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Algorithmic Glide Paths or AA Changes

Chris B · 2021-12-03T15:01:16Z

The issue we face is simply a tradeoff between (a) having too conservative an AA to last 30-40 years, and (b) avoiding damage from a SORR event in the first decade of early retirement. According to the chart ata 20% or greater correction happens on average every 4 years, and 30% or greater happens on average every 9 years. We should know it's coming. What if instead of setting a static AA or planning a glide path that is indifferent to the presence or absence of an actual SORR event, we instead start retirement with a very conservative AA, like 50/50 or 40/60, and wait for it? Then, when a pre-determined SORR threshold is reached, such as for example a 30% drop from the last high in the S&P500, we switch to an aggressive AA like 90/10 or 85/15 and hold that AA for the remainder of our retirement. The idea is we want to position ourselves to minimize damage from the eventual SORR event, but once the SORR event is actually occurring, it has historically been the safest time to pivot to an equities-heavy AA. This is a refinement of the glide path idea because the AA changes in response to an actual event, not a schedule. The AA changes once in response to information available at that time, and we favorably adapt to the often-fatal first SORR event of early retirement. ----- Imaginary example sequence of events: 1) Begin a 40 year retirement in January 2022 with 25x and a 40/60 stock/cash allocation. Our IPS says switch to a 90/10 AA if the S&P 500 drops 30% from its most recent high. This is our trigger event. (fill in your own preferred details or pick a mix of cash, bonds, and gold) 2) In September 2024, the stock market drops 30% but our portfolio is only down (40% * 30% =) 12%. We switch to a 90/10 AA as our IPS requires. 3) We didn't time it perfectly. The stock market has another 10% drop to go, costing our portfolio another 9% (total damage now -21%). We are still much better off than we would have been had we started with a 90/10 AA and suffered a 36% loss. We are now more aggressively allocated than if we were on a 10 year glide path though. 4) In June 2028 the market again reaches its previous highs. We took most of the downswing with a conservative AA and rode the recovery with an aggressive AA. Our portfolio has grown and we successfully dodged that critical first SORR event of early retirement. Because 40% drops are usually followed by long bull markets, we have a decade of above-average returns ahead of us which we capture in our aggressive AA, outrunning SORR events in the distant future. ------ I think this idea is worth looking into. Glidepaths allow for slightly higher WRs because they sometimes approximate the process I'm describing, slightly reducing damage from early SORR events and going slightly more aggressive as they occur. By tying the AA change directly to the actual event we are worried about, I hypothesize an algorithmic AA approach could save the 4% rule. ERN's SWR spreadsheet is not set up to simulate algorithmic AA changes like this, but if it was we could optimize the variables like starting AA, trigger size, and ending AA. I gave it a try for a couple of hours, but reverse-engineering other people's excel formulas is hard! Someone with more familiarity might knock it out much faster. Any takers?

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Safe Withdrawal Rates

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Chris B

Topic starter

Jan 20, 2022 7:00 am

(@chris-b)

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Joined: 5 years ago

SMH... looks like I had the original and the version I was editing up at the same time and somehow pointed a link to the original file. That's why it worked on my side but not yours.

Corrected.

EarlyRetirementNow-SWR-Toolbox-v20-algorithmic-experiments_2.xlsx

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earlyretirementnow.com

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Posts: 349

Feb 09, 2022 11:53 am

Reply to

Chris B

@chris-b I don't really get what exactly you're doing. In my sheet, the asset allocation is "defensive" for the entire history.

I strongly advise against "hacking" the Google sheet like that. There are two "custom series" that you can populate to simulate active asset allocation strategies. See columns R+S in tab "StockBond Returns". If you want to simulate your lookback strategy (momentum, I guess?) first, then enter the real returns in one of those custom series columns, it would help a lot!

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GregoryStellar

Jan 22, 2022 11:29 pm

(@gregorystellar)

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Joined: 4 years ago

All these are forecasts and hypotheses! It is impossible to predict when the recession and crisis will come! you need to lay a budget to reduce the negative effects of the crisis! As in my surgical practice cosmetology clinic, we always have a cash reserve for for all sorts of unforeseen circumstances!

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Chris B

(@chris-b)

Joined: 5 years ago

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Posts: 38

Jan 24, 2022 10:32 am

Reply to

GregoryStellar

@gregorystellar are you thinking along these lines? In general, yes, we should keep in mind that we are looking at historical probabilities, which themselves have changed over time, and which can be expected to change in the future. These are just one of several inputs into a plan.

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Update (12/31/2022):

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Algorithmic Glide Paths or AA Changes

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