The Level3 Withdrawal Strategy to Maximize Your Long-Term Wealth

The book “Investing at Level3: Higher Returns With Minimal Risk for the Long-Term Individual Investor” summarizes many of the key investing concepts that James Cloonan observed since he founded the American Association of Individual Investors (AAII) nearly 40 years ago.

AAII was started with the belief that with the right education, information and discipline, individual investors are fully capable of becoming effective managers of their own assets. “Investing at Level3” lays out a practical framework suited for individuals that helps investors overcome short-term emotional decisions that hurt long-term performance.

Individual investors have unique needs, opportunities and risks compared to the institutional (professional) investor. Cloonan notes that while individuals have the ability to get out from under the burdens institutions must bear, the investment services industry has been able to convince individual investors to voluntarily accept and bear the same burdens as the institutions. These burdens include:

short- to intermediate-term investment horizons,
the need to perform relative to competition,
the need to take very large positions,
the need to appear competent by complying with academic theory and, most importantly,
the acceptance of meaningless measures of risk.

“Investing at Level3” explains how individuals can lift these burdens to maximize their long-term wealth.

The book gets its name from the range of approaches employed by investors:

Level 1 is unorganized investing driven by impulse and emotion. It is influenced by random observations and advice and is in a constant state of flux. Unfortunately, this is still the level of investing for too many individual investors.

Level 2 represents the investing strategy that has evolved from modern portfolio theory. It assumes an efficient market with random events in which investors take rational actions to seek optimal outcomes from models based on statistical measures of return and risk. It has also been formulated without these models but maintains academic measures of risk. Variations of this model are considered best practices by most investment advisers.

Level3 Investing is the strategy offered by Cloonan that looks to maximize long-term wealth and is specifically geared to the individual investor. It is reality-based rather than mathematically based in that return and risk are derived directly from actual historical data and common sense without attempting to force them into a mathematical distribution or model first.

Cloonan explains that each of the three investing levels are continuums with a range of approaches and theory within each level.

The focus of this article is to present the withdrawal strategy detailed in Level3 that allows investors to stay invested in assets that offer the greatest potential for long-term wealth growth while satisfying current funding needs and minimizing real risk.

Measuring Risk Properly

Before we can explain the Level3 withdrawal strategy, we must examine the proper measure of investment risk for the long-term investor. We are bombarded with news and warnings regarding market volatility and have come to equate volatility with risk. However, Cloonan notes that real risk is the chance of investment loss. It’s a mistake to tie short-term volatility to long-term investment risk and let it dictate our long-term investment decisions.

Cloonan’s formal definition of risk is the likelihood that when we must withdraw assets from our portfolio for consumption, they will have a lower value than we could reasonably expect based on our investment strategy.

Volatility is somewhat related to the chance of loss in the short term, but has only a limited relationship to it in the long run.

Real risk is the chance of underperformance, while volatility or phantom risk describes how stock returns vary up and down through time. For short-horizon portfolios, volatility contributes to real risk. For long-horizon portfolios, volatility has a much-reduced role. Attempts to reduce short-term volatility tend to reduce our long-term expected return, thereby actually increasing our long-term real risk of not having enough financial assets for our needs. A classic example of this is investing in both stocks and bonds in a long-horizon portfolio in an effort to reduce short-term volatility, with the likely result that you will underperform a 100% stock portfolio over the long term.

Cloonan argues that traders and investors with short-term time horizons trying to avoid market volatility help to push up the returns realized by investors with a long-term investment horizon. The fear index for traders becomes the opportunity index for long-term investors.

It is important not to panic at times of market distress. Selling during a bear market turns a paper loss into a real loss, especially when the market recovers and you are sitting on the sideline. It helps to be a student of the market and understand that regular market drops are not only possible but likely. It’s likely that every investor will see two or three severe stock market collapses of 40% or more in their investing lifetime. Expecting the drops will make them easier to endure. Your comfort comes from the understanding that the market has always come back to reach new highs.

Investors need to be smart about market risk and avoid excessive leverage, moderately diversify their investments and time-diversify new large investments. Cloonan recommends that investors should consider spreading out their investment over 18 months if committing to a large relative investment when the market is within 5% of its high.

Defining the Long Term

It is important to determine where to draw the line between short term and long term in terms of our strategy.

Cloonan makes a case for using four years as the length that divides short term from long term. Funds needed in four years or less should be treated as short-term funds and invested in defensive securities. Funds not needed in the next four years are invested without regard to short-term volatility and oriented toward maximum return over the long term.

Over the past 50 years, there have been two occasions (1973–1974 and 2007–2008) where the bear market was severe enough that the period needed to recover the losses lasted over five years, using the S&P 500 index as our portfolio. However, if you examine the equal-weighted Wilshire 5000 index, the maximum loss duration was four years. Protecting a portfolio for five years is less cost-effective, but Cloonan says that risk-sensitive individuals can use five years if it makes them more comfortable. More aggressive investors can use three years as the safe period.

Short-Term (Defensive) Assets

Funds needed in the short term should be invested in assets safe from significant price volatility as well as safe from default. Cloonan points out that short-term Treasuries or insured CDs are very good options.

If the timing of your withdrawals is definitely known, then Treasury STRIPS can be effectively used. (See “A Pseudo-Life Annuity: Guaranteed Annual Income for 35 Years,” by Robert Muksian, June 2012 AAII Journal.)

Basis for Withdrawal Plan

The Level3 withdrawal strategy builds upon the idea that you should maximize your long-term return potential by being fully invested in stocks until you reach a point that you anticipate the need to withdraw funds for expenditures. The primary time that this will happen is at retirement when investors are now faced with short-term risk. While conventional wisdom has investors diversifying into a wide range of assets, Cloonan presents a compelling argument for establishing a short-term defensive allocation and keeping the remainder of your assets in stocks.

The major concern in Level3 when it comes to facing short-term risk is to find an operational definition of “short term” that balances the two bad things that can happen:

not earning enough return on your portfolio, and
losing too much in down markets.

We lose capital in down markets if we are forced to sell our equities while the market is down and has not had sufficient time to recover.

Unfortunately, the risk of too little return and the risk of loss are linked, so both can’t be avoided. The superior long-term return of the equity market comes about as compensation for being exposed to volatile short-term market moves. The key is to find an approach that balances risk and return in a rational way. The approach of Level3 Investing is to protect the assets needed in the near future from market downturns.

Rules for Withdrawal Stage

Beginning four years before your retirement date, estimate the annual dollar amount you will need to withdraw, with a maximum of 5% of your portfolio, and move that amount of assets into defensive investments.

Transfer the same amount for each of the next three years into defensive investments, so that when you reach retirement you have four years of necessary portfolio withdrawals in short-term investments.

Cloonan recommends making allocation decisions generally only once a year. There may have to be exceptions to this if your requirements change significantly, but acting only once a year will reduce short-term volatility and risk as well as simplify activity and record-keeping. Making a strategic process as simple as possible greatly increases the chances that it will be followed.

If you don’t retire at the exact end of a year, make a one-time adjustment so that your decisions are always near year end. This makes all kinds of market data easily available and, more importantly, gives you a chance to act just before or just after the calendar year based on income tax considerations.

At decision day each year (December 31), check the level of the S&P 500 index at that time and compare it to the all-time highest level of the S&P 500. If the current level is more than 5% below the all-time high of the S&P 500, put your portfolio in defensive mode. Your withdrawal in the year you determine as a down year will be taken from the safe investment part of your portfolio.

Cloonan notes that using 5% as the level is arbitrary. You could use 1%, 10% or even 20%, which is the usual definition of a bear market. The higher the criteria, the less activity there will be. It’s your choice, but pick one and stick to it. Consistency will reduce the chance of mistakes coming from behavioral pressures.

Continue withdrawing from the safe portion each year until on a decision day the S&P 500 is above the level that you used to choose defensive mode. At this point, you not only resume annual withdrawals from the equity holdings of your portfolio, but you immediately begin to restore the four-year withdrawal level to the safe investment segment. Cloonan recommends doing this over two years—restoring half of the deficit (the amount below four years of withdrawal) each year. Any restoration would stop if a new down year occurred and withdrawals were to revert to the safe portion.

If the defensive mode lasts long enough that the safe investment part of the portfolio is depleted, you would have to withdraw from the equity part, but Cloonan’s research indicates that this has not happened since the Great Depression of 1929.

If a down market occurs at decision time while you are in the process of building the safe investment portion of the portfolio (one to four years before retirement), don’t put the one-year withdrawal amount into the safe investment portion of the portfolio until your definition of the end of defensive mode applies. If the down market continues into the actual withdrawal period, withdraw from any safe assets until they are used up and then sell equities. Build the safe investment portion up again after the market recovers.

There are choices in determining how to measure market highs. The market could be measured by a number of indexes or by your own portfolio. Cloonan selected the S&P 500 because it is generally accepted as the primary market measure. The performance of the S&P 500 is used to represent the weighted average of all portfolios. This is not quite true since there are considerably more than 500 stocks, but the totality of the remaining stocks is minuscule compared to the 500. In addition, data on the S&P 500 is readily available.

Since we are much more concerned with our own portfolio than with the overall market, why not use our own portfolio as the market indicator? We could, but this involves extensive record-keeping and we would have to make adjustments for withdrawals and additions. Rule simplicity avoids rule violation.

An additional problem involves assigning market highs. We can use intraday levels, closing daily levels or closing levels of the week, month or even year. Cloonan feels that looking at the market only once a year would likely be the wisest thing any of us could do, but in the real world it is unrealistic to think that the vast majority of investors can ignore market behavior in the short run.

The process described in moving into retirement mode is shown in Table 1.

Table 1. Establishing a Defensive Strategy

As you can see, based on a retirement date of January 1, 2022, money begins to be shifted into the safe portion of the portfolio at one year’s withdrawal rate during the four years prior to retirement. Withdrawals are made from the equity portion of the portfolio while the market is in a flat or up mode.

When on January 1, 2023, the market is 5% below its previous all-time high, we switch to defensive mode. Annual withdrawals are taken from the safe portion of the portfolio until the market returns to within 5% of its previous high. At that time, annual withdrawals once again are taken from the equity portion of the portfolio. Any deficit is restored to the safe portfolio in annual transfers spaced equally over a two-year period.

Withdrawal Strategy in Down Markets

The key to the strategy is to use the funds put aside for rainy days when it rains. As stated, if the market has not fully recovered in four years then the safe funds may have run out and you may have to liquidate some stock. But this scenario would not have occurred in the last 50 years using the strategies employed by Level3 investors.

Table 2 traces the Level3 defensive strategy through the Great Recession until the recovery. Actual S&P 500 returns are used rather than the advanced Level3 portfolio strategies to illustrate how the defensive approach would have worked during that time. Four percent is used as the return on the safe investment portion of the portfolio, which could be a blend of short-term Treasuries and other very safe investments.

Table 2. Application of Defensive Strategy During
Great Recession

The impact of inflation is ignored on the $50,000 annual withdrawal in order to simplify the example; inflation was not very significant over this short period and would not have impacted any decisions. The 5% withdrawal rate, however, is inflation-adjusted.

It is important to note that the withdrawal amount is in dollars, not in percentage of the portfolio. If the market drops 10%, your mortgage payment doesn’t. You would still need $50,000 a year, even though that is now 5.56% of your portfolio rather than 5%.

In Table 2, the portfolio had $1 million on January 1, 2008, and an annual withdrawal rate of $50,000. The market was not lower than the previous January and so the normal withdrawal process was used, taking the funds from the equity portfolio.

The portfolio took a 37% hit that year, and so at January 2009 the portfolio was put in defensive mode and the $50,000 withdrawal was taken from the safe portion of the portfolio. The table shows the results of the strategy and the returns for each year.

At January 1, 2013, the market returned to within 5% of the old high and the strategy reverted to normal mode, taking the $50,000 withdrawal from the equity part of the portfolio along with restoring half ($89,000) of the existing shortfall in the safe portion.

Going into 2014, there was $894,000 in equities and $116,000 in bonds (if you allow the bond to grow at 4% during 2013). The portfolio was back above its original value even after taking $300,000 out in cumulative withdrawals.

Despite the severe downturn, the four-year reserve of $200,000 in the safe portion of the portfolio was enough to handle all the withdrawals. However, one more down year would have required going into the equity holdings.

Variations on the Level3 Withdrawal Strategy

The very specific defensive approach illustrated in the Level3 example was taken for two reasons:

First, if you have a very specific approach with defined rules, it is easier to avoid deviating randomly and substituting guesses about market direction at various points in time. Certainly, withdrawing a full year’s needs at one time or acting only on the first of the year is not a requirement for the Level3 defensive approach.

Second, a specific version of the Level3 approach was needed to illustrate its application. Different variations of the general approach will give different results depending on the actual market behavior over time.

Discussion

Tom Jeffrey from MA posted over 8 years ago:

The book is great and is filled with many useful concepts that will definitely enhance anyone's investing success and build their wealth. Thanks.

John Lambert from NJ posted over 8 years ago:

Yes I enjoyed the book. And initially I believed in this two bucket withdraw strategy. Then I tested this strategy using total stock market return data starting in 1873, plus short term interest rates, and inflation. 115 30 year retirement periods. With a 4% withdraw rate and four years of safe assets; 14% of the time this strategy fails. The portfolio doesn't last 30 years. And counter intuitively a strategy of 100% stocks and no safe assets only fails 4% of the time. The larger the safe bucket the more failures.

James Borgeson from NJ posted over 8 years ago:

I retired in July 2016 and had structured my portfolio using the 3 bucket approach described by Christine Benz of Morningstar. This approach is similar to the Level 3 approach. It just separates the Level 3 "Safe" bucket into separate buckets for Cash and Bonds. They both share the goal of not selling depreciated assets to fund retirement. What I like about this article is 1) there is only one method presented for spending down the two buckets, and especially 2) the clear examples of that method. In contrast, Benz gives four methods from which to chose, and no examples. So the level 3 approach seems superior in terms of simplicity, and as this article notes, simplicity makes rule breaking less likely. However, some of that simplicity may be illusory since spending down the level 3 "Safe" bucket, would still involve having to decide what to do with any bonds it contains (assuming it does). This has the potential for selling depreciated assets. This is obviously counter to the goal of not selling depreciated assets. So perhaps there is a hidden bond bucket in the level 3 "Safe" bucket and making it explicit would likely improve one's ability to achieve the goal of not selling depreciated assets, albeit at the cost of some added complexity. I am going to examine applying the spend down approach described so clearly in this article to the 3 buckets of my current portfolio. One thing I didn't understand about this article is how the "Safe" bucket could achieve 4% return. John Lambert's comment above about what could be called a one bucket approach is interesting. It is the approach I used to accumulate my retirement funds (100% equity). Now that I'm retired, I feel the need to be more conservative and embrace the goal of not selling depreciated assets. But I would love to see the spreadsheet/data he used as I would have difficulty validating his conclusion from scratch.

John Lambert from NJ posted over 8 years ago:

James, The stock market data I used for my analysis of this withdraw strategy is from Robert Shiller's website (multpl.com). All of the 4% withdraw strategies fail when the retirement period includes early poor stock returns and later high inflation. Retirements starting at the outset of the Great Depression and early 1960's. I would like to have a "safe" retirement (soon) but I am not convinced that bonds are safe. Current interest rates are at 40 year lows. At best rates could stay the same for the next 30 years. They almost can't go much lower. But they could go higher. From 1946 to 1981 long term bond returns were negative.

Bill Roberts Jr. from OR posted over 8 years ago:

I enjoyed the specific outline of strategies to maximize my long-term wealth by setting aside 4 or 5 years worth of withdrawals (for needed living expenses). In Table 2 the analysis shows "safe" investments earning 4% in the years 2008 to 2013. Could you explain what safe investments one could use that would return 4%. The article mentions a blend of short-term Treasuries and other very safe investments. Could you provide some specific examples. Thanks, Bill

Jan Cornish from CA posted over 8 years ago:

Hi, After reading Level3 investing and several articles on Robo-Advisers it seems that Robo-Advisers really solidly on Level2 investing concepts. Am I missing something? Secondly, it seems that Level3 investing entails a so-called barbell portfolio, in which one end of the barbell consists of extremely safe investments and the other end of the barbell consists of investments with potential for much higher return, but much greater risk.

Rex Peterson from Wisconsin posted over 8 years ago:

Jan, the key to your question, I believe is in properly understanding risk. The side of your barbell holding stocks is held FOR THE LONG TERM. Hence, they do not offer "much greater risk" as you describe. It is the lower performing bond side of the barbell that enables you to reliably be able to avoid selling stocks in a down market by providing assured short term funds as long as they are likely to be needed. Since long term risk and short term market volatility are not the same thing, we can exploit market volatility in the service of our long term goals. This understanding helps investors to alleviate the fear that could otherwise cause them to sell at the bottom of fluctating markets. Long term, markets have always gone up; short term, who knows. With this strategy, we don't need to worry about short term volatility and we can keep our investments optimally growing for the long term while reliably meeting short term needs.

Dave Gilmer from WA posted over 8 years ago:

I recently took this level3 testing through some real life data on a portfolio made up of 4 Vanguard funds specifically picked for a clients needs that included the Total Stock Market, Wellington, Small-Cap Blend index, and Equity income, all going back to Apr of 1992. I broke the data into price data and dividend data since by using the cash flow of dividends into the cash bucket you alleviate some need for selling equity assets. This use of income generation funds such as Wellington and Equity Income help to soften the downside risk to the portfolio. I used cash with a return of 1.25%, which is what I foresee you being able to get with Vanguard money market within the next year. I tested both 3 and 4 year cash buckets, with both being acceptable in my opinion based on a quarterly trigger point of monthly data over the last 25 years. I tested trigger points from -1% to -20%. Not a huge difference, but in general the smaller the trigger point (such as -1%) the quicker the response to not selling assets that are down. I also developed my own custom trigger, because using the SPY is not all that relevant to this type portfolio. Instead each month I calculate a 'weighted price trigger" made up of the sum of the weighted prices of the 4 funds in the portfolio. I then find the largest trigger since inception and compare it to that weighted price for the current month. On a quarterly basis I check the difference of this calculation to determine if money needs to come from cash or from equities. If the cash bucket is "overfull" from either gains or dividends I will take money from there first before deciding to take money from equities. In general I believe a 3 year bucket is sufficient for this type of approach.

John Lambert from NJ posted over 8 years ago:

Dave, Assuming the next 25 years is a repeat of the period since 1992 you are golden. Interesting that there are few articles on timing retirement investments. Instead slow and steady we are advised to invest with each paycheck for retirement without regard to market conditions. But when it is time to withdraw; we suddenly need a multi-bucket strategy to time the equity withdraws.

Bryan Loy from KY posted over 8 years ago:

Still not understanding how one can achieve a 4% return on a "safe" investment. Can you please explain?

Peggy Boike from AZ posted over 8 years ago:

I am so glad to have learned about this withdrawal strategy. I have been trying to maintain a 3 year "safe investment fund" for RMD withdrawals, but had no plan for when to withdraw from that fund or from equities. I have decided to take an approach similar to Dave's. All of our wealth is invested in Vanguard's Life Strategy Moderate Growth Fund (60% stock, 40% bond), although now I am considering switching to the 80/20 fund. My "Decision Day" will be once a year, at the end of the year, and I will be using the Fund's price per share, with a "Trigger Point" of 5% below the all time high pps, which is right now. Yesterday, I replenished our "safe investment funds" to contain 3 years' worth of estimated RMDs plus the estimated RMD for 2018, by exchanging Life Strategy to Prime Money Market in each of our IRAs. We just reached the point that our RMDs exceed our living expenses, so my plan is to invest the excess into the same fund outside of the IRAs.

Ronaldo Jenkins from MD posted over 8 years ago:

Overall, this withdrawal strategy seems oriented toward preventing retirees from cashing out of equities at the "wrong time." The underlying financial planning premise is to maximize your asset growth over time which is great if the objective is to leave monies after death. Given the poor state of retirement preparation in the country, I believe the primary objective should be just having sufficient funding to maintain your lifestyle during retirement. Assuming you start with a sufficient amount the problem is a) inflation and b) withdrawal for expenses will reduce the value of your assets over time. I have seen friends and relatives do a good job estimating (b) but forget about (a). In other words, if inflation is 3% and you need 4% for expenses your assets must grow 7% per year. The time to buy equities is when they go on sale like every other bargain you have gotten in life not relying on the greater fool principle. Buy when prices are lowest for the quarter, the year and the bull market advance so the focus of the cash/fixed income bucket portion is to generate income until the next buying opportunity. I will be doing some testing to model this approach. The article's basic premise to prepare your portfolio so you can avoid premature investing decisions is a sound one. I just think that buying equities at all times only works if you have +20 years horizon before you need to use these assets. BTW - bonds should be purchased to hold until maturity not traded and vulnerable to interest rate risk.

Dave Gilmer from WA posted over 8 years ago:

@Ronaldo, I may not be exactly understanding what you are saying as it relates to the timing of buying equities, but the best way to make it to retirement is to be fully invested at all time, which amounts to just following a DCA method to put the most you can into your retirement savings plan. In most cases this amounts to between 10-15% of your gross salary. If you invest prudently (index funds, etc) I have rarely seen this plan go wrong. When people start thinking they know when is the best time to invest this is when they seriously underperform the market. Now in retirement you have to switch some of this thinking upside down because in this case you can use history of your account to gleen whether it is a good time to withdraw money or not - where as in the accumulation stage you have no future crystal ball which is what is needed to know when is the right time to invest. If you read the Level3 book you will understand what happens when you are out of the market for 5+ years because you think it is overvalued - you can never catch up even if you pick up a 20% downturn for your cash.

Dave Gilmer from WA posted over 8 years ago:

@John, <<... slow and steady we are advised to invest with each paycheck for retirement without regard to market conditions. But when it is time to withdraw; we suddenly need a multi-bucket strategy to time the equity withdraws.>> There is a very simple reason why slow and steady wins the race and market timing fails in most cases and that is because we have no way of knowing the future and one of the biggest ways to win in building up your retirement investments is to start early and save on a regular schedule. In other words control what you can and don't try to bet on things that are out of your control - like timing the market.

Dave Gilmer from WA posted over 8 years ago:

@Bill, << In Table 2 the analysis shows "safe" investments earning 4% in the years 2008 to 2013. Could you explain what safe investments one could use that would return 4%.>> It was in fact quite easy during 2003 thru 2012 to have a total return above 4% in a combination short & intermediate term bonds such as VBILX & VFSUX. In fact if you look at the index that these track which is Barclays US Aggregate index there is only one year out of the 10 where the index was below 4% (2005). The high year was 2011 at 7.8%. Sure returns above 4% have been rare since 2012, but they are approaching there this year @ 3.81% YTD for VBILX.

R Stephens from WA posted over 8 years ago:

I enjoyed this article very much. I am 79 and living off of my investments and this presented another alternative to withdrawal strategies. I have been using a strategy much like this but perhaps a bit more conservative. I had a question about the "safe" money shown in Table 2. For my safe money I have CDs and a mixture of short term and intermediate term bond funds (selected from AAII mutual fund listings). Some of the intermediate bond funds returned 4%; these however become more risky as inflation (and interest rates) rise. Where are you finding 4% return for safe assets? I eagerly await your response. TO OTHER POSTERS: This is the first time I have posted on AAII. Do authors routinely respond to questions posed?

Dave Gilmer from WA posted over 8 years ago:

R Stephens, "Do authors routinely respond to questions posed?" Sometimes they do, but it is usually a rare occasion. The comments aren't really conducive to holding a conversation, since there is no email notification to tell if a new comment is added. You're lucky if you can even find later where you left a comment among the many articles on the site. I would like to see some change in that respect. Dave

Herbert Schechter from MN posted over 8 years ago:

My Level 4 is a refinement of "Level 3". The article assumes that an investor's portfolio will mirror the general market or S&P 500. this is likely if you buy pooled investments like mutual funds and ETFs. Directly owning securities in your own name has many additional advantages. 1) investments are not effected by the irrational actions of other investors which is the case in a mutual fund. 2) Your do not own the "market" because you can choose value stocks that are less likely to crash. 3) At the time of withdrawal, you can pick and choose what to sell. It is unlikely that everything will have declined in value so permanent losses will not be incurred. 4) dividends received in cash can fund some or all of a withdrawal. 5) The normal turnover of the portfolio generates cash without the need to sell at the "wrong times". Investors can purchase stocks themselves following AAII guidance or have s Separate Managed Account with selections by a professional portfolio manager. While having a short term allocation to fixed income is prudent, the amount may be able to be reduced to 2 years rather than 4 years. Then more money can be invested for the long run with better returns. That is my "Level 4".

D Logan from MI posted over 8 years ago:

I like the barbell, two bucket approach. Bucket 1- Cash and cash equivalents and bucket 2- stocks. I believe the market is overvalued now. Dow P/E 26 (historically 17).Shiller Index 30 (historically 20). In ordinary times I would be 90% stocks. Now I'm largely in cash and cash equivalents, anticipating a correction. So the cash bucket is now 50%, the stock bucket is 50%. When a correction occurs- Dow down ten percent i.e. from 26,000 to 23,500, I'll start dollar averaging investing into stocks till the buckets are 10% cash and 90% stocks. If the market continues it's perilous upward course I'll rebalance to keep 50% cash. I'm 10 years into retirement and living on RMDs. I'm OK if the market stays unchanged, goes up or more likely goes down...

Kevin from CA posted over 7 years ago:

I use the level 3 approach for part of my portfolio, comparing it to a 7:12 portfolio and AAII Dividend stocks. They real key to level 3 is understanding that the traditional advice (70/30, 60/40, age minus stocks, etc) is too generic for many. Allocating large dollar amounts to bonds to reduce "risk" is really an attempt to reduce volatility. But level 3 says we do not care about volatility that much - we care about the total at the time we need the funds. Overinvesting in bonds is buying insurance against volatility that we may not need. This is a real investor mind shift from standard literature. Since switching to level 3, my performance has been much improved over the decreasing amount of money I am still running at level 1.

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