How often should we rebalance our portfolio? – SWR Series Part 39

August 5, 2020

In the 3+ years, while working on the Safe Withdrawal Rate Series, I regularly get this question:

What’s my assumption for rebalancing the portfolio?

In the simulations throughout the entire series, I’ve always assumed that the investor rebalances the portfolio every month back to the target weights. And those target weights can be fixed, for example, 60% stocks and 40% bonds, or they can be moving targets like in a glidepath scenario (see Part 19 and Part 20).

In fact, assuming monthly rebalancing is the numerically most convenient assumption. I would never have to keep track of the various individual portfolio positions (stocks, bonds, cash, gold, etc.) over time, but only the aggregate portfolio value. If the portfolio is rebalanced back to the target weights every month I can simply track the portfolio value over time by applying the weighted asset return every month.

But there are some obstacles to rebalancing every single month:

  1. It’s might be too much work. Maybe not necessarily the trading itself but keeping track of the different accounts and calculating the aggregate stock and bond weights, potentially making adjustments for taxable accounts, tax-free and tax-deferred accounts, etc.
  2. It might involve transaction costs. Even in today’s world with zero commission trades for ETFs, you’d still have to bear the cost of the bid-ask spreads every time you trade.
  3. Even if you hold your assets in mutual funds (no explicit trading costs) there might be short-term trading restrictions prohibited you from selling and then buying (or vice versa) too frequently.
  4. It might be tax-inefficient. If an asset has appreciated too much you might have to sell more of it than your current retirement budget to bring the asset weight back to target. But that would mean you’ll have an unnecessarily high tax bill that year. Of course, this tax issue could be avoided by doing the rebalancing trades in the tax-advantaged accounts, not in the taxable brokerage accounts.

And finally and maybe most importantly, there might be a rationale for less-than-monthly rebalancing: it might have an impact on your Sequence of Return Risk. So, especially that last point piqued my interest because anything that might impact the safety of my withdrawal strategy is worth studying.

So, on the menu today are the following questions:

  • Under what conditions will less-frequent rebalancing do better or worse than monthly rebalancing and why?
  • How much of a difference would it make if we were to rebalance our portfolio less frequently?
  • Could the “right” rebalance strategy solve or at least alleviate the Sequence Risk problem?

Let’s take a look… Continue reading “How often should we rebalance our portfolio? – SWR Series Part 39”

When Can We Stop Worrying about Sequence Risk? – SWR Series Part 38

July 15, 2020

Welcome back to a new installment of the Safe Withdrawal Series! If you’re a first-time reader, please check out the main landing page of the series for recommendations about how to approach the 38-part series!

I’ve been mulling over an interesting question I keep getting:

Is there a time when we can stop worrying about Sequence Risk?

In other words, when is the worst over? When are we out of the woods, so to say? A lot of people are quick throwing around numbers like 10 years. I would normally resist giving a specific time frame. The 10-year horizon indeed has some empirical validity, but I also want to point out a big logical flaw in that calculation. Nevertheless, in today’s post, I want to present three different modeling approaches to shed light on the question. And yes, I’ll also explain what the heck that Mandelbrot title picture has to do with that! 🙂 Let’s take a look…

Continue reading “When Can We Stop Worrying about Sequence Risk? – SWR Series Part 38”

My Thoughts on the “Passive Investing Bubble”

July 1, 2020

One question that I frequently get – in the comments section, via email and in-person – is whether the continued shift away from active stock picking and into passive index investing is all going to create one big, scary bubble. Will this all end in tears? As a member of the FIRE community and a lifelong true believer in passive indexing, it definitely piqued my interest when I heard that I’m (partially) responsible for increasing market inefficiencies and dislocations and potentially even a bubble.

The issue of the “passive investing bubble” bubbles up, so to say, with great regularity. An example is the August 2019 Bloomberg piece “The Big Short’s Michael Burry Sees a Bubble in Passive Investing” likening the current state of the equity market to the crazy CDO market right before the 2008/9 meltdown. Well, that definitely got everyone’s attention! Especially during the slow months in the summer when there isn’t much else going on and financial journalists have to come up with some eye-catching headline!

Long story short, I find that this a bunch of mumbo-jumbo. And instead of replying via email about 10 times a year I just decided to write a blog post about this topic, so I can point to this post in the future if there are people still wondering about my views. That saves me a lot of time and I get to distribute my view to a larger audience, just in case other readers had this same question. And I get into the details a bit more than in a short email reply.

So, why am I not too worried about this shift to passive indexing? Let’s take a look…

Continue reading “My Thoughts on the “Passive Investing Bubble””

Passive income through option writing: Part 5 – A 2018-2020 backtest: Guest Post by “Spintwig” (plus a quick update on last week’s volatility)

June 17, 2020

Welcome back to another post centered around Put Option Writing. Today we got a real treat because my blogging buddy, fellow option trader and frequent commenter “Spintwig” offered to do a guest post to perform an independent review of my trading strategy. If you don’t know Spintwig, he also retired in 2018 (at age 30!!!) from a career in IT and now writes about FIRE and options strategies at his blog. He does a lot of interesting and important work, including careful and comprehensive back-tests of different option trading strategies, i.e., different underlying assets, different Deltas, different horizons (days to expiration), etc. I highly recommend you check out his work if you’re interested in option writing!

Oh, and following the guest post, I’ll also give a quick update on how my portfolio did during the crazy,  scary volatility last week! Stay tuned!

Over to you Mr. Spintwig…


Thank you BigERN for the opportunity to peer review your options strategy and publically share the results with you and your readers. I’ve relied on your research in my own journey to and through FIRE and I’m happy to be able to add to the discussion and body of research.

A few years ago I stumbled upon BigERN’s blog as I was researching safe-withdrawal-rate topics. Among the material was a novel idea: selling put options on the S&P 500 index could mitigate sequence-of-return risk.

The concept was straightforward but I wanted to know if there was an optimal approach or if it could be applied to other indices and have similar results. Would it be advantageous to replace a traditional buy-and-hold portfolio with an options trading strategy? Unfortunately, there were no definitive or trustworthy answers to this question on the internet so I set out to do my own research and publish what I find. Continue reading “Passive income through option writing: Part 5 – A 2018-2020 backtest: Guest Post by “Spintwig” (plus a quick update on last week’s volatility)”

Passive income through option writing: Part 4 – Surviving a Bear Market!

June 10, 2020

Welcome back to another post dealing with an investing strategy that’s central to our own retirement strategy here in the ERN household. Just a bit of background, about 35% of our financial net worth is currently invested in this strategy. But it accounts for more than 50% of our taxable assets, so for our early retirement cash flow planning, this is really serious business. This puts food on the table in the ERN household!

If you’re not familiar with this strategy, I’ve written about the topic of option writing to generate (retirement) income in general and my personal approach here:

The first three links are more about the general philosophy and the last link, Part 3, is about how I’ve been running the strategy most recently. The strategy involves writing (=selling/shorting) put options on the S&P 500 index with a little bit of leverage. And one can also keep the majority of the account in income-producing assets (bond funds, preferred stocks) to generate additional cash flow. Sweet!

In light of the recent market volatility, of course, it would be a good time to do an update on my strategy because I’ve gotten a lot of questions on how that strategy has been holding up during the bear market. Did it blow up? You are all a bunch of rubbernecks, aren’t you? 🙂

Long story short, my strategy did pretty well so far this year. Not just despite but even because of the volatility spike. Let’s take a look…

Continue reading “Passive income through option writing: Part 4 – Surviving a Bear Market!”

Are we in another Bull Market now?

May 11, 2020

The stock market is still well below its February all-time-high, but it’s holding up remarkably well considering how poorly the economy is doing right now:

  • Double-digit unemployment,
  • 20+ million jobs lost according to the BLS payroll employment data,
  • 30+ million jobs lost according to the sum of weekly unemployment claims since March,
  • -4.8% GDP growth in the first quarter (annualized rate) and possibly a 10% drop quarter-on-quarter in Q3, which would be reported as a 34% drop annualized!
  • And a whole host of other economic indicators that look so bad, you’d have to go back to the Great Depression to find similar readings

Actually, “holding up” is a bit of an understatement when you look at the stock market as of the Friday, May 8 close:

  • The S&P 500 TR index rallied 31% since the March 23 low!
  • We’ve recovered more than half of the drop peak to trough!
  • Since April 8, we’re no longer 20% below the recent all-time-high, which is often quoted as the cutoff for the Bear Market!

2020 Case Study
The 2020 Bear Market up to May 8. Did a new Bull Market start on 3/24?

Does that mean the Bear market is over now? I certainly hope so! Whether the Bear Market is over and a new Bull Market might have started already obviously depends on the definition of Bull vs. Bear. What is that definition of Bull vs. Bear anyway? Different people have different definitions, some more sensible than others. And it gets more complicated: even if we do agree on a sensible definition, there could still be uncertainty over what’s the state of the market right now because some criteria cannot designate the state of the world in real-time but only after the fact. There’s a confirmation lag! So, we could be in a sort of a bull/bear-limbo state right now! How is that possible???

So many questions! Let’s take a look at how I think about Bull vs. Bear…

Continue reading “Are we in another Bull Market now?”

Three Equity Investing Styles that did OK in 2020

April 22, 2020

Recently, I wrote a post endorsing the simple Bogleheads approach: invest in passive index ETFs. Everything else is just mumbo-jumbo, window-dressing and people not understanding the (mostly) efficient market nature of the stock market. In other words…

Simple (indexing) beats complicated active investing

Well, after unloading on some of the fancy complicated investing styles, I just like to point out the select few of them that indeed performed relatively well in 2020. At least better than the index. So, for the record, I’d also like to write about three examples where…

Complicated beats simple index investing

And most importantly, I’m not pulling some “Monday Morning Quarterback” nonsense telling you that if you could have sold your airline stocks in February and replaced them with stocks for video conferencing makers you could have done really well. Well, duh, very few people other than U.S. Senators had that kind of inside information back in February! Rather, I want to write about some of the deviations from simple indexing that were mentioned here on the blog in my posts and/or in the comments. Before the crisis!

Let’s take a look:

Continue reading “Three Equity Investing Styles that did OK in 2020”

COVID-19: Some Empirical Observations and Reasons for Optimism

April 14, 2020

Welcome back to a new post! I hope you all had a happy and safe Easter Weekend! Last week I published a post wondering about how the stock market can be down “only” about 20% in the first quarter when we’re facing a deadly virus, a wide-ranging shutdown of the economy and no clear idea when we can reopen again. We are expecting a deep recession and macro data significantly worse than during the Global Financial Crisis.

If you listen to the media talking heads it’s all doom and gloom, so why is the stock market holding up so well? Why isn’t the stock market down 55% as in 2009 or even 80% as in 1932? Does the stock market “know” something that even your trusted news anchor doesn’t realize yet?

I updated some of the charts I posted a few weeks ago and gathered some additional data as well. And it all looks much better than the breathless and scary headlines in the media. Maybe that’s why the stock market looks relatively solid – under the circumstances, at least.

Let’s take a look… Continue reading “COVID-19: Some Empirical Observations and Reasons for Optimism”

Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)

April 8, 2020

Wow, we made it through the first quarter of 2020. Seemed like an eternity! Remember January 2020? Suleimani Drone strike and an almost-war with Iran? Australian Wildfires? February? The Super Bowl, the impeachment trial? Even early March: Super Tuesday (March 3). It all feels like years ago! All those daily 100-point S&P 500 and 1,000-point Dow Jones moves took a toll. They make you age in dog years, I guess!

Time to look back and reflect. Let’s take a look at a few lessons I learned… Continue reading “Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)”

Million Dollar FIRE Summit: My interview with Liam Austin on the Bear Market and what it means for the FIRE community

April 4, 2020

Are you worried about how the current bear market will affect your financial situation? I had the pleasure of chatting with Liam Austin of Entrepreneurs HQ about the FIRE community and what the current market conditions mean for folks in the FIRE movement.

I’ll be sharing my thoughts at the Million Dollar FIRE Summit (Special Market Crash Edition), on Thursday, April 9. It’s a free, virtual event, meaning you can tune in from anywhere. So, if you like to hear from me and four other FIRE/Personal Finance bloggers who I really like:

… then head to

—> This link <—

… and find out more.

Again, this is a free event but it does require registration. I don’t make any money from this event. I simply chatted with Liam because I feel passionate about personal finance.

I hope to see you there!

Stay safe



PS: Some additional resources and posts I mentioned in the interview:

Continue reading “Million Dollar FIRE Summit: My interview with Liam Austin on the Bear Market and what it means for the FIRE community”