100% Equity vs Equity/Bond

Linton

point5clue wrote: »

The original question was about mixing in bonds - I've wondered about the risks and benefits myself and graphed LS 100 vs 40 etc to see how they compared, but on the Fidelity site it only allows you to go back 5 years - over which time I couldn't see any 'crashes' (mabybe I'm just over estimating what a 'crash' looks like on a 5 year graph ? )

Is there a place to get a graph of stocks vs bonds during the times when you suddenly don't want to be 100pc equities ! ?

with >10 years to go, and intending to drawdown for 100 years afterwards I'm 100pc equities in my pension, but I also want to build up a long term ISA holding partly as a buffer for variable spending during drawdown - cash would be madness, 100pc equities would defeat the point, so something like a LS40 seemed ideal, but I really like to get a better feel for what it might be like during a 'crash' (I know its a relative term, but there' a few that most people would confidently call).

The VLS funds started in 2011 so sadly you can't see how they performed during the crash.

For long term graphs look on the Trustnet/Tools/Charting where you can get data going back 25 years, though most funds aren't that old.

jamesd

point5clue wrote: »

The original question was about mixing in bonds - I've wondered about the risks and benefits myself and graphed LS 100 vs 40 etc to see how they compared, but on the Fidelity site it only allows you to go back 5 years - over which time I couldn't see any 'crashes' (mabybe I'm just over estimating what a 'crash' looks like on a 5 year graph ? )

Is there a place to get a graph of stocks vs bonds during the times when you suddenly don't want to be 100pc equities ! ?

The FT often has longer periods. The last big one was in 2008. This five year horizon is a trap for consumers who might not realise that there was something more nasty beyond that time frame that is really why they might want to diversify away from equities.

point5clue wrote: »

with >10 years to go, and intending to drawdown for 100 years afterwards I'm 100pc equities in my pension, but I also want to build up a long term ISA holding partly as a buffer for variable spending during drawdown - cash would be madness, 100pc equities would defeat the point, so something like a LS40 seemed ideal, but I really like to get a better feel for what it might be like during a 'crash' (I know its a relative term, but there' a few that most people would confidently call).

You might want to look at Guyton's sequence of return risk taming as well as the more general Guyton and Klinger drawdown rules.

Given the way tax works it's quite likely to be useful to gradually move money from pension to ISA as a protection against higher income tax rates. If you think it's appropriate for you, you can use VCT buys to reduce or eliminate the income tax cost of the move.

Dird

Is there a (free) site that assesses the risk of your portfolio? Morning star doesn't

Linton

Dird wrote: »

Is there a (free) site that assesses the risk of your portfolio? Morning star doesn't

Trustnet calculates their risk score for a portfolio which forms a basis of comparison between different portfolios and funds. However it appears that the risk score is based on relatively short term volatility calculations, and so may not provide reliable guidance about behaviour during major crashes etc.

jdw2000

jamesd wrote: »

Depends on which of the VLS funds you hold. Here are the historic yields for some of the income versions of the funds in the range:

1.54% 100% equity
1.4% 80% equity
1.24% 60% equity
1.15% 40% equity (1.15% is historic yield, 1.34% is distribution yield)

Your numbers were using 4% which isn't consistent with any of the VLS range of funds but if you were to sell and take capital as well you would be taking about the safe withdrawal rate for a 30 year time horizon from a 60% or more equity mixture. While 4% before costs is US SWR, UK is about 0.3% lower.

You can't expect the fund to grow by 2-7% annually while taking level 4% increasing with inflation. For example, the UK market long term average has been a bit over 5% plus inflation. If costs are 0.25% that's only 0.75% plus inflation available for growth even before the effect of sequence of return risk on safe withdrawal rate.

However, if you were to use the Guyton and Klinger rules, which involve some buying and selling, you could perhaps take 5-6% and have a substantial chance of the capital value at the end not having decreased in nominal terms, the exceptions being if you lived through lower than normal market returns.

From my current mixture of P2P and VCT I'm expecting around 11.7% income before bad debt, maybe 1-2% of that anticipated. Also before inflation.

Thanks very much for that. That's very helpful. It's all pretty straightforward once you get your head around it.

Yes, assuming a (pre-inflation) 5% growth, 4% drawdown is pushing it a bit, especially if you'd like to see some overall growth down the years too.

Not heard of the Guyton and Klinger Rules, or the 'sequence of return risk' so will have a look.

Will also get around to checking out P2P and VCT once my head can handle new info. Income of 11.7% sounds brilliant.

Cheers.

point5clue

Given the way tax works it's quite likely to be useful to gradually move money from pension to ISA as a protection against higher income tax rates. If you think it's appropriate for you, you can use VCT buys to reduce or eliminate the income tax cost of the move.

Can you explain a little more - is this after retirement (perhaps using TFLS) or diverting payments from pension to ISA during accumulation phase ?

You might want to look at Guyton's sequence of return risk taming as well as the more general Guyton and Klinger drawdown rules.

I have read this (and will doubtless re-read all the great stuff on there many times - thanks by the way) which is what made me start to want to build up a cash buffer outside my pension. But it was precisely this buffer which I'm trying to plan - just putting money in a cash ISA for 10 years seems overly cautious to me. Hence thinking about bonds, stock/bond mix or even some P2P (I have a lovely wife with a lovely un-used tax allowance)

Dird

Linton wrote: »

Trustnet calculates their risk score for a portfolio

It seems somewhat random to me, it's showing a 3.5% gain whereas when I compared total deposits/switches vs current value on Cavendish it works out around 20%

coastline

point5clue wrote: »

The original question was about mixing in bonds - I've wondered about the risks and benefits myself and graphed LS 100 vs 40 etc to see how they compared, but on the Fidelity site it only allows you to go back 5 years - over which time I couldn't see any 'crashes' (mabybe I'm just over estimating what a 'crash' looks like on a 5 year graph ? )

Is there a place to get a graph of stocks vs bonds during the times when you suddenly don't want to be 100pc equities ! ?

with >10 years to go, and intending to drawdown for 100 years afterwards I'm 100pc equities in my pension, but I also want to build up a long term ISA holding partly as a buffer for variable spending during drawdown - cash would be madness, 100pc equities would defeat the point, so something like a LS40 seemed ideal, but I really like to get a better feel for what it might be like during a 'crash' (I know its a relative term, but there' a few that most people would confidently call).

A few links as a guide but they are USA based.

Various allocation models showing best and worst years..

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

This link should be useful as it does show charts from any period from 1975 to the present day..

https://www.portfoliovisualizer.com/

On this link you can set 3 different asset allocations and results will show in chart form..

https://www.portfoliovisualizer.com/backtest-asset-class-allocation

From Trustnet another general guide..

https://www.trustnet.com/Tools/AdviserFundIndex.aspx

bowlhead99

jamesd wrote: »

Given the way tax works it's quite likely to be useful to gradually move money from pension to ISA as a protection against higher income tax rates. If you think it's appropriate for you, you can use VCT buys to reduce or eliminate the income tax cost of the move.

point5clue wrote: »

Can you explain a little more - is this after retirement (perhaps using TFLS) or diverting payments from pension to ISA during accumulation phase ?

Not really diverting pension to isa instead of pension during accumulation phase, because you would miss out on income tax relief. So, later than that.

But ultimately you will want to get the money out of the pension again to be able to use it. And it's important to realise that the money in your pension is money you haven't paid income tax on yet, and 75% of it is taxable.

So effectively although we talk about money growing tax free inside a pension wrapper, a pound in a pension that doubles in value over the next decade gets you only 25p of tax free profits and 75p of taxable profits, and 75p of the original pound is taxable as well. Whereas a pound in an isa that doubles in value gives 100p of tax free profits and the pound itself can be accessed whenever you like.

Obviously the fact that part of the pension is 'taxable' doesn't necessarily mean you will pay tax on it, because it might all or at least partially fit into your annual personal allowance. But if you have the opportunity to draw money out of the pension and pay pretty low tax on it (either by fitting a chunk of it in your annual allowance, or by paying some tax and then claiming some other offsetting relief like VCT), it can be a good idea to do that - if you are going to be able to invest it efficiently outside the pension (eg. in an ISA or VCT).

The "risk" of just letting it accumulate inside the pension and keep on growing (75% taxable) until you actually need it, is:

a) you might not be able to fit the same proportion of it into your tax free allowances, by the time you're ready to spend it

b) if you have other pensions that have kicked in, or you have a very large amount of money to take out of this one in a particular year, or just generally have a lot of income, you might even go up to a high tax bracket e.g. 40% in later life

c) at the moment basic rate tax is "only" 20% on taxable income (effective 15% on pension money after getting a quarter of it out as TFLS) but successive govts could tinker with rates to your disadvantage.

So, if you have capacity to draw pension money at a pretty low rate and shove it in an isa giving it tax free status indefinitely, that can be a useful thing to do, rather than have a "tax time bomb" on your pension money. The stuff in the pension wrapper is effectively a deferral of paying tax bills in your earlier life when employed, and so it's not giving you entirely "tax free" growth in the same way an ISA does (i.e. ISA being funded from already-taxed income).

jamesd

point5clue wrote: »

Can you explain a little more - is this after retirement (perhaps using TFLS) or diverting payments from pension to ISA during accumulation phase ?

Not during accumulation any more. Pension first, then start moving from pension to ISA once you get to age 55. Tax free lump sum first, plus any taxable income that's within the basic rate band.

The working assumption I have is that income tax rates are more likely to become higher than lower during the years of retirement. So it's good to take the initial tax hit at 20% to get rid of the risk of higher later. Though not if the Money Purchase Annual Allowance will be inhibiting, which means the taxable portion taking may have to wait until not working any more.

Then the potential for VCT relief is icing on the cake since you can get money out tax free in effect if you can wait five years and in retirement pretty much by definition you have way more than five years you can wait.

The "any more" is in the first sentence because before pension freedom you were effectively forced to use non-pension money for retirement planning so you could draw at a high enough rate during early retirement, because the GAD limit cap was too low to allow a high enough rate.

VCT during accumulation can make sense, though, since the 30 tax relief there can be had once every five years. Means you can potentially get more than a hundred percent relief after a few cycles. But there's an effective limit on how much you can do because relief is capped at tax paid in the tax year of purchase.

point5clue wrote: »

I have read this (and will doubtless re-read all the great stuff on there many times - thanks by the way) which is what made me start to want to build up a cash buffer outside my pension. But it was precisely this buffer which I'm trying to plan - just putting money in a cash ISA for 10 years seems overly cautious to me. Hence thinking about bonds, stock/bond mix or even some P2P (I have a lovely wife with a lovely un-used tax allowance)

My pleasure, it saves me a lot of time as well and means I can know that people are getting suitable context and background material at the same time as I refer people there. I think a wife might be a net financial loss in spite of her handy tax relief use...

Just be sure that you maximise the potential for pension, and if suitable VCT, reliefs.

To add to bowlhead99's answer, taking the tax free lump sum at 55 is also handy because that fixes the percentage of your lifetime allowance that is used at the earliest possible moment, pre-empting a lot of the future growth. And with suitable planning you can recycle it all into pension if still working (taking care to stay within the recycling limits), VCT or whatever. There's another lifetime allowance test at age 75 that covers the growth in the pot since crystallisation (the tax free lump sum taking or whatever else caused it) so it's handy to withdraw at least the growth to avoid that future cost. Assuming you think that you might eventually go over the LTA.