Is Rebalancing a Portfolio During Retirement Necessary?

Is Rebalancing a Portfolio During Retirement Necessary?

John J. Spitzer, Ph.D., and Sandeep Singh, Ph.D., CFA, (JFP Journal, June 2007)

This paper investigates the strategy of rebalancing the retirement portfolio during the withdrawal phase.The goal is to provide the largest number of equal (real) withdrawals from a given retirement portfolio.

• The study investigates six different allocations of stock and five different harvesting rules, only one of which rebalances the portfolio annually.The methods are tested using five different withdrawals rates (3–7 percent).The results look at shortfalls over 30 years, as well as shorter periods.
• The study uses two analysis methods: bootstrap and historical inflation adjusted rates of return in their true temporal order. Both methods find that rebalancing provides no significant protection on portfolio longevity, and this holds for all withdrawal periods. In fact, in some cases, rebalancing increases the number of shortfalls.
• Withdrawing bonds first, over stocks, performs the best of all the methods, though the resulting stock-heavy portfolio may make some investors uneasy. This method also is most apt to leave a larger remaining balance at the end of 30 years, while rebalancing leaves the smallest amount.
• Withdrawing stocks first leaves more shortfalls than withdrawing low first or high first.
• Confirming previous research, the larger the proportion of stocks to bonds, the longer the portfolio lasts; the higher the withdrawal rate, the more shortfalls.
• The results suggest that the use of lifecycle funds or a life-cycle strategy that decreases stock proportions as one grows older needs empirical justification.