Cash component - how do you use it in retirement/drawdown?

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To be honest, I think that Cash should be used differently in draw-down. The point of cash in your asset allocation is to ensure, that you can re-balance and hence constantly ‘buy-cheap’ & ‘sell-high’… and that you are not forced to sell shares in the worst possible moment.

So what to do: Quite simple, if there was a crash, convert your Portfolio’s Cash into a ‘consumer credit’ you grant yourself at banks savings interest rate. And then, over time as the portfolio hopefully recovers, withdraw a bit more from your portfolio and use this to “pay back” your consumer credit. End result: You didn’t sell shares in the worst possible time.

What does this mean in practice:

  1. For each year, define a “Minimum Portfolio Balance”; consisting of starting amount minus 10-20% safety cushion, plus expected return minus expected pay-out.
  2. Proceed with normal withdrawals as long as your portfolio stays above such “Minimum Portfolio Balance”
  3. If the Portfolio falls below the “Minimum Portfolio Balance”, no longer take ANY money out of the Portfolio but simply:
  • Take Cash out
  • Book the Cash as a loan the portfolio holds against yourself (at ordinary Bank Interest Rates you would otherwise earn on your cash balance)
    -Starting from Year Y+3 to Y+8 ‘pa’ back the loan and any virtual interest due, this by means of withdrawing a larger amount from your portfolio
  • and in the meantime, If at any moment in time the Portfolio value exceeds the “Minimum Portfolio Balance + 30% times Shares Percentage; withdraw 50% of such excess and use it to immediately pay off / lower any remaining “loans” you have in your portfolio

Sounds complicated? Its not…

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42

isn’t rebalancing buying high and selling cheap?

43

why do you need cash for that? can’t you sell the overrepresented parts of your portfolio to buy the underrepresented ones?

44

If you have a cap weighted ETF it will even do the opposite!

45

No.

Yes.

No. No trading inside the fund unless you buy or sell.

46

Let’s assume you start as follows:

CHF World ETF
40 % 60 %

After one year, your portfolio is as follows because the global market has lost value:

CHF World ETF
55 % 45 %

Now you start your rebalancing and correct back to:

CHF World ETF
40 % 60 %

What did you do to achieve this? You bought more of your World ETF. And you did so at a time when it was cheaper to buy than it was a year ago. From Wikipedia:

(..) but it also applies to adding or removing money from a portfolio, that is, putting new money into an underweight class, or making withdrawals from an overweight class.

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47

There’s a recent article on FT that covers a lot of the portfolio theory (it also covers the basics like efficient frontier): The hot new investment trend is the ‘Total Portfolio Approach’. Does it work?

For me the critical part is that allocating a risk budget when designing a portfolio is fairly important (and then the goal is to optimize given the risk budget, for example a 20:80 bond:equity portfolio has less risk and more return than 100% bonds, and a 50:50 portfolio has as much risk as 100% bonds but 2x the returns)

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48

Imho all this stuff is exactly what I was referring to in my Robo advisor thread.

I guess everyone is focused on how expensive it is when managing a world stocks portfolio compared to accumulating on a cheap global ETF.

When it comes to total portfolio theory and multi assets management, including cash and alternatives with auto-rebalancing, and keeping the allocation without wondering if it’s right or wrong or the right time… and in parallel have your withdrawal plan on autopilot… I guess I’d pay 0.x% something…

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