Portfolio Reallocation During Early Retirement

eldersIn the previous post we have checked whether it worth to reallocate our portfolio during the wealth accumulation phase in case the stock market dips. That example showed that it doesn’t really worth the effort. Seemingly I am not the only one who was thinking about such strategy. Joe from retireby40.org (who is by the way a great example to prove that early retirement is achievable) had similar thoughts and asked how this strategy would work in the years of early retirement. Let’s see what the numbers show!

Here we take somewhat different starting point than in the previous post, although the investigated period (from August 2002 until today) and the considered ETFs are the same.

In August 2002 you have retired with a portfolio that values USD 1 million. You are allocating this money to 50% equity and 50% bond. By this, you wish to ensure that on a longer term your portfolio value still grows reasonably, nevertheless you want more security and fixed income than during the years when you were still working. Your receive a decent dividend income each year, so for this particular example we assume you don’t need to withdraw any money from your portfolio besides of the dividends.

The first couple of years you are super happy and relaxed. Then 2008 comes and the market starts to rapidly dip. When it already dropped more than 30% from the previous highs, you decide that it’s time to reallocate some bonds to the stock market. Now we are in November 2008 and you’re new portfolio is a 75-25 one. You keep this ratio (by re-balancing at the beginning of each year) until the market exceeds the previous high. At this time it’s early 2013 and you return to the more conservative 50-50 model. Let’s see what the graph shows!


Since you couldn’t catch the market bottom when reallocating your assets, your portfolio value has dropped more comparing to the 50-50 model. Then during the market recovery, it also started to catch up. However, it hasn’t exceeded the 50-50 portfolio by the time of returning to the original ratio. Afterwards (as now we are talking about two 50-50 portfolios) the difference was obviously kept. Under this example the original portfolio has beaten the reallocated one.

Note that the difference is not significant. I have also checked some other scenarios and by doing the reallocation a bit later we could end up with the advantage of the reallocated portfolio (also with similarly small difference). Solely based on this example -which reflects a particular period only with all its relevant market conditions- I would still say that temporarily reallocating your portfolio is much a do about nothing.

You can see above what would’ve happened to the value of the portfolio. But what I find the most interesting is what would’ve happened to our income? Remember, the calculation is based on the assumption that we live off the dividends only.


The total yearly dividends of the 50-50 portfolio varied between 38-50k which is pretty decent, especially if you have some side income. Note that we have generated most of the dividends from bonds. And this is the income that we were sacrificing for the hope of higher return on the stock market. During 2009-2011 the reallocated portfolio has delivered 10-12k less dividends per year. 2012 was also 6.3k short. From 2013 onward with the reallocation it has returned to similar levels.

I want to emphasize that this example doesn’t guarantee that in the future portfolio reallocation would be similarly bad idea. But this can demonstrate that it is definitely not an idea that can only end up good (which is something I initially also have thought).

Have you ever done portfolio reallocation in the past for similar reasons? Did you back test what would’ve happened if you haven’t done anything? Please share your story in the comments!


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