a a very risky portfolio since it would be stock heavy.  The 2000 recession lasted about two+ years while the 2008 recession was about a year and a half.

Monkey Uncle

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Re: 2018 FIRE cohort
« Reply #759 on: November 26, 2017, 04:17:08 AM »
I still have a ways to go before FIRE but had a question for those who keep segregated buckets of cash for X years. It seems to me that if I  looked at all of your financial assets including this cash, isn't it equivalent to having a more conservative asset allocation (due to lower risk tolerance).

What happens if the market drop continues till all of your cash/bonds is exhausted. At this time, wouldn't you have a a very risky portfolio since it would be stock heavy.  The 2000 recession lasted about two+ years while the 2008 recession was about a year and a half.

Yes, that's it exactly.  Sort of analogous to those folks who want to live off of just their dividends instead of using a safe withdrawal rate strategy.  They're tricking themselves into being more conservative.

You could achieve the same result as the cash bucket strategy by just increasing the cash/short-term bond percentage of your asset allocation, and then re-balancing as you spend it down.

To your question about ending up with a very risky portfolio as you spend down your cash during a downturn: yes, that's a possible outcome if the downturn lasts long enough.  But this effect will be mitigated by the fact that while you are spending down your cash, your stock allocation is also decreasing due to the declining value of your shares.  Sort of like involuntary rebalancing.  Also, if you do end up stock-heavy at the end of a bear market, that is the least risky time to be stock-heavy.  Not that I advocate market-timing or anything...

step_away

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Re: 2018 FIRE cohort
« Reply #760 on: November 26, 2017, 07:57:02 AM »
I'm officially joining this thread with a countdown to 5/4/2018 FIRE date (unless my FU stash takes a dive).

I've had FIRE in mind for a long time (almost since working full-time  - lol), but couldn't seem to commit until now.  The 5/4/2018 FIRE date is set to allow for the receipt of my bonus if any in March and turning in a 1-month notice while benefitting for a full month insurance coverage for May.

I am on an extended OMY as I didn't find my work difficult and would prefer to be laid off with a package as it is hard for me to voluntarily quit the nice salary and benefits. My job however has become increasingly frustrating due to tightening regulations in the corporate banking world coupled with a number of problem accounts in my portfolio.  Having my FU stash on accelerated growth is also not helping me stay motivated at work. 

I've been mentally preparing for early 2018 FIRE for the last few months (ie navel gazing) while strategically maxing out certain dental, vision and medical benefits. Wish me luck in finally making the jump.

ETA: Just noticed that this is my 42 post in MMM - the age I'll be by FIRE date. The stars are aligning....
« Last Edit: November 26, 2017, 08:32:31 AM by step_away »

Monkey Uncle

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Re: 2018 FIRE cohort
« Reply #761 on: November 26, 2017, 08:03:42 AM »
I'm officially joining this thread with a countdown to 5/4/2018 FIRE date (unless my FU stash takes a dive).

I've had FIRE in mind for a long time (almost since working full-time  - lol), but couldn't seem to commit until now.  The 5/4/2018 FIRE date is set to allow for the receipt of my bonus if any in March and turning in a 1-month notice while benefitting for a full month insurance coverage for May). 

I am on an extended OMY as I didn't find my work difficult and would prefer to be laid off with a package as it is hard for me to voluntarily quit the nice salary and benefits. My job however has become increasingly frustrating due to tightening regulations in the corporate banking world coupled with a number of problem accounts in my portfolio.  Having my FU stash on accelerated growth is also not helping me stay motivated at work. 

I've been mentally preparing for early 2018 FIRE for the last few months (ie navel gazing) while strategically maxing out certain dental, vision and medical benefits. Wish me luck in finally making the jump.

Congratulations on setting a date!  Best of luck as you cruise in for the landing.

Retire-Canada

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Re: 2018 FIRE cohort
« Reply #762 on: November 26, 2017, 10:26:39 AM »
What happens if the market drop continues till all of your cash/bonds is exhausted. At this time, wouldn't you have a a very risky portfolio since it would be stock heavy.  The 2000 recession lasted about two+ years while the 2008 recession was about a year and a half.

Holding broad stock index funds is not really risky, but they can be volatile. If you decided to spend your bond allocation exclusively and that lasted you 2yrs and the market crash lasted 3yrs you would be forced to sell some stocks at low valuations. That's not a big deal as you made it through the first 2 years without doing so and presumably year 4 and beyond the market starts to recover.

You can then rebuild your bond allocation if that's what your investment plans tells you to do so that you'd have more bonds to deal with the next market crash.

Ultimately the market will go up and down over the course of your retirement. Being comfortable with the idea of selling stocks when they are at low valuations is something you will likely have to deal with.

MaybeBabyMustache

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Re: 2018 FIRE cohort
« Reply #763 on: November 26, 2017, 01:20:46 PM »
I'm officially joining this thread with a countdown to 5/4/2018 FIRE date (unless my FU stash takes a dive).

I've had FIRE in mind for a long time (almost since working full-time  - lol), but couldn't seem to commit until now.  The 5/4/2018 FIRE date is set to allow for the receipt of my bonus if any in March and turning in a 1-month notice while benefitting for a full month insurance coverage for May.

I am on an extended OMY as I didn't find my work difficult and would prefer to be laid off with a package as it is hard for me to voluntarily quit the nice salary and benefits. My job however has become increasingly frustrating due to tightening regulations in the corporate banking world coupled with a number of problem accounts in my portfolio.  Having my FU stash on accelerated growth is also not helping me stay motivated at work. 

I've been mentally preparing for early 2018 FIRE for the last few months (ie navel gazing) while strategically maxing out certain dental, vision and medical benefits. Wish me luck in finally making the jump.

ETA: Just noticed that this is my 42 post in MMM - the age I'll be by FIRE date. The stars are aligning....

That's my planned age as well step_away! I'm shooting for end of June, 2018. Starting to feel closer, now that 2017 is winding down.

step_away

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Re: 2018 FIRE cohort
« Reply #764 on: November 26, 2017, 01:40:06 PM »

ETA: Just noticed that this is my 42 post in MMM - the age I'll be by FIRE date. The stars are aligning....

That's my planned age as well step_away! I'm shooting for end of June, 2018. Starting to feel closer, now that 2017 is winding down.

I thought of moving my FIRE date to 6/1/18 which is a Friday and would mean that I'm covered until end of the June month.  Taking into account the 18 month COBRA, I could then enroll for 2020 medical through ACA with no break in coverage. But given how I'm feeling lately, I'm not sure I want to stay one more month when work will start to really pick up by then.

I'm getting a little antsy and can't believe that I finally have a FIRE date although five months seem to be still a bit far away.

Fresh Bread

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Re: 2018 FIRE cohort
« Reply #765 on: November 26, 2017, 03:04:09 PM »
Does anyone else in this cohort have their own business?

I keep flip-flopping between wanting to keep the business (it's usually quite fun) and just work a few hours when I want, to wishing I didn't have to get out of bed so early or deal with the paperwork.


rpr

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Re: 2018 FIRE cohort
« Reply #766 on: November 26, 2017, 03:09:24 PM »
I still have a ways to go before FIRE but had a question for those who keep segregated buckets of cash for X years. It seems to me that if I  looked at all of your financial assets including this cash, isn't it equivalent to having a more conservative asset allocation (due to lower risk tolerance).

What happens if the market drop continues till all of your cash/bonds is exhausted. At this time, wouldn't you have a a very risky portfolio since it would be stock heavy.  The 2000 recession lasted about two+ years while the 2008 recession was about a year and a half.

Yes, that's it exactly.  Sort of analogous to those folks who want to live off of just their dividends instead of using a safe withdrawal rate strategy.  They're tricking themselves into being more conservative.

You could achieve the same result as the cash bucket strategy by just increasing the cash/short-term bond percentage of your asset allocation, and then re-balancing as you spend it down.

To your question about ending up with a very risky portfolio as you spend down your cash during a downturn: yes, that's a possible outcome if the downturn lasts long enough.  But this effect will be mitigated by the fact that while you are spending down your cash, your stock allocation is also decreasing due to the declining value of your shares.  Sort of like involuntary rebalancing.  Also, if you do end up stock-heavy at the end of a bear market, that is the least risky time to be stock-heavy.  Not that I advocate market-timing or anything...

Monkey Uncle -- Thanks. I like the ways that you suggest for looking at things.

MaybeBabyMustache

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Re: 2018 FIRE cohort
« Reply #767 on: November 26, 2017, 04:03:20 PM »

ETA: Just noticed that this is my 42 post in MMM - the age I'll be by FIRE date. The stars are aligning....

That's my planned age as well step_away! I'm shooting for end of June, 2018. Starting to feel closer, now that 2017 is winding down.

I thought of moving my FIRE date to 6/1/18 which is a Friday and would mean that I'm covered until end of the June month.  Taking into account the 18 month COBRA, I could then enroll for 2020 medical through ACA with no break in coverage. But given how I'm feeling lately, I'm not sure I want to stay one more month when work will start to really pick up by then.

I'm getting a little antsy and can't believe that I finally have a FIRE date although five months seem to be still a bit far away.

My kids are done with school on 6/8, so I'm hoping to make that my last official work day, and then use vacation days to cover me until 6/25 (when I have stock grant vesting). My husband will then add me + the kids onto his work insurance.

DavidAnnArbor

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Re: 2018 FIRE cohort
« Reply #768 on: November 27, 2017, 04:40:26 AM »
Does anyone else in this cohort have their own business?

I keep flip-flopping between wanting to keep the business (it's usually quite fun) and just work a few hours when I want, to wishing I didn't have to get out of bed so early or deal with the paperwork.

Yes I have the same conundrum. Sometimes I like my business, and sometimes I don't.

Mrbeardedbigbucks

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Re: 2018 FIRE cohort
« Reply #769 on: November 27, 2017, 06:35:43 AM »

To your question about ending up with a very risky portfolio as you spend down your cash during a downturn: yes, that's a possible outcome if the downturn lasts long enough.  But this effect will be mitigated by the fact that while you are spending down your cash, your stock allocation is also decreasing due to the declining value of your shares.  Sort of like involuntary rebalancing.  Also, if you do end up stock-heavy at the end of a bear market, that is the least risky time to be stock-heavy.  Not that I advocate market-timing or anything...

I'm still trying to iron out a sound withdrawal strategy.

We plan on having about 3 years of cash/CD's but still not positive when to start spending the cash. Do you immediately start withdrawing from cash when you retire until it's depleted or do most people wait for the markets to start dropping? If you wait until the downturn, how do we know it's not a normal 10-15% market correction and the markets will eventually recover?

I know there's no one size fit's all withdrawal strategy but I'd like to hear how the 2018 cohort plans on managing withdrawals to generate the income they will need.


Retire-Canada

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Re: 2018 FIRE cohort
« Reply #770 on: November 27, 2017, 08:42:03 AM »
We plan on having about 3 years of cash/CD's but still not positive when to start spending the cash. Do you immediately start withdrawing from cash when you retire until it's depleted or do most people wait for the markets to start dropping? If you wait until the downturn, how do we know it's not a normal 10-15% market correction and the markets will eventually recover?

I know there's no one size fit's all withdrawal strategy but I'd like to hear how the 2018 cohort plans on managing withdrawals to generate the income they will need.

I plan to wait until there is a market event to use my bonds/cash/gold asset allocation. There is no way to know anything about the future so you'll have to decide at the time what to do. If you need money to live off of and your stock investments are down 10-15% it seems like a good time to spend cash/bonds. It doesn't have to get worse for that to happen in my opinion. Assuming the market recovers quickly you can always replenish your cash/bond allocation if that's what your investment/withdrawal plan indicates you should do.

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Re: 2018 FIRE cohort
« Reply #771 on: November 27, 2017, 08:46:37 AM »
Quote
I'm still trying to iron out a sound withdrawal strategy.

We plan on having about 3 years of cash/CD's but still not positive when to start spending the cash. Do you immediately start withdrawing from cash when you retire until it's depleted or do most people wait for the markets to start dropping? If you wait until the downturn, how do we know it's not a normal 10-15% market correction and the markets will eventually recover?

I know there's no one size fit's all withdrawal strategy but I'd like to hear how the 2018 cohort plans on managing withdrawals to generate the income they will need.


An excellent question, especially for people getting the great majority of their retirement income from stock investments.  This is the general plan I intend to follow:  Pick the withdrawal rate you need and take out 1/12 of that rate per month.
 from your investments. As the market fluctuates, either add to your cash pile with the excess or take from it to meet your monthly income needs.  There are lots of variations to this plan, but the basics are simple.   
 This plan gives you quite a bit of flexibility.  Most people will have two income numbers, a high one to to live the lifestyle they want and a low one which supports the minimum they need to pay the bills and put food on the table.  Say your withdrawal rate is 3.6% to meet your "lifestyle" number. Each month take out 0.3%. ( lets ignore things like quarterly dividend pay outs and yearly distributions.  You can  take that money and spread it out over  several months and adjust your withdrawals accordingly). As long as your income is between your minimum and your "lifestyle"  numbers,  you don't have to do anything.  If your monthly income drops below your minimum , supplement it with money from your cash.  If it goes above your "lifestyle" number, add to your cash pile.   

sol

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Re: 2018 FIRE cohort
« Reply #772 on: November 27, 2017, 08:52:13 AM »
I am going to make sure I have about 3 years worth of $$ for living expenses in conservative investments.

I have 5 years cash, in my super fund which I will use first.

We plan on having about 3 years of cash/CD's

I plan to wait until there is a market event to use my bonds/cash/gold asset allocation.

All of you people who are planning to spend down bonds/cash/gold in the event of a stock downturn are setting yourselves up for failure.  What happens when you spend all of your cash down but the market is still dropping?  Then you'll be forced to sell stocks at an even greater loss than you would have had if you had just sold them first.

Rather than trying to time the market by spending down stocks or bonds or cash at any point in the cycle, just keep your allocation constant.  That's the whole point of having an asset allocation, it automatically rebalances for you.  It automatically spends down a larger percentage of your bonds when stocks tank, but not ALL of your bonds so you don't get hosed if the market continues to drop. 

Every time I hear someone on this forum say something like "I keep three years of expenses in cash in case there's a downturn" I just facepalm.  Those people have totally misunderstood the entire point of having an asset allocation that includes both stocks and bonds.  You don't buy or sell one or the other depending on what the market has done recently!  You always keep the allocation percentages constant no matter what happens!  That's how the whole theory of Strategic Asset Allocation generates better returns in the first place!  Don't mess with it!

Retire-Canada

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Re: 2018 FIRE cohort
« Reply #773 on: November 27, 2017, 09:49:32 AM »
All of you people who are planning to spend down bonds/cash/gold in the event of a stock downturn are setting yourselves up for failure.  What happens when you spend all of your cash down but the market is still dropping?  Then you'll be forced to sell stocks at an even greater loss than you would have had if you had just sold them first.

If the market keeps dropping for you will take some action that could be any combination of the following:

- sell stocks
- reduce spending
- generate some additional income

You'll have a few years to figure that out before you'd expend your "safety portion" of your portfolio. Let's say you have 3yrs of bonds that you are spending and the event lasts 5yrs and you don't generate any additional income or reduce your spending...in that case you will sell some stocks at a lower value than you would have initially, but you also won't have pulled a significant chunk of 3yrs worth of spending from your stock allocation.

Do you have any sources to back up the "setting yourself up for failure" comment above? Have you read some analysis or done some yourself showing how the approach you are criticising is likely to fail?

Looking at it another way some people are targeting a 100% equities portfolio [ie GCC] is that an example of someone setting themselves up for failure? If so what % of bonds averts failure in your opinion? What about the reverse equity glidepath approach? Starting with a higher portion of bonds and spending them regardless of market conditions to end up with a high % of stocks....perhaps 100%. Starting with a few years of bonds/cash and holding that portion constant then spending that portion during a market crash does not seem to be out of bounds in terms of these other approaches to managing asset allocations and mitigating the early sequence of returns risk.

Maybe I am missing something?
« Last Edit: November 27, 2017, 11:55:10 AM by Retire-Canada »

happy

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Re: 2018 FIRE cohort
« Reply #774 on: November 27, 2017, 02:29:30 PM »
I haven't completely misunderstood the concept of asset allocation. Its an informed decision. Maybe not the one you would make Sol, but then I don't make your decisions for you.

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Re: 2018 FIRE cohort
« Reply #775 on: November 27, 2017, 02:52:12 PM »
I'm don't think I'm familiar with strategic allocation strategies to which Sol refers. The bit I don't follow us: If your stocks halved in value then you'd rebalance your asset allocation by spending cash or bonds to gradually bring the cash or bonds % down wouldn't you? Is that what we're all doing just describing it in different ways?

We'll have 18 months cash in the bank and we'll be living on last year's investment income so that we have 12 months to adapt to any changes in dividend income eg not book travel.

Fresh Bread

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Re: 2018 FIRE cohort
« Reply #776 on: November 27, 2017, 03:05:10 PM »
Does anyone else in this cohort have their own business?

I keep flip-flopping between wanting to keep the business (it's usually quite fun) and just work a few hours when I want, to wishing I didn't have to get out of bed so early or deal with the paperwork.

Yes I have the same conundrum. Sometimes I like my business, and sometimes I don't.

Hey David! Do you have various options eg go part time, employ a manager, or is it an all or nothing situation?

My business doesn't make enough money for me to pay a manager and therefore is also not a v attractive purchase. It's looking like either I stay and work minimal hours (I have employees) or I close up shop. But then I'd lose friends by leaving people in the lurch. Hard one.

DavidAnnArbor

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Re: 2018 FIRE cohort
« Reply #777 on: November 27, 2017, 03:16:18 PM »
Does anyone else in this cohort have their own business?

I keep flip-flopping between wanting to keep the business (it's usually quite fun) and just work a few hours when I want, to wishing I didn't have to get out of bed so early or deal with the paperwork.

Yes I have the same conundrum. Sometimes I like my business, and sometimes I don't.

Hey David! Do you have various options eg go part time, employ a manager, or is it an all or nothing situation?

My business doesn't make enough money for me to pay a manager and therefore is also not a v attractive purchase. It's looking like either I stay and work minimal hours (I have employees) or I close up shop. But then I'd lose friends by leaving people in the lurch. Hard one.

I just work for myself, massage therapist and yoga teacher. Yes I can cut down the workload and that's the direction I'm going. I will be getting rid of an office location early next  year that is a 40 mile drive from me, but closer to the northern suburbs of Detroit. I've been working in that area for the past 20 years, and it will be good to finally close that part of the business down.

Monkey Uncle

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Re: 2018 FIRE cohort
« Reply #778 on: November 27, 2017, 05:09:03 PM »
I don't think a withdrawal strategy needs to be all that complicated.  Spend cash when you need to.  Sell some stocks and/or bonds when you run low on cash.  Use those sales as an opportunity to rebalance your asset allocation.  Check once or twice a year to make sure your allocation hasn't gotten too far out of whack.  Rebalance as necessary.

Wax on, wax off.

Mr Mark

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Re: 2018 FIRE cohort
« Reply #779 on: November 27, 2017, 08:37:15 PM »
Does anyone else in this cohort have their own business?

I keep flip-flopping between wanting to keep the business (it's usually quite fun) and just work a few hours when I want, to wishing I didn't have to get out of bed so early or deal with the paperwork.

Yes I have the same conundrum. Sometimes I like my business, and sometimes I don't.

Hey David! Do you have various options eg go part time, employ a manager, or is it an all or nothing situation?

My business doesn't make enough money for me to pay a manager and therefore is also not a v attractive purchase. It's looking like either I stay and work minimal hours (I have employees) or I close up shop. But then I'd lose friends by leaving people in the lurch. Hard one.

Why not sell the business?

Fresh Bread

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Re: 2018 FIRE cohort
« Reply #780 on: November 27, 2017, 10:40:40 PM »
Does anyone else in this cohort have their own business?

I keep flip-flopping between wanting to keep the business (it's usually quite fun) and just work a few hours when I want, to wishing I didn't have to get out of bed so early or deal with the paperwork.

Yes I have the same conundrum. Sometimes I like my business, and sometimes I don't.

Hey David! Do you have various options eg go part time, employ a manager, or is it an all or nothing situation?

My business doesn't make enough money for me to pay a manager and therefore is also not a v attractive purchase. It's looking like either I stay and work minimal hours (I have employees) or I close up shop. But then I'd lose friends by leaving people in the lurch. Hard one.

Why not sell the business?

I'm not sure it would sell -it makes about 1.25 a FT but quite low income. I already downshifted in 2012, I used to have a well paid but stressful career, so it's a bit of a hobby job in a random niche. I have 3 pt employees, one of them might take it on. I put a thread about my quandary in the entrepreneur section. It's hard to explain what I do without outing myself, there's only a handful of us out there. It's ok, I'll figure it out.

sol

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Re: 2018 FIRE cohort
« Reply #781 on: November 27, 2017, 11:32:01 PM »
If your stocks halved in value then you'd rebalance your asset allocation by spending cash or bonds to gradually bring the cash or bonds % down wouldn't you? Is that what we're all doing just describing it in different ways?

Right, but the recommended plan is to spend down your bonds or cash until you reach your original allocation again.  Most people here are saying that if the market tanks, they'll spend ONLY their cash/bond portion until it is gone, to protect their stocks, which is exactly the wrong thing to do.  That increases your risk (by raising your stock percentage) at the exact wrong time.

Yes, please rebalance back to your original desired allocation.  Please do NOT spend down all of your cash/bonds during a recession, as if they were a savings account for you to draw on in times of need.

You can tell which type a person is by the way they phrase their plan.  If they say "I plan to keep 20% of my assets in bonds" then they probably understand the need to restore their bond allocation to 20% in a stock downturn.  If they say "I keep two years of expenses in bonds" then they're probably planning to spend down their bond allocation to zero over the first two years of a downturn.

In any circumstance, including a healthy growing market, during the drawdown phase of your retirement you should always be selling both stocks AND bonds to maintain your chosen AA.  You can temporarily sell all of one or the other if you're trying to rebalance faster, but never spend ALL of one or the other because that would mean you have abandoned your chosen AA.  Unless your chosen AA is 100/0/0, in which case this is a silly discussion.

Fresh Bread

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Re: 2018 FIRE cohort
« Reply #782 on: November 28, 2017, 12:07:04 AM »
Hypothetically, if you had a large % of cash, like 40%, and the stock fell significantly in value, you would not only be spending cash for a few years but you would also need to buy more stocks to rebalance. Mentally, that would pretty hard to do when you're out of work and the market is tanking. I don't think I could do it, but I'll still have rental income and a relatively low % of my net worth is in stocks.

edgema

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Re: 2018 FIRE cohort
« Reply #783 on: November 28, 2017, 05:41:41 AM »
I would argue there is a big difference to using an asset allocation with re-balance, versus some sort of 'sell your stash' approach. 

To use an asset allocation you decide what makes sense for your personal risk tolerance and then re-balance between asset classes to meet that allocation. If you keep to that model and there is a material move then you sell/buy to re-establish the allocation you decided on. So if you have a 60% equity / 30% bonds / 10% cash allocation and equities drop 20% with nothing else moving, then you will sell some bonds and use a little cash to buy equities and get back to the 60/30/10 ratio.

There is quite a difference between this and what some are saying when they say they will use a 'cash stash' to fund their life and not to touch the equities if they do down. Although this intuitively feels like it protects you from selling equities when they are down you are actually making big market timing decisions. To list a couple of examples you have to 1) decide what equity market decline is large enough for you to start spending your stash rather than re-balance 2) decide when you stop spending your stash and start going back to using an asset allocation 3) decide what to sell if the equity downturn outlasts your stash. These are all market timing decisions and the nice thing about having a long term asset allocation is that you don't have to worry about these things (although this is not saying it is stress free). It naturally has you buying more of an asset class as it goes down and gets cheaper (sounds good!) and then selling them as they go up (also sounds good!).

In part, using an asset allocation approach, is sort of doing the 'use your stash' approach with the key difference being you are doing little and often and on smaller moves to acknowledge the difficulty of timing the top and bottom of markets. It might sound the same, but is quite different.

Some institutional investors try to overlay a 'tactical' asset allocation to allow them to move slightly away from the long-term 'strategic' asset allocation. As someone who works in that industry, lets just say the success of those tactical decisions is pretty patchy.

My two pennies worth is therefore that unless you want to get into the business of partly betting your future on your own ability to time the tops and bottoms of markets then decide on a sensible allocation and stick to it. Personally I think the 100% equities gang are too confident (after an 8-year bull market) in their ability to ignore an equity market decline were it to happen so I have a mix of equity, credit, bonds and property to spread myself out. I will never top the list for returns in any given year but it works for me.

brooklynguy

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Re: 2018 FIRE cohort
« Reply #784 on: November 28, 2017, 08:37:09 AM »
Please do NOT spend down all of your cash/bonds during a recession, as if they were a savings account for you to draw on in times of need.

Holding a cash buffer to be spent down during bad years and replenished during good years isn't necessarily a bad strategy.  It's not my cup of tea, but its adherents include some members of this community who are clearly competent in these matters (like Nords).

Retire-Canada

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Re: 2018 FIRE cohort
« Reply #785 on: November 28, 2017, 08:48:24 AM »
Yes, please rebalance back to your original desired allocation.  Please do NOT spend down all of your cash/bonds during a recession, as if they were a savings account for you to draw on in times of need.

Sol you haven't provided a compelling explanation for your "setting yourself up for failure" comment in the previous post. If holding various AA's between 100% stocks to say 50%stocks/50%bonds are all valid approaches not to mention AA's the change over time like the reverse equity glidepath approach than it hardly seems gloom and doom to spend down a cash/bonds component of your portfolio during a market event as WR plan.

Beyond that without taking into consideration other factors like %WR and ability to change spending from year to year you can't really assess someone's FIRE plan based on one component.

If there is a fatal flaw to the approach you are criticising please explain it more clearly.


Retire-Canada

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Re: 2018 FIRE cohort
« Reply #786 on: November 28, 2017, 08:59:30 AM »
There is quite a difference between this and what some are saying when they say they will use a 'cash stash' to fund their life and not to touch the equities if they do down. Although this intuitively feels like it protects you from selling equities when they are down you are actually making big market timing decisions. To list a couple of examples you have to 1) decide what equity market decline is large enough for you to start spending your stash rather than re-balance 2) decide when you stop spending your stash and start going back to using an asset allocation 3) decide what to sell if the equity downturn outlasts your stash. These are all market timing decisions and the nice thing about having a long term asset allocation is that you don't have to worry about these things (although this is not saying it is stress free). It naturally has you buying more of an asset class as it goes down and gets cheaper (sounds good!) and then selling them as they go up (also sounds good!).

You can simply set a rule that you'll spend your cash/bonds after a market drop of X% and either spend them down to $0 or stop once your portfolio recovers. It's not a hard system to setup.

And frankly if this ^^ constitutes "timing the market" I'll be doing a lot of that in FIRE. I won't be pulling $40K/yr from my initial $1M stash like a robot. If the market crashes I'll put off non-essential spending like luxury travel and replacing my car to keep my spending at say $30K/yr for a bit. Then after a recovery I might decide to spend $50K/yr for a year to replace that car and go on the fancy trip I put off. If things got really bad in the market I might get a PT job to bring in $20K/yr for a few years.

All of that sounds like what you are calling "timing the market", but to me that sounds like a normal set of FIRE decisions.

edgema

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Re: 2018 FIRE cohort
« Reply #787 on: November 28, 2017, 09:42:11 AM »
We may just have to disagree on this one as your response prompts more questions than answers for me. Please be aware that I am not listing these to sound aggressive just what comes to my mind.

What is X? How long do equity markets need to be down X or more before I switch into 'cash stash' mode? If equity markets have just gone up very quickly, does X get bigger to reflect that I might only be giving back some recent outsized gains rather than 'losing' money? What do I define as recovery, a new high, in which case for the declines in 2000 or 2008 that would be 5-8 years which is a long time to survive off the cash stash? If X happens very quickly (i.e. spending is not a consideration) what is the logic that I believe a lower equity allocation at that point in time is better (at a cheaper level) than before X happened? If I believe in asset allocation (which as Sol says if you are a 100% equity person this is all moot) then how do I justify rebalancing on the way up but not the way down?

I think it would be very hard pre-define a set of actions you will take in advance that successfully deals with all the scenarios which could occur and you instead end up with a lot of emotion wrapped into the decisions you take. To me that is the great thing about sticking to an allocation as you take all that away as you know what you are going to do in advance and the approach tends to work over time.

Of course it is a complicated interplay between declines / spending. If you happen to spend the exact same amount out of cash/bonds in 2-years as the equity market decline then you have effectively done exactly the same thing as re-balancing.

I agree completely that you may separately reduce or perhaps increase spending based on the overall value of the portfolio but, to me at least, this is related to the size of the pot and not the allocation inside the pot.

Retire-Canada

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Re: 2018 FIRE cohort
« Reply #788 on: November 28, 2017, 09:50:27 AM »
I agree completely that you may separately reduce or perhaps increase spending based on the overall value of the portfolio but, to me at least, this is related to the size of the pot and not the allocation inside the pot.

They aren't separate at all. They both are part of your risk management plan. The same decisions required around changing spending are what would drive you decisions around spending your bond/cash allocation. If you can make one set of decisions than you can make the other. If you are arguing that a FIREr can't make any decisions related to the market and their portfolio around spending than that's a fair point although I disagree with it. If you accept they can decide to alter their risk management response by changing spending based on the market than I can't see how you can argue they would be incapable of making reasonable decisions around spending a portion of their portfolio.


edgema

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Re: 2018 FIRE cohort
« Reply #789 on: November 28, 2017, 09:56:15 AM »
I don't think there is necessarily a fatal flaw, but I also don't see the approach as an asset allocation approach.

I think you can create scenarios which expose a flaw (perhaps not fatal). Lets say you set your X at 15% and markets drop 16%. Then they rise 10% but do not hit your recovery point (a new high) for 3-years, which is the size of your cash stash. At this point, your allocation is 100% equities because you have sold down everything. Now the market falls another 20% and your whole portfolio is down 20%.

Now of course this is not good for either approach, but if you had rebalanced, you would at least have participated in the 10% gains a little. You would also have been selling down equities a little over the next 3-years to fund life (in proportion with your bonds/cash) so at the point the market declines 20% you have a lower equity allocation than the stash approach so the 20% decline hurts less. Further, after the 20% decline, you have cash and bonds to sell to rebalance into equities at a lower price (happy days). You might even have some gains in your bond portfolio due to 'flight to safety'.

Of course the reality is that if you are 80% or more in equities equities then all of this is pretty incremental as 95% (citation needed) of your risk is in equities anyway.


edgema

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Re: 2018 FIRE cohort
« Reply #790 on: November 28, 2017, 10:05:50 AM »
Apologies to others as we are off topic for the 2018 thread. Retire-Canada - that we are even having this debate is showing considerable more concern to the topic when compared to 95% of people. Perhaps we need to start a separate thread to continue to discuss this if we want to.

There is a conflict here as most people on this site would say that they would love a 40% decline in equity markets and would then fill their boots - equity sale here! You may not be one of those but of course that doesn't fit with the stash approach and is much more of an asset allocation approach.



tooqk4u22

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Re: 2018 FIRE cohort
« Reply #791 on: November 28, 2017, 10:10:34 AM »
Yes, please rebalance back to your original desired allocation.  Please do NOT spend down all of your cash/bonds during a recession, as if they were a savings account for you to draw on in times of need.

Sol you haven't provided a compelling explanation for your "setting yourself up for failure" comment in the previous post. If holding various AA's between 100% stocks to say 50%stocks/50%bonds are all valid approaches not to mention AA's the change over time like the reverse equity glidepath approach than it hardly seems gloom and doom to spend down a cash/bonds component of your portfolio during a market event as WR plan.

Beyond that without taking into consideration other factors like %WR and ability to change spending from year to year you can't really assess someone's FIRE plan based on one component.

If there is a fatal flaw to the approach you are criticising please explain it more clearly.

What people are describing is essentially the Rising Equity Glidepath whether they mean it or not, and contrary to what Sol and Edgema say - it does have merit.
« Last Edit: November 28, 2017, 10:12:35 AM by tooqk4u22 »

Retire-Canada

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Re: 2018 FIRE cohort
« Reply #792 on: November 28, 2017, 10:12:05 AM »
Of course the reality is that if you are 80% or more in equities equities then all of this is pretty incremental as 95% (citation needed) of your risk is in equities anyway.

For myself and the other folks who seem to be talking about a similar approach the bond/cash allocation is 20% or less - essentially a few years of spending. I'll probably be closer to 10%. I don't plan on setting a specific % at which I will take action. I feel like I am able to make decisions around spending in FIRE based on my portfolio value and market returns.

To your example I can construct a scenario where the spend bonds/cash first approach is superior. Ultimately without knowledge of the future that doesn't tell us anything, but I agree with your point above given the constellation of reasonable asset allocations and WR approaches I don't see a compelling argument for fear of failure in any of them.

In any case if there is interest we can certainly start another thread about this topic.

edgema

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Re: 2018 FIRE cohort
« Reply #793 on: November 28, 2017, 10:15:43 AM »
But following the link the conclusions state;

"Overall, the results show that rising equity glide paths from conservative starting points can achieve superior results, even with lower average lifetime equity exposure. For instance, a portfolio that starts at 30 percent in equities and finishes at 60 percent performs better than a portfolio that starts and finishes at 60 percent equities. A steady or rising glide path provides superior results compared to starting at 60 percent equities and declining to 30 percent over time."

At the typical MMM person is 1) younger and 2) way higher than the percentage equities here. I am not sure it is applicable.

rpr

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Re: 2018 FIRE cohort
« Reply #794 on: November 28, 2017, 10:16:46 AM »
My apologies as well for going off-topic. I asked about this earlier in the thread. I'd love to have this discussion continue in a separate thread. Is there a way to get the relevant posts to be part of the thread.

tooqk4u22

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Re: 2018 FIRE cohort
« Reply #795 on: November 28, 2017, 10:37:50 AM »
I don't think there is necessarily a fatal flaw, but I also don't see the approach as an asset allocation approach.

You are correct, the strategy being discussed is more of a volatility approach than AA but some saying 1-2 years only then I would tend to agree with you and Sol that it might impart more risk than less bc it might not provide sufficient time exposure to get through down or more importantly flat then down markets. 
But following the link the conclusions state;

"Overall, the results show that rising equity glide paths from conservative starting points can achieve superior results, even with lower average lifetime equity exposure. For instance, a portfolio that starts at 30 percent in equities and finishes at 60 percent performs better than a portfolio that starts and finishes at 60 percent equities. A steady or rising glide path provides superior results compared to starting at 60 percent equities and declining to 30 percent over time."

At the typical MMM person is 1) younger and 2) way higher than the percentage equities here. I am not sure it is applicable.

Maybe but that really hasn't been the discussion, the discussion has been AA vs. living off bonds/cash for couple of years.  So the Rising Equity Glidepath is applicable as it just means a higher Bond/Cash position than your normal AA and then over a certain timeframe increases to your desired AA whether that be starting at 30/700 and going to 60/40, or 60/40 going to 100/0 or anywhere in between but the premise is the same - reduce conservative holdings over time...but it does say this in the linked article

"Depending on the underlying assumptions, the optimal starting equity exposures are generally around 20 percent to 40 percent and finish at around 40 percent to 80 percent."

and in the implications section at the end...

"The implications of this research for financial planners are significant. Results suggest that the traditional approach of maintaining constant asset allocations in retirement, which are routinely rebalanced, are actually far less than optimal. Although such an approach is actually superior to decreasing equity exposure through retirement, the results of this study reveal that the best solution may be to steadily increase equity exposure throughout retirement, while starting at a lower initial equity exposure."


Basically...
...when markets have high/good returns, doesn't matter other than it leaves you with way more money then you will need and heirs will be happy.
...when markets rise in the beginning but fall after glidepath years, equities grow beyond what you need reducing risk of sequence and likely allowing higher WR but maybe more volatility later but doesn't matter bc you have more than enough bc of early growth
...when markets decline in beginning, gives time for equities to recover back to base level reducing sequence risk and have expected levels of investments.
...when markets have low/negative returns over long term, doesn't matter because no AA will help you but this way might extend the race a bit.

Sounds like a win win.....lower volatility, increased likelihood of success


brooklynguy

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Re: 2018 FIRE cohort
« Reply #796 on: November 28, 2017, 12:01:12 PM »
Do you [sol] have any sources to back up the "setting yourself up for failure" comment above? Have you read some analysis or done some yourself showing how the approach you are criticising is likely to fail?

The following Kitces article summarizes research demonstrating that the use of cash buffer strategies substantially increased historical failure rates (when compared to a baseline of using an identical asset allocation without employing a cash buffer) across a range of different stock/bond asset allocations and different withdrawal rates.  So, while using a cash buffer doesn't necessarily "set you up for failure," it does increase your likelihood of failure (based, like all Trinity-style SWR analysis, on historical market performance).

Kitces:  Research Reveals Cash Reserve Strategies Don’t Work...Unless You're A Good Market Timer?

Again, I don't think cash buffer strategies are necessarily bad (and, as the article points out, they may be superior after accounting for behavioral/psychological factors, in the case of investors who lack the discipline to stick to their chosen asset allocation in the absence of a cash buffer).  But they are probably worse than straight constant-asset-allocation-maintenance-via-rebalancing for investors with the disposition to actually follow that approach.

Retire-Canada

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Re: 2018 FIRE cohort
« Reply #797 on: November 28, 2017, 12:10:47 PM »
Do you [sol] have any sources to back up the "setting yourself up for failure" comment above? Have you read some analysis or done some yourself showing how the approach you are criticising is likely to fail?

The following Kitces article summarizes research demonstrating that the use of cash buffer strategies substantially increased historical failure rates (when compared to a baseline of using an identical asset allocation without employing a cash buffer) across a range of different stock/bond asset allocations and different withdrawal rates.  So, while using a cash buffer doesn't necessarily "set you up for failure," it does increase your likelihood of failure (based, like all Trinity-style SWR analysis, on historical market performance).

Kitces:  Research Reveals Cash Reserve Strategies Don’t Work...Unless You're A Good Market Timer?

From that paper:

Quote
THE BOTTOM LINE

In the end, the reality is that while cash reserve strategies appear psychologically appealing, their actual benefits as an enhancement for retirement income sustainability appear to be a mirage upon closer inspection. The buffer zone approach appears to do little to effectively “time” the market, and/or to the extent it does, the benefits are overwhelmed by the adverse consequences of a large allocation of cash in the portfolio that drags down long-term returns. Notably, though, separate research has shown that shifting equity exposure in light of market volatility (and based on fundamental valuation principles) can in fact enhance both returns, risk-adjusted returns, and the sustainability of retirement income – and without the unfavorable impact of an unduly large cash position.

The issue he has is with holding cash. Changing your asset allocation in response to market conditions seems to be something he favours. I'll try and track down the related paper.

sol

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Re: 2018 FIRE cohort
« Reply #798 on: November 28, 2017, 12:17:50 PM »
What people are describing is essentially the Rising Equity Glidepath whether they mean it or not

No.  Not at all.

The rising equity glidepath modifies your AA over time as a function of your retirement date.  It totally ignores market conditions because asset allocation theory totally ignores market conditions.  The whole point of asset allocation theory is that you maintain the percentages despite the market ups and downs.  The rising glidepath is predicated on an understanding of asset allocation, and then branches out from there to suggest a way to modify the AA as your needs change with age.  Just age.  Not market condition.

What these peeps are doing is just market timing.  They think they can predict when the market is going down, and by how much and for how long, and that they can strategically choose what to buy and sell to outperform the index portfolio throughout these fluctuations.  They are trying to be active fund managers of their private funds.  Active fund managers, historically, underperform the market. 

The best performing portfolios are always the ones that never do anything except rebalance back to their original percentages.  That's why AA theory exists.  That's the central finding of the entire body of literature about it.

But I don't control your funds, and we are each free to try to outperform the market in any way we see fit.  If you think you are smarter than the hedge fund quants, go right ahead and play the market any way you like.  I'll be over here in the corner, getting my guaranteed risk-adjusted market average returns by doing nothing at all.  I will get slightly less than the full S&P500 gains during the bulls, and I will lose slightly less during the bears, and my assets will continue to grow steadily over the long term without me having to make any predictions about what will happen next.

Which doesn't mean you can't make all the predictions you like.  It's your money.  I'm just quietly pointing out that market timing has historically been a losing strategy (hence the "failure" comment) for most adherents, and then advocating that this thread's passive readers keep that in mind when evaluating people's claims about how awesome they will do in the next recession.
« Last Edit: November 28, 2017, 12:21:01 PM by sol »

Retire-Canada

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Re: 2018 FIRE cohort
« Reply #799 on: November 28, 2017, 12:31:00 PM »
Which doesn't mean you can't make all the predictions you like.  It's your money.  I'm just quietly pointing out that market timing has historically been a losing strategy (hence the "failure" comment) for most adherents, and then advocating that this thread's passive readers keep that in mind when evaluating people's claims about how awesome they will do in the next recession.

Got it. That was a whole different meaning of the word failure than I was understanding [ie. portfolio/FIRE failure].