Say I have a portfolio composed of 80% index funds, and 20% bonds. This portfolio was created under the assumption I would have a relatively large income, and wouldn't need to withdraw any funds for a few years.
Now, some time after this portfolio was created, this assumption is proved incorrect. I am now earning less than I used to, and actually need some extra cash, so I plan to cash in on a part of the portfolio.
My initial instinct tells me I should withdraw bonds, because "stocks and index funds are best held over a long period of time, while bonds can be withdrawn more readily". However, when I analyse the situation I actually reach the opposite conclusion - if my 80%/20% portfolio was drafted on the false assumption that I would earn X, and I now earn Y, I need to shape the portfolio to be less stock intensive, perhaps 60%/40%. In order to do that, the best thing right now would be to sell off index funds and not bonds.
The painful thing is that my index funds actually lost a good deal of money in the last year, and ideally I would want to hold them for a bit longer to let them "regain value" - but I do have to keep in mind that the stock market is "memoryless" - past performance has very little or no implication on future performance - so my plan right now is to indeed sell index funds and not bonds.
Is my analysis correct?