Dawg, speaking as a nuclear-trained submarine engineer, if I were to assemble all of your posts into one gigantic quote then I think it'd be apparent that you have one of the worst cases of over-nuking it that I've ever seen.
You may also wish to reconsider your math. The numbers are correct but your perception of what's happening to the numbers is not.
Let's take your latest example and work it a little differently.
First, I understand the concept of AA and practice rebalancing presently, but am not FIRE yet, so no withdrawals, just accumulation. Let me try and provide a simple illustration to show you where I am struggling with the "sell more bonds and buy more stocks when stocks are down " in a post FIRE world. The premise is you are drawing down $40K/yr 1 from somewhere and based on what I am hearing from most folks, you generally hit your bond-ish investments first, particularly in down yrs of the stock market. Let's assume the following...
- Yr 1 I have $1M + $40K cash so I don't make my first withdrawal until end of first yr
- Withdrawals thereafter once/yr for next yrs expenses, following 4% SWR
- 75% Stock/25% Bond-ish
- My annual withdrawals typically from my 25% first in most cases... isn't that the conventional wisdom here???
- Assume no inflation
- 2 Yr analysis assumes Portfolio performs -10% yr1, +10% yr 2, all losses come form stocks, bonds return 0
Eg
End Yr1: 75% = $675,000
25% = $250,000 - $40,000 = $210,000
New balance = $885,000
Rebalance = $663,750/$221,250 (selling stocks low/buying bonds)
End Yr2: 75% = $730,125
25% = $221,250 - $40,000 = $181,250
New balance = $911,375
Rebalance = $683,531/$227,844 (selling stocks high/buying bonds)
What I am hearing you all say is in yr 1 to sell more bonds and buy stocks because they are down, and while I get the concept, you are working against the rebalance approach and further depleting your bonds should we hit an extended down cycle in the stock market. I am just trying to point out that I don't see how you can do both in this example of a down cycle (rebalance and buy when down). My common sense tells me at the end of yr 1 in this example to NOT rebalance at a min, and if I am bullish, consider buying stocks while down and selling some bonds (knowing this can risk my number of safe yrs if we have an extended negative cycle). If I am not bullish on the stock market coming back and the market continues to crap out yrs 2 & 3, continue to tap my 25% which will make me look further out of balance for the current term, but keep me from selling stocks low. Alternatively, my thought was there could be value in harvesting the 75% when returns hit a certain threshold as opposed to always tapping the 25% first?
Not trying to beat this horse to death, but IF all of our $$ to cover our expenses are coming from our portfolio, we have to draw them from somewhere which further affects the balances at the end of the yr.
Let's go back to the end of Year #1, where stocks have returned -10% and bonds have returned 0% and your cash balance is zero. Don't sell anything yet, but instead take another look at the asset allocation.
At that point the numbers would be:
Stocks = $675K (= 90% of $750K)
Bonds = $250K.
Total Stocks + Bonds = $925K.
Before you sell anything, you want to end up with $40K in your checking account for the start of Year #2. Technically, you actually want a bit more than $40K because there might have been some inflation during that terrible year for the stock market, but let's ignore that for now. Or let's decide that it's a recession and you're going to cut back on your spending a little. Either way the number is $40K.
Total S+B = $925K
Cash needed = $40K
New Total S+B = $885K.
Now rebalance as you've done:
Rebalancing stocks would be $885K x 75% = $663,750.
Rebalancing bonds would be $885K x 25% = $221,250.
Now here's what's happening to get you to those numbers:
Sell off stocks $675K-$663,750 = $11,250.
and sell bonds $250K -$221,250 = $28,750.
Conclusion:
Yeah, you sold some of your stocks in a down market. But as others have pointed out, the stocks you sold (at year-end prices) are still worth more than what you paid for them (your average cost basis). You've been buying stocks for years, maybe even decades, and during two-thirds of that time the market has gone up way more than it's dropped. Although the stock market was down at the end of Year #1, you did not sell stocks at a loss. You would be keenly aware of this as soon as you got your 1099 from your brokerage and saw that you had taxable capital gains.
If the market had been flat during Year #1 then you would've sold $30K of stocks (75% of $40K) and only $10K of bonds (25% of $40K). But because stock performance sucked last year, you're taking far less from your stock shares. You're easing up on the stock harvest and taking most of next year's $40K from your bond portfolio.
You're actually leaving nearly $20K of your stocks in the market (to recover) instead of selling. By leaving money in your stock AA, you essentially bought more stocks. You're actually taking more of your bonds because they didn't lose as much as the stock market lost.
It's just asset allocation. Do the math and don't over-think it.