A Strategy For Buying Into A Bear Market

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Buying into a bear market is a tricky thing, and the volatility we’ve experienced this year is enough to test anyone’s nerves.  

We don’t want to be market timers, but we also don’t want to miss an opportunity to buy “on a dip”.  We know we shouldn’t try to time the market, but we also know we should have a strategy for rebalancing our portfolios. Today, I’ll share a strategy I’ve developed to address the market volatility, along with some thoughts on the following questions:

  • Should we have a strategy for buying into a bear market? 
  • When should we rebalance, and should it change in the midst of volatility?
  • What should we be doing to manage our investments during a time of market uncertainty?

In short, how should we manage our portfolios given the volatility in the current market?  I’ve developed a strategy I’m calling “The 5% Rebalancing Strategy” which I’ve conceived based on my experience in 2008 and implemented during the volatility of 2020.  I trust it will be worthy of consideration for those of you who struggle with how, when, and if you should be buying into a bear market.  I’ll answer the three questions raised above in specific bullet sections below.

Buying into a bear is tricky. How should we be managing our investments during a time of market uncertainty? Click To Tweet

A Strategy For Buying Into A Bear Market

Back in 2008, I shot all of my “Dry Powder” too early in the bear market.  Trying to catch that falling knife drew blood as the market continued to fall, but fortunately, the wound healed in time. More importantly, I learned a lesson. With the bear market and volatility we’re facing now, I developed a new approach.  Below, I share a strategy for buying into the bear that also addresses questions on when and how to rebalance during a volatile market.  

While the bear has retreated a bit from his rampage in March 2020, he’s still lingering.  Best to have a plan before he comes with his next attack.

Let me state upfront my sincere compassion for folks who are struggling today.  There are millions of people impacted by the Coronavirus, and many are on the brink of financial ruin.  Add the 300k+ deaths globally, and it’s a difficult time to write about financial planning.  As I wrote in “When Money Doesn’t Matter”, it seems insensitive to write about financial planning in times such as these.

And yet, we still have an obligation to manage our portfolios.

Should I ignore the topic, or is there value in addressing how we should handle our investments in spite of the suffering?  Suffice it to say, I’m trying to balance two very delicate issues, and I trust you’ll take this post in the sensitive manner in which it is intended.  

We’re in a time of above-average volatility, and it’s an appropriate time to discuss a strategy for buying into a bear market.

If you're struggling with buying into a bear market, today's post will be of interest. Click To Tweet

Q1:  Should we have a strategy for buying into a bear market? 

Yes.  Whether we realize it or not, we all have a strategy for dealing with a bear.  We either ignore it and let things ride, or we take a more hands-on approach to take whatever advantage we can from the realities of a volatile market.  In a worst-case, some panic and sell. No one should retire without a strategy for how they’re going to manage volatility,  a strategy that should be prepared before the volatility strikes.  I’ve written several previous posts on how to manage a bear market, linked below for your reference:

Today’s post is different.


Today I’ll be sharing a strategy I implementing for the first time in March 2020.  It complements the previous bear market posts with a specific tactical approach that automates the rebalancing process in the midst of market volatility.  Ironically, I saw the quote to the left from Vanguard’s CEO as I was doing my final edit on this post.  It’s a positive reinforcement to have Vanguard cite the importance of rebalancing, and it strengthens my opinion that this strategy makes sense for certain situations.

Disclaimer:  This strategy is not intended as a recommendation.  Rather, I am simply sharing my decision on how I’ve decided to approach market volatility.  I don’t know your situation, and my strategy may not be appropriate for you.  Please consider this strategy as simply a case study rather than a specific recommendation for you.

 


The 5% Rebalancing Strategy

When the market started dropping in February, I started paying close attention.  Typically, I don’t look at our financials very often. I only update our Net Worth once a year. I run through our Annual Financial Checklist every January, and I automate our monthly paycheck.  I’ll refill Bucket 1 several times throughout the year, and do occasional spot checks on our Asset Allocation.  Beyond that, I prefer to focus on the more enjoyable things in life.  

When the bear came out of the woods earlier this year, however, I implemented a plan I’d been thinking about for some time.  The actions I’ve taken are summarized in the following chart, where the red circles show the dates I executed trades and was buying into a bear market, selling cash/bonds to fund the transaction.  I’ll explain my strategy below:

As you can see, I’ve been buying consistently during the downturn, and have stopped buying as the market stabilized.  What was my process for deciding when to pull the trigger?

With the 5% Rebalancing Strategy, I simply move 1-2% of my portfolio from cash/bonds into stocks with each 5% downward move in the S&P 500. Click To Tweet

The strategy is simple.  With every 5% move down in the market, I rebalance an amount equal to 1-2% of my portfolio from cash/bonds into stocks. The simplicity of the above strategy appeals to me in several ways, as summarized in the benefits listed below.

The Four Benefits of the 5% Rebalancing Strategy

  1. It automates purchasing decisions, removing emotion from action.
  2. It automatically rebalances when stock allocation drops below target.
  3. It provides a system to “buy low”.
  4. It avoids shooting all “dry powder” too early in the bear.

Let’s look at each one of the above points in detail:


Benefit #1:  It Automates The Purchasing Decision

First, I must state that I started this strategy with an excess of cash/bonds.  As I shared in my Annual Financial Update in January 2020, I was 8% “over-weight” in cash/bonds at year-end and looking to shift some money into equities during the year. The cash in Bucket 1 is excluded from this strategy.  If you’re starting in a position where you’re under-weight equities, this strategy could be worth your consideration. The advantage of this strategy is that it automatically establishes triggers for when I should be buying into a bear market.

“If the stock index of choice drops by 5%, I automatically shift 1-2% from cash/bonds into equities.”

Given my objective of increasing stock holdings, I established the 5% Rebalancing Strategy as my approach.  As the bear came out of the woods, I waited patiently and began buying into a bear market via tranches when each new 5% downward move was hit.  Initially, I made smaller moves, with the first move of 0.3% of my portfolio executed on Feb 25th, followed by successive tranches as shown in the chart above. 

As the bear deepened, I increased my tranches to 1.5% – 2% of my portfolio, culminating with a 2% rebalance from cash/bonds into stocks on March 23rd, the low point of the market to date.

Rather than being anxious during the bear, I simply took a screenshot of the market data on the date of my latest trade and waited for a 5% further decline.  I actually began looking forward to further declines and the opportunity to execute my next tranche.

Having a plan to automate my purchases made the ability of buying into a bear market stress-free, and took the emotion out of the situation.  Benefit #1 achieved.


Benefit #2: It Automatically Rebalances Stock Allocation

The second question I raised in the introduction was this:

  • Q2:  When should we rebalance, and should it change in the midst of volatility?

At a minimum, I develop a rebalancing strategy once a year when I do my Year-End Review.  However, I do tend to increase my frequency when the markets get volatile. When the stock market drops quickly, your asset allocation follows suit.  If stock prices drop while bonds/cash hold steady, you’ll see your stock allocation declining as a % of your asset allocation. Depending on your sensitivity to asset allocation, more frequent rebalancing in the midst of high volatility may make sense for you.

An example is in order. The following Asset Allocation Impact simulation uses actual VTSAX data as a proxy for the S&P 500, and demonstrates the impact of falling equity prices on your asset allocation.

A 5% decrease in equity value shifts asset allocation by 1% (assuming a 50/50 portfolio):

Assumptions:  $1M portfolio, 50% Equity (VTSAX), 50% Cash/Bonds.  Cash/Bonds assumed to be stable for simplicity.

If we assume a 1% rebalancing from cash/bonds to stocks is executed per the 5% Rebalancing Strategy guidelines, you can see the Asset Allocation “corrects” from 51/49 to 50/50, maintaining our targeted asset allocation during the bear market:

As I shared in my Annual Financial Update post, it’s critical that retirees establish a process for rebalancing, a point which is best illustrated with this chart from M. Kitces:

the importance of rebalancing your portfolio
Source: M. Kitces

As the bear market continued, I stayed true to the new strategy and executed rebalancing trades throughout the drop as previously shown.  Here’s a chart I made to explain the strategy on my Twitter Account:



By the depth of the bear on March 24th, our hypothetical VTSAX account (after rebalancing at each 5% tranche) would be as follows:

By looking at the cash/bonds line, which drops from $500,000 to $422,000 you can see we’ve rebalanced a total of $78,000 and increased our shares in VTSAX from 6,274 to 7,540 shares.  In spite of those moves, we’re still holding close to our 50/50 target.  Had we not done the rebalancing, our equity allocation would have fallen to 41%.

Thus far, we’ve concluded that we should have a strategy for managing a bear market, and we should have a process to ensure we rebalance when appropriate.  The 5% Rebalancing Strategy accomplishes both objectives, along with the following advantages:


Benefit #3: It provides a system to “buy low”.

Using the 5% Rebalancing Strategy forces you to continue to buy as the market declines.  It eliminates (most of) the anxiety of the bear, and ensures you continue to buy lower and lower as the market declines.  The interesting thing is what happens when the market rebounds.  I updated my VTSAX scenario in late April for the ChooseFI podcast, and it gives a glimpse of what the impact will be if/when the market recovers:

As the market rebounds, you begin to see the value of “buying low”.  The shares you purchased during the decline start making gains, in spite of the fact that the price of VTSAX is still lower than your starting point.   In fact, the $20k (2% of $1M) that you purchased on 3/23 is now up 26%, from $54.49 to $68.92/share. At some point in the recovery, you’d begin to rebalance back toward cash as your equity allocation exceeded your target.  I’ve set a range of 60% maximum for my “ceiling” on when I’ll start selling the equities and moving back into cash/bonds, with the plan on rebalancing in either direction (as dictated by the market) to maintain my targeted range between 50 – 60% in stocks.

How does it impact performance?

If we compare the 5% Rebalancing Strategy to the “Do Nothing” strategy over the same timeframe, you’ll see the action has resulted in a 1% improvement in portfolio performance. 

While the “market” (VTSAX) has declined 13.5%, a 50/50 beginning portfolio would have declined 6.8% if you’d done nothing.  By implementing the 5% Rebalancing Strategy, your portfolio would have declined only 5.8% and your period ending net worth would be $9,231 higher, at $941,657.  (Again, assuming no movement in cash/bonds to simplify the example).


Benefit #4: It avoids shooting all “dry powder” too early in the bear.

As mentioned earlier, I bought too early in the 2008 bear. After years of a bull market, a “small” move downward can feel bigger than it really is, and it’s easy to get trigger happy about buying some stocks too early.  Knowing that bears can drive a market down 30 – 50%, it’s better to have a system that automates your decision on when to buy-in.  If we assume a 50% decline, the 5% Rebalancing Strategy would execute rebalancing trades throughout, assuming your targets were established based on the amount of dry powder you were hoping to invest.  Rather than invest too much too early, your moves are automatically triggered by each successive 5% downturn.

In fairness, it’s also possible that the strategy will keep you from buying all that you “should have” with the wisdom of hindsight.  Since it limits your trades to 1-2% of your net worth per 5% move, it avoids the temptation of “buying big” when you “feel” the market is near its bottom.  To me, the tradeoff of having a system in place is worth the cost of potentially retaining too much dry powder when the market rebounds.  

Obviously, each individual could modify the 1-2% trade amount (as well as the 5% trigger movement) to suit the strategy to their own risk profile.  A higher trade amount per trigger would burn through the dry powder more quickly, though it could also cause your asset allocation to deviate beyond your targeted range.  I chose the “1% per 5%” target based on my objective of not having my stock allocation fall below 50%, and it achieved that objective.  I wasn’t trying to time the market, I was simply seeking a more strategic approach to rebalancing during a time of increased market volatility.


This brings us to the third question we asked at the beginning of this post:

Q3: What should we be doing to manage our investments during a time of market uncertainty?

Each of us must decide for ourselves how we want to manage our investments during market volatility.  What’s important is that you have a strategy in place prior to the bear’s arrival.  As long as the system you’ve chosen is consistent with your investment philosophy and risk tolerance, it will prevent you from making poor decisions when things start getting crazy.


Potential Improvements – Compliments of The Money Guy Show

I’ve been a big fan of The Money Guy podcast since well before my days of writing this blog.  I was honored to appear in a Money Guy YouTube episode (The Secrets of Successful Retirement Savers), and consider Brian Preston and Bo Hanson as friends.  I was talking with Brian recently and mentioned my 5% Rebalancing Strategy to him.  We had a great chat about the strategy, and he provided some professional insight worth sharing:

  • The strategy could be especially useful for someone who is seeking to invest a lump sum (e.g., bonus windfall money), but is concerned about investing it “all at once”.  While Dollar Cost Averaging (DCA) is a viable alternative, the 5% Rebalancing Strategy could be used as an “accelerator” in conjunction with DCA.  Essentially, you’d establish your automatic investment schedule, then accelerate as the triggers in this strategy are hit.   Great thought, Brian.
  • If you prefer to avoid actively monitoring your portfolio for the initial tranche, you could wait to implement it until a bear market (20% decline) has been announced.  A big advantage of the strategy is how it takes advantage of a limited window of opportunity, and this advantage could still be leveraged with adjustments to the starting point (for reference, I started with the first 5% decline in the market).  

I’m pleased that I asked Brian for his thoughts, his professional input is credible.  It’s always possible to improve on a strategy by brainstorming with professionals in a given field (note, I’ll do the same with you at the end of this post).


Personally, I’m pleased with the results thus far with the 5% Rebalancing Strategy.  It’s early in the game and I’ll continue to monitor performance.  If the market continues to recover, I’ll implement a similar strategy to begin selling 1% tranches of stocks as my asset allocation increases beyond the 60% stock target.  If the market takes a turn for the worse, I’ll continue following my strategy, using a 5% decline from the March 23rd bottom as my next rebalancing tranche.  Even Big ERN is trying to figure out if the Bear is over and the Bull has returned – the nice thing about the 5% Rebalancing Strategy is that it should work well regardless.

It’s been a useful strategy for me.  I thought it worthy of sharing with you.

Further Reading:


Conclusion

Implementing the “5% Rebalancing Strategy” has provided me a systemic approach for buying into a bear market. By rebalancing 1% of my portfolio for every 5% correction in the stock market, I’ve been maintaining a steady asset allocation, buying low, and strategically putting my dry powder to work as the market declined.  As the market has begun to recover, I’m seeing benefits from buying stocks while they were on sale, with a 26% return achieved within one month on the shares purchased at the depths of the bear.  Increasing my rebalancing frequency in the midst of market volatility has achieved my objectives while improving my overall return compared to the “Do Nothing” approach.

Should the market continue to improve, the strategy will be complemented with a similar, but opposite rebalancing approach of selling shares equal to 1% of my portfolio for every 5% improvement in the market (triggered when my stock allocation hits 60%).  In the meantime, I’m continuing to count on the bucket strategy to provide cash liquidity to meet my spending needs, while avoiding selling equities in the midst of the bear market.  In all likelihood, the initial “sell” tranches on the rebound will be used to refill the cash I’ve pulled from Bucket 1 through the first four months of the year.  If the market fall resumes, I’ll look to continue drawing down on my three years’ worth of reserves in Bucket 1, potentially refilling it with some bond or gold sales later in 2020 or 2021 if necessary.

Your Turn:  Did you have a strategy for managing the bear that appeared earlier this year?  If so, what was your approach?  What are your thoughts regarding the 5% Rebalancing Strategy?  How could we improve it, together?  Let’s chat in the comments…

48 comments

  1. I use 5% rebalancing bands for the entire Portfolio. When stocks went down to 45%, I bought enough to get back to 50%. I have a 50/50 allocation and rebalanced twice into VTSAX(Vanguard total US market) and into bonds(VBTLX) from equities once. I have also recovered a little more than just staying the course. This was part of my IPS(Investment Policy Statement) that I prepared long before this bear market. Your method makes the adjustments after smaller moves in the overall portfolio, but I can see the advantages. Thanks for sharing your thoughts on the subject of rebalancing.

    1. Dan, similar strategy, amazing minds. Yours is absolutely a valid approach, I decided to make the adjustment to the smaller moves to take advantage of the speed of the March decline. It sounds like your strategy also triggered a rebalancing move (two, in fact), so I suspect the net effect between the two approaches is minimal. Interesting that we landed, independently, on very similar strategies.

  2. Brilliant! Just when I think I know it all I come here and find out I don’t. Mrs. Groovy and I bought several tranches of stock index funds during the current crisis, but our approach was rather ham-fisted. “Hey, DOW down 800 points today. Let’s exchange $10,000 worth of bonds for stocks.” In other words, we were acting like “pinball wizards”–playing by our sense of smell. Thinks have worked out so far, but I like your more learned and mindful approach better. Bravo, my friend.

  3. Fritz, I really like this idea of a systematic approach to rebalancing and buying into a bear market. I want to seriously look into this and figure out what percent figure works best for our situation. As for our 401-k’s we have continued “as is”, dollar cost averaging as the market declined. This worked tremendously in 2008-2009. As far as our non-retirement accounts I did go in on 3/17 and bought odd numbers of shares of individual stocks to round up the share numbers to an even “100” number. I guess I’m just kind of OCD in that respect! 😊 But, I’m happy to say they are all up considerably since I bought them. As I get closer to my July 2 retirement date I am even more confident that the bucket system I have in place is going to work like a charm. And today’s post has given me some new ideas to make sure I keep things on the right track. BTW my wife and I are both reading your new book. Keep up the good work!

    1. Dale, as long as you’re still contributing (working), I think the Dollar Cost Averaging approach is absolutely sound. Glad the post has given you something to think about for how to handle the bear after you cross The Starting Line on July 2nd. Only 6 weeks to go, exciting time for you! And, thanks for reading my book, perfect timing for you and your wife!

  4. Hi Fritz, great post and I’ve been doing some rebalancing as well, although using more of an “all the dry powder at once” approach. I like your method and may try it next time instead.

    Question: are you using a similar 5% rebalancing strategy as the market is moving back up (thus selling 1-2% of your equities for each 5% market rise), or is this solely your approach as the market goes down?

    1. Casey, as I stated in the post, I’m going to wait until my equities hit a 60% allocation before initiating my rebalancing in the opposite direction on the rebound, at which point I’ll rebalance 1% from stocks into bonds (or, more likely, cash to refill Bucket 1). Once triggered, I’ll establish the same 5% threshold for any moves up from there.

  5. Your approach is beautiful because of it’s simplicity . I did deploy my dry powder a tad earlier than I liked this time around and it causes unnecessary remorse. Simple Systems usually work effectively in almost all areas of life and I will use this approach going forward. Great article!

  6. Great, timely post. I’ve taken the “ride it out strategy” but this has inspired me to pay a little more attention and taken action when appropriate.

    One favor I’d like to ask: Could you add a “PRINT” feature to your posts? As a dinosaur (who can read) I find reading something this long tough to absorb. AND, I have many of your posts printed and stored in my $$Money$$ Notebook, for future reference. A print feature would make it a little more print friendly for those of us who still have some old school habits.

    Thanks, and keep up the good work!

    1. Lou, your wish is my command. I had to do some research on how to add PRINT functionality, but you’ll now find it on the top right of my posts! Let me know if any issues, you’ve been the first to ask for it, but it’s a nice feature to have available for all. Thanks for storing my posts. And, for the record, there’s nothing wrong with those old school habits!

      1. Thank you! Perfect! Now if I could only get my husband to jump this quickly when I make a request. Lol

  7. Fritz,
    I think that your dynamic re-balancing approach is clever and simple to implement. Using the same approach during a bull market rebound would protect you from the “dead cat bounce.”

    1. I agree on the potential to avoid the “dead cat bounce”, but only if the bounce is high enough to push my equity allocation to 60% (my target for implementing the reverse strategy of selling stocks in tranches). Clever and simple, couldn’t ask for a better compliment than that!

      1. I also love clever and simple. and your first cut analysis shows it produces results, at least in the short term. But I have to ask – why the different approaches on bear vs bull market? You buy on the down slide with every 5% change, but not on the upside. Intuitively, this does not make sense to me. If your target allocation is 50/50, why wait until until your allocation reaches 60% to make adjustments?

        I know you have STRONG quant skills and appreciate their power to cut to the truth. Have you tried to back test your approach on historical moves to see the results (on both the down- and up-ward movements)?

        1. Kevin, the main reason is that I’m 100% comfortable anywhere between 50 – 60% stock allocation. Sitting at my minimum (50%) made sense when stocks were overvalued, but if I can grow it to 60% with low-priced purchases, I’m fine with that. Waiting until I get to 60% to begin executing the strategy to the upside ensures I get more of the long-term gain from the equities, maintains a conservative position and avoids excessive trading. I may be able to do a few things with spreadsheets, but I’m afraid back testing isn’t something I’ve figured out.

  8. Fritz,

    Have you balanced back from equity to cash/bond recently since your 4/24 illustration shows an “out of balance” 55:45 (from the target 50:50. Now more like 56:44 if untouched)? Or you have room to let it ride until 60:40?

    Zac

  9. Thanks for this – I’ve been looking for something along these lines. Question – how do you track the % market drops. In other words, what index or other measure do you consult to determine it’s time to move $$?

    1. Amy, I just use the S&P 500, but any macro index would work. I take a screenshot on my phone of the S&P close on the date of my last trade, then do the math to know what my next “strike price” will be (level at last trade – 5%).

  10. Enjoyed your strategy Fritz! As I’m a few years away we continue to invest in our employer plans . The one move I made was around March 13 – I had an old retirement plan which was invested in a Retirement Date fund and I thought it was starting to get a bit too conservative for me so on that date I sold it and invested in a Science and Technology fund with the same fund family and it sure has done pretty well since that date. On a side note – your book came in the mail yesterday and I spent some time on the back porch last night “savoring’ the content! It’s really good and I knew I would like it because I enjoy your writing style from your blog posts.

    1. Dusty, kudos for executing a buy in midst of the bear, a lot of folks get too nervous to take advantage of the low prices. Glad to know my book is now in your hands (thanks for ordering it!), hope my writing continues to meet your expectation as you move through the book.

  11. Love it sell high buy low to maintain the 50/50% allocation .But more importantly going into retirement with 8 to 12 year cash bucket not only mitigates sequence risk it also supplies you with the available cash to take advantage strategies like this .

  12. Rebalancing involves leaning into the pain. As Arnold said “no pain, no gain”

    Investing is hard. Especially when headlines people read don’t seem congruent with stock market highs.

    The stock market is forward looking while headlines are point in time. I see a melt-up given the fiscal and monetary support. Plus lack of other good options

  13. Instead of taking a screenshot, and then calculating and constantly checking for your next 5% drop, why not place a limit order (at 95%, with a good till cancelled expiration) when you make your initial purchase?

  14. I execute a similar approach which uses the overall market as a barometer for when to buy more during “the dip”, but I will venture into specific sectors or regional indexes and even individual stocks to buy rather than buy broad market indexes. I look for beaten down industries/regions/stocks that I think suffered a disproportionate drop in price relative to the general market drop and buy those equities. I’ve suffered both greater paper losses and seen bigger paper gains as a result so I guess it all averages out. Trying to find bargains just suits my style more.

    1. Phillip, actually, I do to. I used VTSAX to keep the example simple, but I’ve been buying various mutual funds when I get the “trade” trigger, including a blend of small-cap value, international, and S&P 500. Complex enough strategy to explain as it is without throwing that nuance into the mix…

  15. Here’s my dilemma. I inherited a very large sum of money a couple weeks ago. I also retired at 61 on March 12. This new money represents about 55% of our wealth. I have it sitting in cash, slightly terrified of when and how to get this into the market. I think I’m comfortable with a 50/50 allocation. What would you do? Wait for those upcoming (probable) declines in the market and go in with 5% each time…or something similar? I already have enough cash to live on for a couple years. We are waiting to see if my husband is going to have to retire one year earlier than planned this year due to Covid 19 lack of business. I know leaving this much in cash isn’t good for the long-haul, but I want to be smart.

    1. LW, first – congrats on crossing The Starting Line! Second, congrats on your “dilemma”, not a bad one to face. I can relate to struggling with investing a large lump sum. The “experts” say investing it as soon as possible is the “best” solution, but many (including me) prefer to take the “Dollar Cost Averaging” approach. If it were me (not intended as personal advice for YOU), I’d set up automatic exchanges from a money market fund into your targeted mutual funds on a regular basis (weekly or monthly). Say, for example, you had $120k. You could schedule $10k/month over each of the next 12 months (or, $2k/week). If the market drops, you could accelerate the investing by using a strategy similar to what I laid out in this post (that’s the approach The Money Guy suggested in their input in the article). Hope that helps.

  16. So one more question – what is the baseline for your subsequent drops? For example, in this volatile market, you might have a 5% drop followed by a 15% rally followed by a 5% drop. Do you set a single baseline initially and stick with it? Otherwise, you could find yourself buying in at higher and higher points if you had significant rallies followed by less significant pullbacks, no? (Obviously I’m intrigued by this idea – trying to figure out how I might best execute it. Thanks again for the post.)

      1. Hmm. So in a rocky but rising market you would be buying in at higher and higher price points?

  17. Apologies if I have misunderstood, but, at least in theory, does this strategy not lead to you ultimately spending all your cash/bonds if the bottom totally falls out of the equity market – which, worst case, could leave you broke. Or, have you got some guard rails in mind?

    1. I do have guardrails, Al. As I cited in my Annual Financial Review post, every December I set up my automatic paycheck based on a Safe Withdrawal Rate X my updated Net Worth, so if my portfolio is tanking my spending will automatically be reducecd. See the annual financial review link included in the article above for details.

  18. Fritz, how would this work in an IRA that is in a mix of Target Retirement funds and Wellesley? Those are just rebalancing automatically so no need to do anything, right?
    But I do have a 401k with Stable Value as the bond portion and a separate stock fund so I could use this strategy in that account as long as my overall asset allocation across all accounts stays on track. Am I thinking correctly?
    This rebalancing is new to me. I usually just let it ride. I can’t wait to purchase your book. I love the insight from your blog. Your work is appreciated!

    1. K – that’s a great question. Target date funds are great when you’re accumulating, but they definitely make things more difficult when you’re trying to strategically withdraw. You are correct, they automatically rebalance (and reallocate based on your age), so you don’t have to do anything. The problem is whenever you sell you have no choice but to sell both stocks and bonds, at whatever allocation your target fund holds. You could use your other funds to implement the strategy. Personal Capital will show you your overall Asset Allocation, including the stock/bonds from your target funds. Thanks for your kind words on my work, much appreciated.

  19. Fritz, I really enjoyed your book and am actively working on my homework. I’m especially interested in the “re-entry” conversation here. My husband panicked in mid-March and we “cashed out”…now I’m trying to come up with our re-entry strategy (hindsight can be painful!) . I’ve read all of the comments above and replies, but still looking for what seems right for us. I’d like to get back in, only up to the 50% mark. I’d like our decisions to be un-emotional, based on some objective plan. I know that you mentioned DCA to someone and also recommended the Money Guy’s plan to “accelerate” when appropriate. This seems like the “hybrid” that I’m looking for, but not really visualizing the details of how it would work – regular DCA in a up market, and the 5% strategy on the way back down? Can you clarify, or refer me to a good reference? Thanks so much!

    1. Laura, your husband is far from the first to panic and sell in a bear, that’s exactly why we all need a cash cushion to calm our nerves. Hopefully you’ll learn from the experience with minimal long-term impact, thought you’re not facing the same problem most people do who sell at the bottom. Many just wait for it to get lower before they’ll buy, and end up losing years of stock market growth with too much cash in their portfolios. I’m a fan of setting up your Dollar Cost Averaging, based on how much you want to move back into stocks. If you want to move $100k, pick a time frame and automate it. Assume 20 months, and schedule $5k a month via ACH transfers. Then, accelerate as cited in the post, using the 5% threshold as detailed in the post. If you need a reference or help in implementing it, you may want to reach out to Brian @ The Money Guy Show, he’s a CFP and helps clients implement that strategy, among others. Hope that helps.

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