The right portfolio for extended retirement

gadgetmind

dunstonh wrote: »

if the shares of the property companies falls because the property company has to have a fire sale of their properties.

Values of shares in property companies will fall because of a combination of 1) NAV reducing, 2) Discounts widening. Neither of these will cause the property company to have to sell property unless they breach loan covenants. Property funds can be forced to sell by breach covenants or for simple day-to-day redemptions. They can avoid this by either holding a large slug of cash (which reduces returns) or locking investors in for many years at the first whiff of a run for the exits.

I've been caught out in the past by the "lock in" and would never use an open ended fund for anything illiquid again.

Your point about correlation is valid, but funds are valued at NAV, and property companies (which do business along the same lines) at NAV + sentiment. This sentiment can be positive even when the outlook on equities is negative, as is the case now.

I also have direct experience of how investment and pension companies manage their commercial property, and can compare to how their more agile commercial counterparts manage them, and it's chalk and cheese.


BTW, apologies to OP for digression, but I didn't want them to worry about that property tracker without fully understanding the pros and cons.

Triumph13

A couple more factors for the OP to consider are 1) 'less volatile' assets might be good news if there is a prolonged market slump, but would generally be bad news in a prolonged period of inflation; and 2) what degree of volatility in income are you prepared to accept in return for a higher average income?
On the latter point, most of the modelling done on safe withdrawal rates assumes you have no tolerance for any volatility in your income. If you have sufficient income relative to your fixed expenditure that you don't have a problem with your income bouncing around a bit, then you can potentially go for a much higher equity ratio and withdrawal rate. This can be particularly the case if you split your assets to give you a 'bread and butter' income level with minimal variability (annuities, state pension, bonds etc) and then equities to fund the 'jam' on top. That way you'd expect to get more jam over your lifetime than if everything was in low volatility assets, but at the risk of having more jam some years than others.
You can smooth the jam levels to a large extent with cash (at the cost of reduced returns) eg if you held 1 year of jam money in cash and sold a fixed percentage of equities each month (eg 0.25% = 4% pa), paid the proceeds into the jam account and then transferred 1/12th of the balance to your current account then your 'income' would be smoothed quite considerably.

dunstonh

BTW, apologies to OP for digression, but I didn't want them to worry about that property tracker without fully understanding the pros and cons.

It is important to "worry" about it if it was chosen to increase diversification and reduce risk (which bricks and mortar funds do effectively). We have seen people purchase prorperty share without realising they are increasing risk rather than reduce it as they didnt realise there was a difference.

I've been caught out in the past by the "lock in" and would never use an open ended fund for anything illiquid again.

The worst lock in I have been affected by was 6 months. In fact, with most property funds, that is the maximum they can do for smaller amounts. If you do have a larger amount then you just spread it. increasing the volatility of the portfolio is not the answer. You would have to bring it down using bonds or cash.

gadgetmind

dunstonh wrote: »

The worst lock in I have been affected by was 6 months.

Fine, but these lock ins can last for many years.

http://www.telegraph.co.uk/finance/personalfinance/investing/funds/11751077/Property-fund-freeze-leaves-investors-with-two-year-wait-to-get-money-back.html

There's risk and there's risk!

caveman8006

Another factor to bear in mind is the tax liabilities of different investment vehicles. Drawdown pension pots will (sooner or later) reach the LTA cap and become subject to a punitive additional tax on returns. But they also have the most attractive (essentially zero on point of transfer and possibly zero on subsequent income to recipient if you die before 75) inheritance tax characteristics. On balance I think this favours keeping your high risk assets within your ISA wrapper where income and capital gains are always tax-free so do not impinge on risk-reward trade-off. Pension pots on the other hand, once they reach the LTA (which is almost inevitable for many these days) force you to take all gains as taxable income so should best be invested in low risk low return assets (ie. cash).

dunstonh

gadgetmind wrote: »

Fine, but these lock ins can last for many years.

http://www.telegraph.co.uk/finance/personalfinance/investing/funds/11751077/Property-fund-freeze-leaves-investors-with-two-year-wait-to-get-money-back.html

There's risk and there's risk!

That is the problem with niche ones. You could have linked a number more non-mainstream ones too which had long periods or even failed. There are many to avoid but fewer that are suitable.