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Exactly. It's not about timing the market, it's about time IN the market.
this is not what this thread is about ...it is about having a portfolio that can provide short and intermediate term money in market down turns and the ability to draw that income ...it is not about not looking or not utilizing that portfolio . these comments do not apply to this discussion where the question relates to spending down in down markets.
cash buffers do nothing and add little if any financial value despite what many uninformed think .
Last edited by mathjak107; 06-27-2019 at 08:42 AM..
Bear market? I can't wait for the next buying opportunity!
most of those who wish for the next opportunity don't realize that depending on their existing balance it can be like peeing in the ocean ... you manage to get a few bucks in cheap and then risk another lost decade of gains on the real money you have . be careful what you wish for , it can bite pretty hard .
a 7% drop today represents 10 years of me maxing out my 401k at catch up .... i rather not see that drop just so i can add a couple bucks . that drop has the ability to stick around pretty long ... adjusted for inflation it took 13 years to get a head from 2000 .... Adjusted for inflation, the stock market didn’t rise above its 1965 value until 1984 ,19 years later. Dividends moved sideways over 2 decades
I'd still have to sell as I needed money, but would probably withdraw significantly less.
I think the problem comes when you HAVE to withdraw $X,000 every year to meet basic expenses and $X,000 has become, say, 10% of your current assets. In an extended bear market that's a disaster and that's how people "lose all their savings" in a bear market.
Forty percent of my spending is travel and charity. I could cut back on both if needed. I hope I never have to.
As long as your annual withdrawal amount is less than your safe withdrawal amount, you don't need to change how much you withdraw just because the market is down. That might be a little hard psychologically to accept, but historically that has been the case.
Some people try to boost their annual withdrawal amount by using a variable percentage withdrawal scheme and those people will likely need to spend less during a bear market.
Once you're retired and need those annual RMDs (or more) to actually live on, you have substantial market risk if your portfolio has a significant portion in stocks or other volatile assets. And to beat inflation, in the long run you NEED some stocks for the performance boost, unless you are among the fortunate few who have enough invested that safer, fixed income but low return vehicles provide adequate yearly income.
However, with stocks in the portfolio, and having to sell some assets each year for the distributions, you are essentially REVERSE dollar cost averaging. Rather than buying more shares when the market is down, you have to SELL MORE to get the same distribution. Of course, that means you may have to exceed the recommended safe 4% per year withdrawal rate to meet expenses, which further depletes your portfolio and limits the future gains you can make even when the market recovers. It's a permanent negative impact.
There are no truly good solutions, other than having more than enough saved and invested to weather such problems. I think there are strategies to mitigate the pain, however.
One is to invest in high yield securities that have reliable payouts, which will likely continue even in bear markets. Your principal may (almost surely will!) decline, but the income will be less affected. One such category is REITs, which must pass through 90% of their earnings to shareholders. If they have stable tenants or higher grade mortgage securities (mREITs), then the income stream is likely to be stable as well. Add some other things like ETNs or MLPs to the mix, and you can get some pretty good returns with good diversification. 8% is easily doable - with a little more risk (and some extra funds to cushion that), 17% annual returns are possible. I've been collecting that much for the past year, without touching principal.
I have currently replaced 150% of my final employment income this way, which allows for a 30% decline in proceeds (say, in a bear market) without having to touch any of the principal. And this is before adding in any income from Social Security (which will suffice to pay all my housing-related costs for the foreseeable future). At some future date my wife will also get her Social Security, which will probably just get reinvested. Since I have more monthly income that needed to live on, I'm reinvesting a third of it, which will further insulate me from future asset value declines such as in a bear market.
As long as your annual withdrawal amount is less than your safe withdrawal amount, you don't need to change how much you withdraw just because the market is down. That might be a little hard psychologically to accept, but historically that has been the case.
I know- what's driven me my entire life is a fear of being old and poor so I'm a bit conservative and DS (only child) and DDIL will probably have a nice windfall after I'm gone. I'm OK with that.
Once you're retired and need those annual RMDs (or more) to actually live on, you have substantial market risk if your portfolio has a significant portion in stocks or other volatile assets. And to beat inflation, in the long run you NEED some stocks for the performance boost, unless you are among the fortunate few who have enough invested that safer, fixed income but low return vehicles provide adequate yearly income.
However, with stocks in the portfolio, and having to sell some assets each year for the distributions, you are essentially REVERSE dollar cost averaging. Rather than buying more shares when the market is down, you have to SELL MORE to get the same distribution. Of course, that means you may have to exceed the recommended safe 4% per year withdrawal rate to meet expenses, which further depletes your portfolio and limits the future gains you can make even when the market recovers. It's a permanent negative impact.
There are no truly good solutions, other than having more than enough saved and invested to weather such problems. I think there are strategies to mitigate the pain, however.
One is to invest in high yield securities that have reliable payouts, which will likely continue even in bear markets. Your principal may (almost surely will!) decline, but the income will be less affected. One such category is REITs, which must pass through 90% of their earnings to shareholders. If they have stable tenants or higher grade mortgage securities (mREITs), then the income stream is likely to be stable as well. Add some other things like ETNs or MLPs to the mix, and you can get some pretty good returns with good diversification. 8% is easily doable - with a little more risk (and some extra funds to cushion that), 17% annual returns are possible. I've been collecting that much for the past year, without touching principal.
I have currently replaced 150% of my final employment income this way, which allows for a 30% decline in proceeds (say, in a bear market) without having to touch any of the principal. And this is before adding in any income from Social Security (which will suffice to pay all my housing-related costs for the foreseeable future). At some future date my wife will also get her Social Security, which will probably just get reinvested. Since I have more monthly income that needed to live on, I'm reinvesting a third of it, which will further insulate me from future asset value declines such as in a bear market.
The rmds can just be reinvested in the same investments they were in .just because you need to draw it out does not mean you must spend it.
As I said above ,even 100% equities is not a problem because of the cushion developed in up markets ...data shows it has been just another old wives tale ......over time your balance ends up being that much higher offsetting any selling in down markets ..... out of 119 30 year cycles through everything from the Great Depression to wars and everything else , 100% equities failed to cycles more than 50/50 did ...
Going out longer 100% equities actually did better through it all
As counted by the people who do these things for a living, the worst bear market is said to have lasted 39 months. Of course effects of a bear market might be felt for some years after.
If you have a strategy in place and an allocation set up so you're not all in equities, then you should be able to use cash reserves + sell bonds/bond funds to get your living expenses covered without having to sell off equities. Having money in lower risk/less volatility type instruments to cover shorter term needs (up to 4 or 5 years) should give you the room to maneuver in a bear market. Nothing is 100% certain, but it's a reasonable approach to making sure you don't panic and sell equities in a bear market.
39 months is if you don’t account for inflation ..inflation adjusted 2000 took 13 years ,,,1964 to 1984 took almost 20 years to hit another high.. I doubt I even have 20 years left
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