Investing in Drawdown

jamesd

Aged wrote: »

I can see that now yes. So, putting your examples here in order of risk (starting with the least) let me see - property, corporate bonds, ETFs then P2P. How did I do?

Not particularly badly or well, the problem is that there's a range of risk levels within each.

Commercial property: there are two broad types, one that holds shares of property-related firms like builders and service companies, the other that owns actual buildings. The first one is quite volatile, more so than a UK share tracker. The second one is less volatile than either, probably, but there is a risk of being unable to sell during times of economic stress, due to lack of buyers or realistic prices. This happened in 2008.

Corporate bonds: these are normally unsecured investments so the capital is all at risk, usually coming after all other creditors in priority. They usually have lower volatility than equities but at the moment they are vulnerable to losses due to an increase in interest rates, with substantial capital loses likely for long duration bond funds (that is, those holding bonds with long time to maturity). Defensive moves here include using short term bonds, you can normally find out the average maturity of the bonds in a bond fund if you ask.

ETFs: ETFs can hold equities, property, corporate bonds and many other things. No way to say what the risk level is as a whole because it depends on what the other thing. In effect by just saying ETF you wrote "carrier bag" but didn't say what's inside the bag.

Equity ETF: if this is what you meant, the UK stock market can be expected to see drops of 20% two or three times a decade and 40% once or twice. Emerging markets might drop 60-80%, as might specialist funds like natural resources or individual unsettled countries. No capital value protection at all.

P"P has a huge range. Normally here people rite about lending P2P, rather than the equity P2P that tends to be investing in very high risk startup companies. Within the lending P2P sphere there's a big range as well but I tend to stick to mentioning those that are secured or have protection funds or both. The secured ones have actual security for your capital - meaning actual property that can be seized and sold to get you your capital back. the biggest risk in this area is actual fraud by a P2P lending platform that you protect yourself against with diversification as well as picking platforms with some care.

Of the ones you named, the lowest risk in my opinion would be secured P2P lending with a protection fund on top coupled with prudent diversification between platforms. That's because there is actual security for capital, moderated by the fraud risk.

jamesd

Lets perhaps ask a straightforward question: can you deal with a period of one month in which a fund investing in global equities via a tracker fund or tracker ETF drops in value by 40%? That's what is expected for a completely routine global tracker fund one decade or so, just like the UK. It's not really a straightforward question, of course, but it's a key one to ask and consider.

Within conventional investments that's the sort of straightforward equity investment that is often recommended for the bulk of the money.

Say you can't handle that, can you combine 50% in that and 50% in cash and see that the average drop is 20% and concentrate o that average, or would you still see and be very upset by the 40% drop in part of it? This question matters because it is routine to construct portfolios of investments so that the average result will be within the risk tolerance, and it relies on the investor being able to accept bigger drops in some parts than in others.

For example I might suggest a 75% global tracker to 25% secured P2P mixture, knowing that the 25% P2P will have essentially no volatility. So when the stock part drops 40%, the drop from the combination is only 30% because 25% didn't drop at all. Then within the P2P part I'd suggest at least five different places so that the maximum exposure to one is just 5% of the amount invested. And also for those five I'd pick different underlying types of investing, like to consumers with protection fund or security (say secured on cars), secured on buildings, secured on pawned items so that if one type had trouble the other types might not.

It's not so much a case of finding one thing that you like as identifying how much up and down you can handle and picking a range of things that can be within that sort of range when combined together.

For example, I think the equity markets in much of the world are a bit high so I'm moving much of my own money into secured lending P2P and secured VCT lending investments so I'm not going to see as much volatility in my whole combination of investments when equities take their next big dive, whenever that is, whether it's next week or ten years from now.

Daniel54

maximumgardener wrote: »

also "fill your boots" with S&S ISA's ?

As the pension has been inherited it should still be wrapped as a pension,so no need for ISAs.This is not entirely clear from the OP's posts so far and neither is it clear if the previous investments have been sold and everything is currently sitting in cash

http://www.hl.co.uk/pensions/death-tax

jamesd

As Daniel54 wrote, S&S ISA may not matter much. There are two ways to inherit the pension, one if the person died before age 75, when the pension pot money is tax free as it's taken out. The other is from age 75 when it's taxed as normal income for the recipient.

If Aged has inherited from a person who died under age 75 they are in a great position with all of the money already protected as well from income tax as an ISA. It's also easy to move it to ISA using the annual limit as desired.

[Deleted User]

I have been running a sipp for my husband since A day. I got his authorisation and did the transfers myself, his was his lifetime private pension pot. I also ran a very small one for myself. I put both into drawdown about 5 years ago and changed tack into a wider spread of `safe assets, mostly income producers. I made his sipp grow by about 75% since start.

Things changed drastically a few months ago when he died suddenly under age 75. The previous year he took his pension from drawdown as yearly payment, it was taxed. When he died then his sipp was easily transferred to join my sipp (sippdeal were outstandingly helpful). I withdrew and paid tax on the whole of my sipp portion, simply to make tax calculating on my future withdrawals simpler ie no tax on any withdrawal.

I am aiming to keep the sipp assets pretty well intact now for my beneficiaries. Every stock in my sipp is a large cap and has a pretty good dividend and I have good asset allocation between the various sectors. So on retirement I went into more cautious mode but I still sold to conserve value and then bought back when appropriate, only ever buying back when I got more shares for the same total amount of money. Bit by bit, I have seen the portfolio increase over time. I never use funds and I am my own financial advisor. There will be enough cash dividends dropping into the sipp to provide a good tax free pension and quite probably there will be capital growth too

Over time, the past 20 years, I learnt to trade stocks and was more adventurous in the past. I traded gilts, ETFs, smaller companies etc. Sippdeal charges don`t make any sort of dent in the portfolio. I am happy to let things roll just now, no longer being adventurous, just careful

Aged

jamesd wrote: »

If Aged has inherited from a person who died under age 75 they are in a great position with all of the money already protected as well from income tax as an ISA. It's also easy to move it to ISA using the annual limit as desired.

Daniel54 wrote: »

As the pension has been inherited it should still be wrapped as a pension,so no need for ISAs.This is not entirely clear from the OP's posts so far and neither is it clear if the previous investments have been sold and everything is currently sitting in cash

Yes, all sheltered from tax and sitting in cash ready to invest.

Aged

kittie wrote: »

I have been running a sipp for my husband since A day. I got his authorisation and did the transfers myself, his was his lifetime private pension pot. I also ran a very small one for myself. I put both into drawdown about 5 years ago and changed tack into a wider spread of `safe assets, mostly income producers. I made his sipp grow by about 75% since start.

Yes, 'safe' assets, that's exactly what I'm looking for

Things changed drastically a few months ago when he died suddenly under age 75. The previous year he took his pension from drawdown as yearly payment, it was taxed. When he died then his sipp was easily transferred to join my sipp (sippdeal were outstandingly helpful). I withdrew and paid tax on the whole of my sipp portion, simply to make tax calculating on my future withdrawals simpler ie no tax on any withdrawal.

I'm sorry for your loss.

I am aiming to keep the sipp assets pretty well intact now for my beneficiaries. Every stock in my sipp is a large cap and has a pretty good dividend and I have good asset allocation between the various sectors. So on retirement I went into more cautious mode but I still sold to conserve value and then bought back when appropriate, only ever buying back when I got more shares for the same total amount of money. Bit by bit, I have seen the portfolio increase over time. I never use funds and I am my own financial advisor. There will be enough cash dividends dropping into the sipp to provide a good tax free pension and quite probably there will be capital growth too

Well done you! You're an inspiration.

Over time, the past 20 years, I learnt to trade stocks and was more adventurous in the past. I traded gilts, ETFs, smaller companies etc. Sippdeal charges don`t make any sort of dent in the portfolio. I am happy to let things roll just now, no longer being adventurous, just careful

Thanks for sharing your experiences, I am encouraged by your story

coyrls

Aged wrote: »

Yes, 'safe' assets, that's exactly what I'm looking for

I don't think Kittie is using the word safe in the same way that you are. From what Kittie has described, she is taking equity risk, something that you don't seem keen on. In fact Kittie could be considered to be taking more risk than most because she is investing in individual shares.

[Deleted User]

private message for you AGED

Malthusian

the 25% P2P will have essentially no volatility

This is very misleadingly put. The only reason it has no volatility is that it's totally illiquid.