You Can’t Leave It Up To How You Feel

Good Morning Relaxing Retirement Member,

You’ve built your foundation and you’re now there!

You’ve determined just how dependent you are on your Retirement Bucket™, and you’ve forecasted out how dependent you are each year going forward (at least the next five years).

You’ve determined the investment rate of return you must earn in order to have your Retirement Bucket™ remain intact for the rest of your life despite your withdrawals and inflation.

And, you have strategically allocated your Retirement Bucket™ to capture the returns of a diversified and strategic mix of asset classes while exposing you to an appropriate level of risk and volatility.

The next step in The Relaxing Retirement Formula™, in order to ensure a consistent level of risk exposure, is Retirement Bucket Rebalancing.

Long-term academic research of markets has demonstrated that out of balance investment portfolios, with asset classes that have grown beyond their target allocations, take on inappropriate risk exposures.

Given this, on a very strict timetable, OBJECTIVELY evaluate your current vs. your target Retirement Bucket™ allocation to determine if there is a need for strategic and disciplined Retirement Bucket Rebalancing.  

OBJECTIVE vs. Subjective Evaluation

Note that I used capital letters for the word OBJECTIVELY.   The reason for this is that we have to remove our subjective emotions when investing.

It’s challenging to do, but it’s imperative if you want to be successful.

You can’t leave it up to how you feel on a given day.

For a recent example, let’s contrast how you felt on two different days this year which were only 10 market days apart:

  • 2,873: The price of the S&P 500 Index at the close on Friday, January 26th
  • 2,581: The price of the S&P 500 Index at the close on Friday, February 8th

If January 26th was your pre-scheduled day to rebalance your Retirement Bucket™, how committed would you have been if you subjectively evaluated everything vs. objectively?

If you are like most Americans, you would have felt pretty confident on that day given that prices had risen 7.5% just 26 days into the new year.  You likely would have chosen to wait a little while to trim back some of your equity positions which had grown beyond your targeted risk range because the consensus “feeling” was that there was more growth to come!

How about 10 business days later on February 8th after prices had fallen 10.1% since January 29th?

If your objective evaluation pointed to the need to purchase more equities in certain asset classes in order to bring your levels up to your target range, how enthusiastic would you be to buy more of something whose price had just fallen 10+% in 10 days?

Emotionally and subjectively, you’d say “no way”.

“Not only do I not want to rebalance back into equities, I want to get out of them completely!  Everywhere I turn they’re saying this is just the beginning of another big correction.  I knew it was too good to be true!”

This is why it is so critical to remain objective in both scenarios.

Retirement Bucket Rebalancing Example

To keep it very simple, let’s assume that you’ve followed each step in The Relaxing Retirement Formula™ so far, and your carefully calculated  investment mix is to allocate 30% to fixed income and 70% to equity investments. (We don’t even need to get into specific investments yet to understand the principle.  Let’s simply stick with a basic 30%/70% allocation without factoring in whether that’s a proper allocation for you or not.)

If this was true for you, and you hadn’t rebalanced in four months or so, it’s highly likely that if you took a snapshot of your allocation on January 26th (see above), your mix likely would have shifted to look more like 28% fixed income and 72% equity investments because equity prices (in general) grew.

If January 26th was your pre-scheduled date to evaluate and rebalance (if necessary), what would be the objective action to take?

The objective answer is to rebalance back to your target allocation of 30%/70%, which requires you to trim back and sell some of your equity positions, i.e. sell “high.”

On the flip side, if your scheduled rebalance date was February 8th, after prices had just fallen 10% in ten days, your objective evaluation would likely have told you to add more to your equity positions, i.e. buy “low.”

The bottom line is two-fold:

First, remain objective during good times and bad, as hard as that is during heightened market volatility.  Emotional investors never win.

And, second, successful investing in your retirement years, when you’re dependent on your Retirement Bucket™ to provide you with monthly cash flow to cover your spending needs, is very different than investing during your “working” years.

It requires a carefully thought out and disciplined “system”.  Random movement for the sake of movement is a recipe for disaster.

Criteria and Guidelines for Rebalancing

Now that we’ve outlined Retirement Bucket™ Rebalancing, the next step is to establish your criteria and guidelines for rebalancing.

There are three major areas to consider which we will explore next week.

Stay tuned.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)