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  • FIRST POST
    • username12345678
    • By username12345678 8th Sep 17, 3:17 PM
    • 114Posts
    • 48Thanks
    username12345678
    Preservation vs Growth
    • #1
    • 8th Sep 17, 3:17 PM
    Preservation vs Growth 8th Sep 17 at 3:17 PM
    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.
Page 1
    • dunstonh
    • By dunstonh 8th Sep 17, 3:26 PM
    • 89,501 Posts
    • 54,962 Thanks
    dunstonh
    • #2
    • 8th Sep 17, 3:26 PM
    • #2
    • 8th Sep 17, 3:26 PM
    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). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • coyrls
    • By coyrls 8th Sep 17, 3:42 PM
    • 851 Posts
    • 864 Thanks
    coyrls
    • #3
    • 8th Sep 17, 3:42 PM
    • #3
    • 8th Sep 17, 3:42 PM
    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.
    • username12345678
    • By username12345678 8th Sep 17, 3:52 PM
    • 114 Posts
    • 48 Thanks
    username12345678
    • #4
    • 8th Sep 17, 3:52 PM
    • #4
    • 8th Sep 17, 3:52 PM
    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.
    Originally posted by dunstonh
    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
    • By Malthusian 8th Sep 17, 3:54 PM
    • 2,884 Posts
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    Malthusian
    • #5
    • 8th Sep 17, 3:54 PM
    • #5
    • 8th Sep 17, 3:54 PM
    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
    • By dunstonh 8th Sep 17, 4:07 PM
    • 89,501 Posts
    • 54,962 Thanks
    dunstonh
    • #6
    • 8th Sep 17, 4:07 PM
    • #6
    • 8th Sep 17, 4:07 PM
    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). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • Linton
    • By Linton 8th Sep 17, 5:51 PM
    • 8,202 Posts
    • 8,069 Thanks
    Linton
    • #7
    • 8th Sep 17, 5:51 PM
    • #7
    • 8th Sep 17, 5:51 PM
    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?

    ........
    Originally posted by username12345678
    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
    • By Audaxer 8th Sep 17, 7:11 PM
    • 408 Posts
    • 168 Thanks
    Audaxer
    • #8
    • 8th Sep 17, 7:11 PM
    • #8
    • 8th Sep 17, 7:11 PM
    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.
    Originally posted by username12345678
    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
    • By kidmugsy 8th Sep 17, 7:19 PM
    • 9,614 Posts
    • 6,366 Thanks
    kidmugsy
    • #9
    • 8th Sep 17, 7:19 PM
    • #9
    • 8th Sep 17, 7:19 PM
    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.
    • bostonerimus
    • By bostonerimus 8th Sep 17, 9:05 PM
    • 869 Posts
    • 437 Thanks
    bostonerimus
    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".
    Misanthrope in search of similar for mutual loathing
    • username12345678
    • By username12345678 9th Sep 17, 3:44 PM
    • 114 Posts
    • 48 Thanks
    username12345678
    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.
    Originally posted by coyrls
    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/


    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.
    Originally posted by Malthusian
    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".
    Originally posted by bostonerimus
    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.
    • barginfinder
    • By barginfinder 9th Sep 17, 9:33 PM
    • 325 Posts
    • 83 Thanks
    barginfinder
    Personally I'd look at another way - work out the min income you require indexed linked and after subtracting your state pension / any work pension etc, see how much it would cost to buy an annuity to provide that income. With whatever is left over you can accommodate more risk knowing that even if you lost the lot you will still survive.
    I need a better signature
    • Alexland
    • By Alexland 9th Sep 17, 10:32 PM
    • 234 Posts
    • 120 Thanks
    Alexland
    I would stay invested in diversified equities for around 65pc of the portfolio. And spread the rest across a cash fund and bonds. Yes shares are volatile but over the long term they have not been risky. Maybe if p/e ratios hit 20+ then I would scale back. I think I the old rules of bonds being low risk are not valid when the prices are so inflated by low rates.
    • Linton
    • By Linton 10th Sep 17, 8:02 AM
    • 8,202 Posts
    • 8,069 Thanks
    Linton
    The problem with simply choosing an x% equity fund is why that particular value of x? 60% say may feel right and but on what basis? Why not 40% or 80%. If you are going to choose a top level value it would seem sensible to have a rational way of calculating x.
    • Linton
    • By Linton 10th Sep 17, 8:07 AM
    • 8,202 Posts
    • 8,069 Thanks
    Linton
    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".
    Originally posted by bostonerimus
    In which market? Many countries' government bonds would have lost everything at some point in history. US experience isn't necessarily a good guide. Neither is 20th century history.
    • Malthusian
    • By Malthusian 11th Sep 17, 10:20 AM
    • 2,884 Posts
    • 4,126 Thanks
    Malthusian
    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.
    Originally posted by kidmugsy
    If you were frugal enough you could probably live on that, but with only 25% of the portfolio in assets which would be expected to beat inflation, and 50% in assets which would be expected to deliver nil return whatsoever, you will have to cut your cloth to your asset allocation - and that problem gets worse the longer you have to live on it.

    The portfolio has little logic to it - 25% in cash and 25% in bonds is extremely conservative, something you would normally expect to see in "3 out of 10" risk-rated portfolios, but 25% in gold is a highly speculative gamble. It's more Split Personality Portfolio than Permanent Portfolio.
    • kidmugsy
    • By kidmugsy 11th Sep 17, 12:19 PM
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    kidmugsy
    50% in assets which would be expected to deliver nil return whatsoever
    Originally posted by Malthusian
    You are wrong: only 25% is in income-free assets.

    The portfolio has little logic to it.
    Originally posted by Malthusian
    Wrong again: Mr Browne described his logic quite clearly.
    • IanSt
    • By IanSt 12th Sep 17, 10:23 AM
    • 46 Posts
    • 21 Thanks
    IanSt
    It's not a portfolio that I'd be happy with in these current times, but there are some interesting aspects.

    Take a look at https://portfoliocharts.com/portfolio/permanent-portfolio/, the site also has another 16 portfolios you can view.
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