Portfolio for SIPP Flexible Drawdown

Linton

robmatic wrote: »

They're meant to be around the middle of the table. That's kind of the point about a tracker...

Of course, but the point was about the risk. It would be nice if something around the middle of the table in long term performance was in the middle of the table when it came to susceptibility to catastrophic falls.

5-Star

Thank you all for the replys so far

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Do you mean flexible drawdown? I think there's a difference between ordinary drawdown - where the income you can take is limited - and flexible drawdown - where you can take the whole pot out in one go if you want to.

Yes I do mean flexible drawdown. Though I don't anticipate cleaning out the pot in one go I'd like to have the option.

If the income you take from the pot is more or less covered by the dividends from the underlying investments does is matter if the capital value of those investments goes up and down?

I see where you are coming from but given a choice I would prefer the retain as much of the capital value as I can.

dunstonh

"FTSE tracker is not a low risk investment..." compared to what and over what period of time?

Any suitable risk scale should be benchmarked with cash at 1 - nil risk. They need to be put in context. Some only measure equities/bonds/property with low risk being the lowest equity fund.

snowgo

5-Star wrote: »

My thoughts are 50% in FTSE index tracker and 50% in a corporate bond tracker – does this approach seem sensible and what are the alternatives?

One alternative that you could investigate is a portfolio of high yield shares. There are a lot of folks on the motley fool 'high yield portfolio practical' forum board who are using dividends from high yield portfolio in a sipp for income drawdown. The HYP methodology is also described in articles on the motley fool website. In short it is generally a portfolio of about 20 - 25 ftse 100 companies (those with highest yield, good dividend cover, history of regular dividend payments, and covering a range of sectors). The rationale of using only ftse 100 companies is that they are so big as to be unlikely to run into severe problems - so, for example, difficulties such as BP experienced are not 'disasterous' in the context of the size of the company - and with a portfolio of 20+ companies, many of whom are international names, you have a good degree of diversification.

I suggest this just as you were asking about alternatives. I appreciate that it may seem more complicated than an index fund and need more researching. But for what it is worth, I am in a similar position to you with regard to having investments in addition to a final salary pension, and I find the case for HYP to be quite compelling.

jamesd

HYP is also high risk. Both that and the FTSE can see 45% drops in normal bad dips and potentially over 95% in truly exceptional ones. Routine dips are around 20%. You shouldn't find HYP compelling because it has horribly limited diversification - it's what would be termed a very concentrated set of holdings in fund terms, where anything up to 40 is concentrated. It doesn't help that Invesco perpetual High Income beat the HYP when it was compared, which is why Fool now only says it beats most funds. Why bother when you can do better with one of the most popular funds in the UK, with more diversification?

The argument that FTSE 100 companies are unlikely to run into severe problems is false. It's a regular routine for FTSE 100 companies to sufferer massive failures and losses for investors, quite often accompanied by bankruptcy. Just means that the person writing such an argument doesn't know the history very well.

10-20% worst case likely drop is the sort of thing that would be low risk. It would require a fair bit of cash to counter the FTSE use. But something like the Vanguard World tracker would be a better choice than the FTSE.

Linton

jamesd wrote: »

HYP is also high risk. Both that and the FTSE can see 45% drops in normal bad dips and potentially over 95% in truly exceptional ones. Routine dips are around 20%. You shouldn't find HYP compelling because it has horribly limited diversification - it's what would be termed a very concentrated set of holdings in fund terms, where anything up to 40 is concentrated. It doesn't help that Invesco perpetual High Income beat the HYP when it was compared, which is why Fool now only says it beats most funds. Why bother when you can do better with one of the most popular funds in the UK, with more diversification?

The argument that FTSE 100 companies are unlikely to run into severe problems is false. It's a regular routine for FTSE 100 companies to sufferer massive failures and losses for investors, quite often accompanied by bankruptcy. Just means that the person writing such an argument doesn't know the history very well.

10-20% worst case likely drop is the sort of thing that would be low risk. It would require a fair bit of cash to counter the FTSE use. But something like the Vanguard World tracker would be a better choice than the FTSE.

I have an HYP for income as a useful though not dominant part of my portfolio. Sure, it will suffer the same major fluctuations in capital value as the FTSE100 and I agree an HYP is not a particularly good holding for long term capital growth. However my main metric is the dividend income which is much less variable. The income comes into my bank account frequently throughout the year with zero hassle and minimal need for detailed management.

Having picked up a good range of the key dividend payers in the FTSE-100 I am now moving towards the lower reaches of the FTSE-250. There are some interesting companies down there.

middlepuss

dunstonh wrote: »

Any suitable risk scale should be benchmarked with cash at 1 - nil risk. They need to be put in context. Some only measure equities/bonds/property with low risk being the lowest equity fund.

Are you suggesting that over the long term a cash investment is less risky than a FTSE All Share tracker?

If so I'd disagree. History shows that over the medium to long term cash accounts lose real value whereas stock market investments preserve real value.

A FTSE tracker investment will be more volatile than a cash account, but volatility is not the same thing as risk.

middlepuss

snowgo wrote: »

One alternative that you could investigate is a portfolio of high yield shares.

I'd go along with this but only if the OP will be monitoring the portfolio.

If you'd invested in an HYP portfolio 25 years ago and not switched how would the portfolio be looking today?

For passive investors a tracker, or a huge investment trust such as Foreign and Colonial, means you can invest and forget and let the fund manager do the work.

A tracker may well come in the middle of the performance tables over the long run. So, pick a fund that will be in the top half? OK - please tell us which funds will perform in the top half over the next 20 years!

middlepuss

5-Star wrote: »

Thank you all for the replys so far

Yes I do mean flexible drawdown. Though I don't anticipate cleaning out the pot in one go I'd like to have the option.

I see where you are coming from but given a choice I would prefer the retain as much of the capital value as I can.

These two statements seem to be a little at odds with each other.

If you were to only draw an income roughly equal to the dividends, the capital will be preserved - and indeed should increase. With a high yielding portfolio you should be able to draw at least 4% with a good chance of the capital value being preserved and even increasing.

Given the extra cost of Flexible Drawdown, you could go into ordinary drawdown initially, and then if and when you need to take more out than the ordinarly drawdon rules permit, you could at that point switch to Flexible Drawdown.

dunstonh

Are you suggesting that over the long term a cash investment is less risky than a FTSE All Share tracker?

No. You measure risk by potential for loss. Not potential for gain. You could say that it is about acceptance of volatility.

If you have someone who says they are cautious then that typically indicates a loss tolerance in 12 months of up to 15%. The FTSE can lose 40% in a year. So, it does not fit the risk profile (in isolation). Timescale does dilute risk over the long term but the typical consumer looks short term. It wouldnt matter if the FTSE went up 40% up the year before, if it lost 20% the following year they would moan about it and possibly pull out.

To understand the level of risk, you have to benchmark it to something that is fixed. Cash is often used. Gilts are also considered with some measurements.