Income from Savings

cheerfulcat

I'm sorry dh but it is a risky approach and there are plenty of people with seriously depleted capital in investment bonds to prove it. Yours may have done all right; not all have.

About LTSB. Let me say again that when LLOY shares were priced at ~£8, it was not a high yield share and would not have been bought in a sensible person's HYP. It did make the initial model HYP at ~£7 and has indeed not fully recovered in price but the other shares have more than made up for it.

About the HYP in general - 15 to 30 shares in a diverse selection of large caps in different sectors is no more risky than any other equity investment and a good bit less risky than many.

patch303

Thankyou both for your input. I only wish I understood all that you both have said but one thing is for sure. With the two such opposing views that you have it is no wonder that I am unable to decide which way to jump. I agree that money in tax free saving such as an ISA should not be transferred into a taxable form of saving just to obtain a lesser risk income from these savings. But that is as far as I have got. I shall study and discuss your differing views and hopefully do the right thing but only time will tell and then it could be too late. Why is saving so difficult.
Regards and thanks

dunstonh

I'm sorry dh but it is a risky approach

I'm sorry but its not. Portfolios with only around 30% shares are going be lower risk than a 100% share holding. How much did a typical HYP drop in 2001/2?

and there are plenty of people with seriously depleted capital in investment bonds to prove it. Yours may have done all right; not all have.

I dont see what the tax wrapper has to do with it. Fixed regular withdrawals are available on most tax wrappers.

There are plenty of people who have lost money on shares. Choosing the wrong asset spread or risk to go with the investment goal is not uncommon. It doesnt matter if its shares, investments within ISAs, Unit Trusts, OEICs, Inv bonds etc.

About the HYP in general - 15 to 30 shares in a diverse selection of large caps in different sectors is no more risky than any other equity investment and a good bit less risky than many.

A cautious portfolio wouldnt be 100% shares though.

About LTSB. Let me say again that when LLOY shares were priced at ~£8, it was not a high yield share and would not have been bought in a sensible person's HYP.

I suggest you read this about LTSB: http://www.fool.co.uk/news/investing/high-yield/2006/10/04/it-had-to-be.aspx

So, if was in the MF HYP back in 2000.
http://quote.fool.co.uk/chart.aspx?s=LLOY.L&t=5y&l=off&q=l&c=^FTSE

Look at that £8 share price back in 2002 (and it was floating around £8 in 2000). If your HYP performed similar to LTSB, your capital value would be around 25% lower now and would have been 50% down at the worst point.

A 70/30 (70 non stockmarket, 30 stockmarket) spread in that period would have paid 5% net (thats more than the HYP) and given capital growth by an average of 3.5% a year.

Are you trying to tell me that investing in shares where there is the potential for a 50% loss in a given year is lower risk?

jamesd

patch303, dunstonh is really on the right track here but here's a way to do it that you may feel more comfortable with.

1. Decide how much income you want. Say 5%.
2. Stick two years of that in a savings account and draw from that for your monthly income.
3. Stick the remaining 90% in a mixture of shares, bonds etc in the markets.
4. Every six months top up the savings account so it still has two years of income in it. If the market has fallen a lot, skip that six month topup up to three times.

This gives you complete predictability for your day to day living expenses, lots of opportunity for growth and up to 18 months to smooth out any variations in market returns.

If you want more than 18 months of smoothing you can put some more money in the savings account - 15% would give you 2.5 years of variation you can ride out without having to withdraw anything from the market. Actually more, because you'd get dividend income.

Or ensure that you have corporate bonds providing a steady income and low value variation to draw on. That's more the sort of thing dunstonh has in mind, but using a savings account is more obviously safe because it's what people are used to.

Better what dunstonh is suggesting, but this is eminently practical and comfortable.

cheerfulcat

I'm sorry but its not. Portfolios with only around 30% shares are going be lower risk than a 100% share holding.

Nobody said anything about a 100% share holding. The HYP can be part of a wider portfolio. My point still stands; taking a natural income from dividends presents less risk to capital than selling shares or units for " income ".

patch303 wrote:

With the two such opposing views that you have it is no wonder that I am unable to decide which way to jump.

dh is giving you the industry view. I am giving you the view of someone who makes a living from investing their own money. But really the message is the same - cash is not as safe as it looks, and you have to take a certain amount of risk with your capital to get a reasonable return.

You have to make up your own mind as to what's right for you and that means looking at all available points of view and coming to your own conclusion - that's why I gave you those links to further discussion.

Or get an IFA to do it for you. It's your call.

jamesd

cheerfulcat wrote:

taking a natural income from dividends presents less risk to capital than selling shares or units for " income ".

How about the rest of the picture, the variation in the price of the shares producing the dividends, so the capital is at risk that way, either from outright loss or lower growth than an alternative approach?

cheerfulcat

The alternative of taking income from capital almost guarantees capital underperformance.

dunstonh

cheerfulcat wrote:

The alternative of taking income from capital almost guarantees capital underperformance.

If someone is taking the dividends on shares to live on, rather than have them re-invested, then that will reduce capital growth. The issue here is that the person isnt looking for capital growth. They are looking for income.

All you are doing with a fixed regular withdrawal is having the dividends/income reinvested and relying on 1-2% of the capital growth to make the income up to a fixed level. Although saying that, part of the investment would have funds like Schroder Income Maximiser with a target yield of around 7%. So a chunk of it is HYP style.

If you set the portfolio up with a 7-10% p.a. potential then drawing 5% of that still leaves you growth. 5% has historically been the safe amount to draw.

dh is giving you the industry view. I am giving you the view of someone who makes a living from investing their own money.

Im not sure I am giving the industry view as I dont believe such a thing exists. There are often multiple ways of doing these things. I think you are focusing on what we would both class as the wrong way which is a bog standard managed fund or with profits fund (which still happens today). Whereas I would be using sector allocation with yielding funds but instead of the income being distributed, it is reinvested. Then a fixed regular amount is taken (for convenience of knowing exactly what you are getting each month) at a sensible level rather than distributions that come in every 4 or 6 months which can vary. My view is based on modern research and experience investing and managing millions.

I believe that we are closer on how we do things than you realise with perhaps the only difference being the way the payments are made.

But really the message is the same - cash is not as safe as it looks, and you have to take a certain amount of risk with your capital to get a reasonable return.

No arguement there. If you have £250k and stick it on deposit and draw the interest, then inflation will reduce the spending power of that £250k to around £175k in 10 years. You are running the equivalent of a stockmarket crash every 5 years in real terms.

cheerfulcat

dunstonh wrote:

I think you are focusing on what we would both class as the wrong way which is a bog standard managed fund or with profits fund (which still happens today).

Yes, though I was thinking more of investment bonds where one is encouraged to take out the capital gains as income. Same idea, though.

Whereas I would be using sector allocation with yielding funds but instead of the income being distributed, it is reinvested. Then a fixed regular amount is taken (for convenience of knowing exactly what you are getting each month) at a sensible level rather than distributions that come in every 4 or 6 months which can vary.

Fair enough; so in a sense you are taking the naturally occurring income.

I believe that we are closer on how we do things than you realise with perhaps the only difference being the way the payments are made.

Couldn't agree more...as it happens, I prefer to work a year in advance, taking income as it comes and putting it into a savings account for next year's outgoings but yours is probably a more practical idea for those who need a regular, known income now.

PS if you have the time, I would be interested in the mechanics of your scheme.

dunstonh

PS if you have the time, I would be interested in the mechanics of your scheme.

No problem. Cant today as I am off down to London now and wont be back til late. Give me a reminder if I forget.