Drawdown portfolio - views

eyeonretirement

So do you agree 14 for each for my wife and myself is fine or should that be 7 each =14? What is your view on holding bonds if I shouldnt be 100% in equities in drawdown if not what are the alternatives?

bostonerimus

dunstonh wrote: »

it is unlikely a drawdown investor would be 100% equity. So, it shouldnt be similar.

Agreed, the sweet spot for a 30 year retirement is around a 60/40 asset allocation

Of course if you have a DB pension or something like rental income you should probably have more than 60% equities in the rest of your portfolio.......as the DB should be included in your overall fixed income allocation and a rental would be an allocation to property and provide regular income.

jamesd

eyeonretirement wrote: »

My pot is approx £750K combined. I intend to run as one portfolio as best I can, all four are on the one platform. ... I understand the problem with bonds, but what else can people do other than property and other bond proxies.

Please read the recent discussion My plan at 55. Is my thinking correct? that covers most of the issues relevant for your own planning. Peer to peer lending is what I'm using as a bond alternative, with secured lending (property, land, cars, equipment and such as security) at a weighted mean interest rate of 12.7% before about 1% estimated bad debt after realising the value of security.

Others have commented on how many funds. While I have quite a few most of the fund money is in just three: a global tracker with pound currency hedge, a managed European smaller companies fund and a managed UK smaller companies fund. The global one is there to cover much of the world and the two smaller companies ones are in smaller companies because those do better than big ones long term, but with bigger ups and downs, and I've held them for a while in two areas where such funds have done well and appear to have decent prospects for a while longer. Maybe fifteen total but the amounts in the rest just aren't material. Those three are putting most of the money where I want it to be without a lot of work.

So far as equity/bond mix in retirement goes the theoretical best is 100% equities if you believe Bill Bengen, the founder of modern safe withdrawal theory. But there are two catches with that:

1. There are some times when bonds do better. Not often, but sometimes. There's a solution for that. Another well respected person, Guyton, has used the cyclically adjusted price/earnings ratio to come up with a rule for when to cut equity holdings into bonds, as part of his work on reducing something called sequence of returns risk. That involves checking a few numbers once a year and doing what the rule says, not a lot of work at all.

2. Most people don't have the stomach for it. A 100% equity portfolio will see drops of 40-50% once or twice in a fairly typical decade. That's a really big drop to accept even when you know that a recovery is likely to be along soon. And giving up and selling at the bottom is really bad. So you need to keep the equity portion at a level where the overall drop is one you can stand while not panic selling and not losing sleep.

Beyond that, the difference in safe withdrawal rate up to around 30% fixed interest isn't large, so it's not terribly painful to do that. 50% and up is more seriously troublesome. Though that's bonds and at the moment P2P lending has apparent returns better than long term equity returns, so in the UK today it's actually a painless swap.

Historically I've been close to 100% equities but due to valuations I'm now far below 100%, with P2P lending being most of where I've gone. The free lunch it offers today may not last but I'll take it while it's around.

bigadaj

Jamesd, you talk about moving into bonds but I can't see how they are any better than equities currently, I'm avoiding.

jamesd

I also have low exposure to bonds because of the interest rate risk to capital but even with that they are a far better place to be than equities at high equity market valuations. I mostly use P2P as my fixed interest component.

TBC15

So what’s wrong with putting the whole 9yds into Fundsmith and just getting on with life?

Linton

TBC15 wrote: »

So what’s wrong with putting the whole 9yds into Fundsmith and just getting on with life?

Assuming that's a serious question...

Fundsmith is invested in just 29 companies mainly US based. 80% of these companies are in just 3 sectors. Putting the whole of your £750K life savings in such a limited range of investments would be frighteningly risky, well to me any way.[STRIKE] In 6 not particularly special weeks from October 2016 the fund dropped 10% (£75K). In 3 weeks from August 2015 it dropped 15% (£113K). The fund has yet to experience a real crash.[/STRIKE]

Maths wrong! Ignore!

Fancy a ride?

bostonerimus

Linton wrote: »

Assuming that's a serious question...

Fundsmith is invested in just 29 companies mainly US based. 80% of these companies are in just 3 sectors. Putting the whole of your £750K life savings in such a limited range of investments would be frighteningly risky, well to me any way. In 6 not particularly special weeks from October 2016 the fund dropped 10% (£75K). In 3 weeks from August 2015 it dropped 15% (£113K). The fund has yet to experience a real crash.

Fancy a ride?

I have a high percentage of equities in my retirement portfolio, but the are in very broad indexes.....so thousands of companies. Admittedly they are market cap weighted but if you are an index investor then that's what you do. In the US retirement nerds are pretty sanguine about market corrections of up to 20% as they are going to happen and have strategies that include a dividend, fixed income and cash allocations and reducing withdrawals to cope. I imagine that's the same in the UK.

TBC15

Linton wrote: »

Assuming that's a serious question...

Fundsmith is invested in just 29 companies mainly US based. 80% of these companies are in just 3 sectors. Putting the whole of your £750K life savings in such a limited range of investments would be frighteningly risky, well to me any way. In 6 not particularly special weeks from October 2016 the fund dropped 10% (£75K). In 3 weeks from August 2015 it dropped 15% (£113K). The fund has yet to experience a real crash.

Fancy a ride?

In the last 5ys it returned 175%.

Did you fail to buy a ticket?

In all seriousness Terry seems to be doing what I should be doing if I could be bothered to spend the time. Warren Buffet lite.

dunstonh

In the last 5ys it returned 175%.

It has had a good run in a growth period. However, it's risk level is high. So, expect 40-50% losses in a negative period. So, do you fancy seeing your pension fund value fall by nearly half between statements?

And as this is a drawdown thread, just imagine what that fall in value would do to your income and capital erosion.