Handling emotions during early retirement

ben · Post by **ben** » Mon Aug 16, 2004 9:30 pm

I have been considering how well I would cope with the market swings during FIRE and what my main "tools" would be.
My main tools:

1. well diversified portfolio in non-correlated asset classes/across currencies. This should reduce the blows my portfolio will get overall.

2. mechanical re-balancing. This should also take the emotions out of buying and selling - I am still setting the rules for this - but believe a 10% drop/gain in single asset class could be the kicker - combined with a yearly re-balancing(not sure needed though). I have found this to have a VERY calming effect on me in bad times. I see my 10 asset classes as 10 cups that have to remain evenly full. Takes away a LOT of emotion here.

3. dividend/interest income stream. With a dividend/interest stream of about 3% after (foreign withholding 15%) taxes I could live of that alone - and still be safely in the middle of my needed W/R range (see pt. 4)

4. flexible spending budget (2-5% W/R)

5. seperate "playing" money. :oops:

For all the silly bets/shorts/options Etc. Stops me from doing silly things with the base portfolio money. These have even been put in seperate account/broker (lowtrades.com $5/trade).

You guys/girls have had any thoughts on this issue? Cheers!

PS.This is cross posted at http://www.raddr-pages.com/forums/index.php boards too - as would like input from all.

Post by **ElSupremo** » Tue Aug 17, 2004 5:28 am

Greetings ben

Nice post. Great! My thoughts on #4 are along the lines of what ataloss posted a while back. When the market is good, I'll go to China

When the market is down I'll watch more TV. :roll:

Well it's a plan anyway. :wink:

unclemick · Post by **unclemick** » Tue Aug 17, 2004 9:50 am

Theorywise - I'm mostly Boglehead core and explore school with a nod to old school - ie - watching the yield on all my investments.

ala POGO - 75% balanced index - hands off Lifestrategy (has a tad int'l and asset allocation fund in it) - let the computers rebalance.

Hobby stocks are dividend oriented -----except I save a little out for your number 5.

Me and Monte Python are still looking for that one great stock - ala the Postscript in Ben Graham's Intelligent Investor (4th ed).

Emotions - well - they come and go - so far (ten years) have been succesful in following Bogle's dictum:

"DON'T JUST STAND THERE - DO NOTHING!"

unclemick · Post by **unclemick** » Tue Aug 17, 2004 9:59 am

I forgot - I guess our take out is classed as look back variable sort of keyed off yield (overall portfolio) - sometimes take some - sometimes let it ride - wouldn't look pretty on a spread sheet.

ben · Post by **ben** » Tue Aug 17, 2004 10:27 am

yes mick; I believe that both you and me like the "living of dividends/interest"-approach - it will for sure make it easier for me to spend any money at ALL when reach FIRE - and avoid just watching (public only!) TV together with ES in bad market times!

ES: I will bring some cheap Asien beers...

Bookm · Post by **Bookm** » Tue Aug 17, 2004 11:34 am

Greetings all. Ben's quote:

mechanical re-balancing. This should also take the emotions out of buying and selling - I am still setting the rules for this - but believe a 10% drop/gain in single asset class could be the kicker - combined with a yearly re-balancing(not sure needed though).

I added the bold since this is what I was curious of. I've set my rule a little different - I'll rebalance if one asset becomes either 10% more or less than any other asset. As an example, DW's 403b plan is sliced into 4 funds, 25% each. If any two funds have a 10% gap between each other, I'll rebalance.

In waiting for one asset class to drop 10%, I would suspect some investments could stray quite far from their original allocation percentage. Being that you also rebalance annually, have you ever had to pull the trigger due to the percentage drop?

However, I also recall Bernstein's study into rebalancing where he mentioned doing so when an asset's representation in one's portfolio gets a certain percentage away from it's original allocation. That would be more along the lines of your strategy than mine as well. Ironically, I've not had to rebalance yet due to my plan's percentage change since switching to threshold rebalancing. I did rebalance about 2 years ago when I was doing so based on the annual timeline.

Bookm

Alec · Post by **Alec** » Tue Aug 17, 2004 11:56 am

I believe that somewhere I heard of 5/25 rebalancing. I think it goes like this: Rebalance whenever (taking into account transaction costs and taxes) the asset class/fund increases or decreases the lesser of:

1. 5% absolute (like from 20% to 25%, or 20 to 15%), and
2. 25% relative (like from 10 to 12.5%, or 10 to 7.5%)

If the % of the asset [in your portfolio] is greater than 20%, condition #1 would be hit first, and if the % of the asset is less than 20%, condition #2 would be hit first. Here’s Rick Ferri’s rebalancing study graph:

When to Rebalance a Portfolio

There are a lot of questions surrounding the best time to rebalance a portfolio. We believe the best time to rebalance is when a portfolio need it, not according to any specific time frame. Here is a CHART that shows why rebalancing when the stock and bond mix is off by 5% or more is better than rebalancing monthly, quarterly, or annually.

- Alec

Post by **ElSupremo** » Tue Aug 17, 2004 12:14 pm

Greetings ben

I will bring some cheap Asien beers...

Hey, with that kind of edge even public TV won't be so bad. :wink:

ben · Post by **ben** » Tue Aug 17, 2004 12:45 pm

bookm: I am still re-balancing by putting new money into the cup(s) with the least in them.
Might be that I will use Alec's example which I have also seen elsewhere before.

My initial idea was actually: say 10 asset classes of $100k each at start.
When an asset class reach 110k I sell the 10k and dump into lower performing cups.

Bookm · Post by **Bookm** » Tue Aug 17, 2004 1:00 pm

Hey Alec, do you know if the return in Ferri's chart is annual? If so, you would have gained an extra 1% annually during the time period stated had you followed threshold rebalancing versus annual rebalancing, yet risk increased less that .1%. And even comparing threshold to every 2 years, you again gained 1%, yet risk increased only by about .3%. This seems contradictory to what Bernstein found. He stated that as the time between rebalancing increased to several years, risk increased as one's portfolio percentages grew further apart. Of course, Bersntein didn't actually quantify his risk measurements, IIRC.

Bookm

Alec · Post by **Alec** » Tue Aug 17, 2004 4:58 pm

Rebalancing Act by Wurts & Associates, and corresponding VD conversation, with Rick Ferri’s explanation.

That 5/25 I mentioned in the previous reply was borrowed from Larry Swedroe. When I need some more info, I always go do a search at www.diehards.org. Like this to find conversations about “rebalancing” with Rick “ferri”.

Here's Bernstein's Case Studies in Rebalancing. I'll have to read them again.

Note that in Ferri's graph the range of the standard deviation of yearly returns was only around 0.30%, so the gain in risk reduction from changing the periods of rebalancing wasn't all that great. The difference in periods look pretty negligible. I'm not sure how Bernstein quantified risk either, other than letting your equity allocation grow for a year or three made your portfolio "more risky". I think that rebalancing when asset get out of their % target areas allows for more buying low and selling high, though this requires a bit more monitoring (like 5 minutes with a spreadsheet every quarter).

- Alec

ben · Post by **ben** » Tue Aug 17, 2004 10:53 pm

alec:

I think that rebalancing when asset get out of their % target areas allows for more buying low and selling high, though this requires a bit more monitoring (like 5 minutes with a spreadsheet every quarter).

Hi Alec; yes that is also my findings - and it further gives a feeling of involment that helps on the emotional side - at least for me!