Drawdown: safe withdrawal rates

jamesd

In another topic I just posted this about P2P for a person with about £700k total to invest and who has a quite cautious outlook, so it favours lower risk platforms than I'd generally be inclined to suggest.

2020 update: BondMason and Moneything are/have made orderly exits. Collateral a very disorderly one. The others are still around, though rates are likely to be different.

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Some options to consider in the peer to peer lending area.

With protection fund:

1. Unbolted. Secured on pawned goods, with gold-backed loans paying 8% a year, and other pawned items like high value watches, silver and such paying 10.5%. Gold backed by insurance against a drop in the gold price and the other ones by a provision fund. Also some without either protection. You could probably invest at a rate of about £500-800 a week to a maximum of about £13,000-£21,000 because the normal loan term is six months until repayment, leaving 26 weeks worth the effective maximum. You'd probably get about 10% overall based on the mixture of loans between the types. Pretty much automatic lending, just set up a limit for autoinvest and feed more money in as it gets lent out.

2. Lending Works. About 5% with protection fund.

3. RateSetter. About 3.5% for the rolling market (rapid access) product, with protection fund.

Without protection fund, secured lending instead:

4. BondMason. About 7% after charges. They manage investments at lots of peer to peer platforms for you, a convenient way of diversifying among lots of places. No overall protection fund but some ways they invest may have one.

5. Ablrate. 10-15% for loans secured on property of various sorts, from houses through business buildings, land and machinery. Assume perhaps 2% loss after sale of security for net return before tax of about 10-11%. Has an ISA. No protection fund, secured lending instead. Stick to £250-500 per loan until you know enough to do more by your own decision.

6. MoneyThing. 10-12% for loans secured on buildings and land, rarely other things. Assume about 2% loss to bad debt after security, so about 10% net before tax. ISA planned, not available yet. No protection fund, secured lending instead. Stick to £250-500 per loan until you know enough to do more by your own decision.

7. Collateral. 10-15% for loans mostly secured on land and buildings, though lots are property development loans that are fairly high risk compared to other P2P. Sometimes loans secured on pawned items at lower rates, very high demand for them. Maybe 9% returns after bad debt before tax. No protection fund, secured lending instead. Stick to £250-500 per loan until you know enough to do more by your own decision.

The common factors are that none has FSCS protection and all pay more than any mortgage you have is likely to be costing you. You might consider a split of this sort between them:

1. £20k, 10% expected return
2. £20k, 5% expected return
3. £50k, 3.5% expected return
4. £50k, 7% expected return
5. £20k, 10% expected return
6. £20k, 10% expected return
7. £20k, 9% expected return

On that £200,000 you'd expect an average overall return of about 7.025% before tax, £14,050 a year. For £100,000 keep 1 the same, halve the rest except take 5k more from 4 and 5 to give to 1 and keep that at £20k.

The splits are based on relative risk levels and platform history as well as effort level. Easy diversification is why Bond Mason gets £50k, long history and the protection fund why RateSetter does. With that spread of seven P2P platforms you aren't going to have too much exposure to any one platform.

westv

Bump.

I also see that jamesd hasn't posted for a couple of months.

michaels

westv wrote: »

Bump.

I also see that jamesd hasn't posted for a couple of months.

I was thinking that recently when several 'jamesD' questions came up. We sorely need the sort of knowledge he and other experienced posters provided

jamesd

michaels wrote: »

I was thinking that recently when several 'jamesD' questions came up. We sorely need the sort of knowledge he and other experienced posters provided

Thanks for the kind words. I was and mostly still am on a break but I'm not permanently gone.

stoozie1

I am really pleased to read that you are not gone. As said above, you contribute a lot of wisdom, and it is appreciated.

penwise

Yep - second that- jamesd is one of my favourite contributors - really glad you haven’t gone.

jamesd

I've added some more detail to the third post, about sequence of return risk, which now says:

This is the risk of failure due to the ups and downs of investments and planning for this typically requires an initial income below the one that could be obtained if the performance was the same each year. Looks as though Guyton's approach can significantly reduce the risk from this. See:

Jonathan Guyton Tames a Gorilla (archived, original)
Sequence-of-Return Risk: Gorilla or Boogeyman? (archive)

Those explain how Guyton found that using the cyclically adjusted price/earnings ratio was effective in greatly reducing the impact of sequence of returns issues. Here's a source for PE10 for the US S&P500 with past charts and for other markets.

"Though exhaustive study on the combined impact of dynamic withdrawal and allocation policies has yet to be undertaken, results of their stand-alone impact offer strong reason to believe that employing them together would add around 100 basis points to the sustainable withdrawal rate under static policies"

That's 1% higher sustained withdrawal rate, from 4.5% to 5.5% for anyone still using the "4%" rule.

The Gupta et al rule Guyton uses for his action threshold says:

"P-E10: if the S&P's normalized P/E ratio is less (greater) than its historical mean plus (minus) one-half its standard deviation, the stock allocation in the rebalanced portfolio is decreased (increased) to 25 percent below (above) the baseline allocation"

Guyton kept the one standard deviation threshold but modified the shift:

"Because of my sense that most financial planners (including myself) may be uncomfortable communicating so large a one-time equity allocation change to their clients, in modeling the dynamic allocation policy I use a 65 percent neutral equity allocation with just under a 25 percent shift to 50 percent (80 percent) when an over- (under-) valuation occurs"

There's a common belief that because it's hard to know what will happen in the short term (a top decile PE10 correlates with a 25% chance of a big drop over the following year) you can't usefully predict and change over longer terms. That's not true:

• Should Equity Return Assumptions In Retirement Projections Be Reduced For Today's High Shiller CAPE Valuation? (archived) - no, they already allow for that and you can also use PE10 to get some idea of how you might do
• Understanding Sequence Of Return Risk - Safe Withdrawal Rates, Bear Market Crashes, And Bad Decades (archived) - it's possible to predict the times when low equity mixtures can be expected to do better using PE10, like now, January 2018
• Interpreting Monte Carlo Analyses and the Wrong Side of Maybe Fallacy (archived) - you can know when stocks and money market (bills) beats stocks and bonds, like now, January 2018

Thrugelmir

if the S&P's normalized P/E ratio

Little point in quoting the S&P unless as a UK investor you've a totally hedged currency position against the US $. As returns will be wildly different due to the fluctuating exchange rate.

westv

Thrugelmir wrote: »

Little point in quoting the S&P unless as a UK investor you've a totally hedged currency position against the US $. As returns will be wildly different due to the fluctuating exchange rate.

But it's just used as a guide as to where stock markets might head rather than relating to any specific returns.

System

Other research has highlighted that Guyton Klinger 'decision rules' is not always as good as it may first appear. The ERN website has a good analysis as part of a wider investigation into SWR
https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/