Preservation vs Growth

Hypothetical (or not, perhaps)...

If you'd got to a point where your SIPP/ISA's (whatever) could sustain your safe withdrawal rate (setting aside arguments about the specifics of SWR's) and it would provide you with the income you required would you transition in to a much more cautious portfolio set up or would you plow on with a heavier than possibly necessary equity element in the expectation of generating greater returns over an extended period?

And if you were at that point with a decade or so to go to retirement would that change your view?

I've been thinking about this and my feeling is that whilst the optimal choice over the long term (depending on circumstances) may be continuing with, for example, a 40-60% equity allocation, it would be taking on unnecessary risk.

Accepting of course that inflation erosion of wealth is a risk in itself.
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  • dunstonh
    dunstonh Posts: 116,031
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    and it would provide you with the income you required would you transition in to a much more cautious portfolio set up or would you plow on with a heavier than possibly necessary equity element in the expectation of generating greater returns over an extended period?

    depends on what you are doing with the money on your death. If there is no-one else to leave it to, then you would likely go safer. If you have children, you may not want to use "too low" risk but instead, take a sensible level of risk.
    And if you were at that point with a decade or so to go to retirement would that change your view?

    If you have invested for many years and gone through ups and downs and come out the other side, your views on risk are likely to be different to someone who has not invested before or not taken any interest before. So, that would need to be considered in any risk assessment.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • coyrls
    coyrls Posts: 2,423
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    To sustain a safe withdrawal rate, investments need to grow. If you switched to becoming too cautions in your investments, you could put the sustainability of your safe withdrawal rate at risk. In the extreme case, putting your investments into cash that failed to keep pace with inflation would virtually guarantee failure.

    Note that a safe withdrawal rate is usually defined as a percentage of your initial “pot”, increased by inflation each year; it is not recalculated as a percentage of your remaining pot each year.
  • dunstonh wrote: »
    depends on what you are doing with the money on your death. If there is no-one else to leave it to, then you would likely go safer. If you have children, you may not want to use "too low" risk but instead, take a sensible level of risk.



    If you have invested for many years and gone through ups and downs and come out the other side, your views on risk are likely to be different to someone who has not invested before or not taken any interest before. So, that would need to be considered in any risk assessment.

    We're not planning our finances to leave our son anything beyond what is there at the end although I think he will be fine. He's just turned 17 starting an apprenticeship and is enthusiastic about pension saving in a way even I find a little odd.

    Personally i'm generally a little more negative in my investing outlook than my friends in a similar position (there are a few of us). I got roasted in the late 90's dotcom bubble on companies I can't even remember the name of now and had an equally disastrous experience of spreadbetting in the early 00s (shorting BARC and AMZN particularly stick in my mind).

    Obviously those examples bare no relation to how I now approach investing (it was no more than gambling then) and the few thousand it cost me will hopefully be money well spent in terms of any rose tinted specs about how brutal markets can be when they turn.

    On the flip side though i'm conscious of whether it's made me overly-cautious and unwilling to accept an appropriate level of risk to counter the arguably greater danger of inflation diminishing my spending power.
  • Malthusian
    Malthusian Posts: 10,898
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    I would continue taking as much risk as I could without risking a) my lifestyle and b) my sanity in order to steward the money for the future benefit of my heirs. If I had no heirs, then I would steward the money for the future benefit of my nieces / nephews, or the Cats Protection League, or whatever is precious to me instead.

    Or I'd just spend more money.
  • dunstonh
    dunstonh Posts: 116,031
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    I got roasted in the late 90's dotcom bubble on companies I can't even remember the name of now and had an equally disastrous experience of spreadbetting in the early 00s (shorting BARC and AMZN particularly stick in my mind).

    Conventional investing would have seen you back in profit around 18-24 months later. Much the same with the global recession.
    Obviously those examples bare no relation to how I now approach investing

    You musnt let your poor experience with daft investing in the past influence you now (other than your realisation that it wasnt a good thing to do and you won't do it again)
    On the flip side though i'm conscious of whether it's made me overly-cautious and unwilling to accept an appropriate level of risk to counter the arguably greater danger of inflation diminishing my spending power.

    If you have a typical 1-10 risk scale covering conventional options with 1 being cash and 10 being the highest risk for unit linked funds, you were about 15 on that scale with what you played with.

    If you were overly cautious, you would not use drawdown but buy an annuity. However, you need to look at risks in context. 100% global equity tracker was much lower risk than what you did in the dot.com period but a 100% global equity tracker is about twice as risky as what the average UK consumer is willing to accept.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Linton
    Linton Posts: 17,061
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    Hypothetical (or not, perhaps)...

    If you'd got to a point where your SIPP/ISA's (whatever) could sustain your safe withdrawal rate (setting aside arguments about the specifics of SWR's) and it would provide you with the income you required would you transition in to a much more cautious portfolio set up or would you plow on with a heavier than possibly necessary equity element in the expectation of generating greater returns over an extended period?

    And if you were at that point with a decade or so to go to retirement would that change your view?

    ........

    I am retired and in that hypothetical position now. My answer is to split my portfolio into different tranches with different objectives. One tranche provides a high income, another is invested for wealth preservation with no objective of any higher return than inflation and the third of money I dont need for the other 2 tranches invested for 100% equity maximum growth. Amongst other things this should provide a reasonable level of protection against very high inflation. No matter what happens to the higher risk growth investments I hope to have enough income and capital to withstand any economic storms, barring the collapse of the world as we know it.
  • Audaxer
    Audaxer Posts: 3,506
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    Hypothetical (or not, perhaps)...

    If you'd got to a point where your SIPP/ISA's (whatever) could sustain your safe withdrawal rate (setting aside arguments about the specifics of SWR's) and it would provide you with the income you required would you transition in to a much more cautious portfolio set up or would you plow on with a heavier than possibly necessary equity element in the expectation of generating greater returns over an extended period?

    And if you were at that point with a decade or so to go to retirement would that change your view?

    I've been thinking about this and my feeling is that whilst the optimal choice over the long term (depending on circumstances) may be continuing with, for example, a 40-60% equity allocation, it would be taking on unnecessary risk.

    Accepting of course that inflation erosion of wealth is a risk in itself.
    I wouldn't think continuing with a 40/60% equity/bond allocation is taking unnecessary risk. But if you are sure than you can move to a more cautious allocation and still be able take a Safe Withdrawl Rate that will meet your needs, then that would seem an okay strategy.

    I'm recently retired and started investing and have roughly a 60/40 equity/bond split. I'm not fully invested yet, and even when I am after various fixed Cash ISAs mature, I still intend to have a very healthy cash buffer. So I would say my total portfolio is fairly cautious overall, but it will be enough to meet my income needs.
  • kidmugsy
    kidmugsy Posts: 12,709
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    You could google the Harry Browne Permanent Portfolio. Mr Browne reckoned he'd be defended from pretty much anything if he held 25% gilts (or rather the US equivalent), 25% cash, 25% gold, and 25% equities. He wrote before the age of index-linked government bonds.

    You could also read the monthly reviews of the Ruffer Investment Company and the quarterly reports of Personal Assets Trust to learn how the managers of two wealth-preserving investment trusts think.
    Free the dunston one next time too.
  • Safe withdrawal rates are a function of asset allocation. If you move to a more cautious portfolio then you'll have to reduce your safe withdrawal rate. Historically the most "efficient" balance between risk and return has been a 60/40 asset allocation. Google "efficient frontier retirement".
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • coyrls wrote: »
    To sustain a safe withdrawal rate, investments need to grow. If you switched to becoming too cautions in your investments, you could put the sustainability of your safe withdrawal rate at risk. In the extreme case, putting your investments into cash that failed to keep pace with inflation would virtually guarantee failure.

    Note that a safe withdrawal rate is usually defined as a percentage of your initial “pot”, increased by inflation each year; it is not recalculated as a percentage of your remaining pot each year.

    Link below discusses the blunt tool that is the assumed 4% SWR especially in context of performance variation between nations. The UK SWR is almost certainly lower.

    https://portfoliocharts.com/2017/06/09/your-home-country-is-inseparable-from-your-withdrawal-rate/

    Malthusian wrote: »
    I would continue taking as much risk as I could without risking a) my lifestyle and b) my sanity in order to steward the money for the future benefit of my heirs. If I had no heirs, then I would steward the money for the future benefit of my nieces / nephews, or the Cats Protection League, or whatever is precious to me instead.

    Or I'd just spend more money.

    Looking at the Monte Carlo simulations it's clear that whilst it's prudent to base your calculations off worst case there is of course, far more likelihood of you ending up with surplus (sometimes many multiples of your original pot).

    I have read a couple of articles about massaging Bengen's rates (using a set formula) to raise and lower withdrawal depending on performance.
    Safe withdrawal rates are a function of asset allocation. If you move to a more cautious portfolio then you'll have to reduce your safe withdrawal rate. Historically the most "efficient" balance between risk and return has been a 60/40 asset allocation. Google "efficient frontier retirement".

    Some fascinating stuff again on portfoliocharts relating to this. I don't know who the guy is who creates the content but it's a superb resource.
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