“And I follow those recommendations. So right now, my stock allocation is really low. I expect at some point I will hear from the service that ‘Hey it’s time to get back in like it did in March of 2009, the party is back on. Let’s get heavier in stocks.’”
“I think it’s important to be an active investor, particularly today because the involvement of central banks in the markets has created bubble after bubble,” Bengen said.
They’ve also created bear markets that are much longer than we’ve seen in the past. “The bear market in 2000 saw about a 50% decline in stock prices, with almost a 60% decline in 2008 and who knows what we’ll have this time around. Not a clue.
“I recommend being an active investor because we know a stock market decline is one of the most damaging things to your withdrawal rate. If you can prevent your portfolio from shrinking in a bear market, you’ve done yourself a favor,” Bengen said.
He also noted that his research has shown that rebalancing on a fixed schedule or too often can hurt a portfolio, while letting rebalancing periods run longer—even every three, four or five years—“can actually significantly add to your withdrawal rate, as much as a quarter of one percent.
“The reason for that is that bull markets are longer and average about five to six years, so if you rebalance too soon, like annually, and you do it during a bull market, you’re cutting off the returns your stocks would have earned and reducing your withdrawal rate,” he said.
Bengen also said that while investors and some advisors have adapted the notion of taking higher withdrawals in the first 10 years of retirement while investors are more active, his research shows the higher rate can severely decrease sustainable withdrawal rates over the 20 years that follow.
“Let’s say you start out with 5.5% for the first 10 years, you might end up with 3.5% for the last 20 years of retirement. And you’ll have to decide if that would really work for you or not,” Bengen said.
“It’s certainly a cruel twist of fate and math that says ‘Hey you’re young you want to spend your money and do all these things but that’s when it’s the most risky to spend most of your money,’” Luskin said.
“Yeah, it is because you’re effectively creating your own bear market,” Bengen warned.