Potential Inflexibility of VLS60 et al during drawdown?

_pete_

I anticipate starting to draw down from my SIPP in a couple of years time.

I've come across the suggestion that when the market is falling
dramatically, one should take drawdown funds from bonds rather than selling equities.

1. Is this a sensible approach?
2. How do you do it if your portfolio is all in Vanguard Lifestrategy 60 or similar?

Or have I missed something (eg, does the 'automatic' rebalancing of the VLS products somehow egate the need for this approach)?

dunstonh

I've come across the suggestion that when the market is falling
dramatically, one should take drawdown funds from bonds rather than selling equities.

What reason was given?

2. How do you do it if your portfolio is all in Vanguard Lifestrategy 60 or similar?

I wouldnt have someone in drawdown in VLS60. However, as a single multi-asset fund you really only have two strategies. 1) keep an amount in a cash account and draw on that or 2) just draw directly from the fund through sale of units.

TBC15

How many years of draw down cash to have in reserve would you recommend?

atush

The answer to such volatility is to have a cash funds, both for emergencies 50% or more of income) and a min of 1-3 years more as cash (you can use TFLS for this).

Then if a downturn comes, you can switch from income to accumlation units for the first 6-18 months of a downturn returning to income after as required/prices recover.

dunstonh

TBC15 wrote: »

How many years of draw down cash to have in reserve would you recommend?

Depends on the individual. There are multiple strategies and you have to go with what works for the person rather than have the person fit your preference. I tend to use income units and have the income pumped into the cash account. The cash account feeds the withdrawals. Somewhere between 12-24 months is typical but flexibility is retained depending on where we are in the cycle.

Some portfolios have no cash account and draw proportionality across the funds each month based on that days values.

Some are built to be higher yielding and you dont sell anything unless it has to do with investment selection rather than withdrawal requirements.

davieg11

As others suggest, better to keep 2 years money in cash to use in a downturn. If you still have a couple of years before drawdown from SIPP then you can either start saving now or keep money aside from your 25% tax free lump sum if you are withdrawing that

Cash-Cows

dunstonh wrote: »

I wouldnt have someone in drawdown in VLS60.

Why is this?

jamesd

_pete_ wrote: »

I've come across the suggestion that when the market is falling dramatically, one should take drawdown funds from bonds rather than selling equities.

1. Is this a sensible approach?

Of course. You always want to try to avoid selling low.

A rising equity percentage as you get older is also one of the best performing approaches in drawdown studies and you can facilitate that by drawing on bonds before equities. Better performing still are management rules like Guyton-Klinger that draw on cash and bonds first, replenishing during good equity years.

Further, Guyton's sequence of returns risk reduction strategy greatly varies the bond percentage based on cyclically adjusted price/earnings levels and given how important this risk is in drawdown shouldn't be neglected.

_pete_ wrote: »

2. How do you do it if your portfolio is all in Vanguard Lifestrategy 60 or similar?

You don't, the products are only half-decent even for those using not particularly good fixed splits.

_pete_ wrote: »

Or have I missed something...?

The last ten to twenty years of research into income drawdown. You might even be using the old 4% rule that usually would have left people dying with twice as much money as they started with, without adjusting for inflation.

You can find references and discussion of more recent research linked from Drawdown: safe withdrawal rates. That also suggests a baseline approach using more recent research than the 4% rule.

dunstonh

Cash-Cows wrote: »

Why is this?

1 - Our own portfolios outperform VLS60.
2 - Drawdown investors tend to have larger amounts. So, using a single multi-asset growth fund doesnt really sit with the objective.
3 - If the person was focused on costs rather than potential returns (which is usually the reason for VLS) then there are cheaper options.
4 - HSBC is lower cost and better return since they moved the fund to the active passive style. Although again, I would not use that for drawdown.

I have put millions in VLS. It is great for small investors. Although the others have caught up. However, I couldnt see it being used for drawdown unless you were using the segmented portfolio drawdown method (where you allocated x% of your portfolio to provide withdrawals over the next x period and have another segment of your portfolio allocated to growth - often running multiple segments to cover different timescales - not a method I particularly like but some do).

gadgetmind

_pete_ wrote: »

I've come across the suggestion that when the market is falling
dramatically, one should take drawdown funds from bonds rather than selling equities.

There are different approaches, but using bonds to fund drawdowns, and then topping up the bonds when equities have done well, passed a *lot* of back testing.

This book is *well* worth a read.

http://monevator.com/review-living-off-your-money-by-michael-mcclung/

_pete_

gadgetmind wrote: »

There are different approaches, but using bonds to fund drawdowns, and then topping up the bonds when equities have done well, passed a *lot* of back testing.

This book is *well* worth a read.

http://monevator.com/review-living-off-your-money-by-michael-mcclung/

I must admit that looks like a great book. But I'm a little daunted by the complexity and level of detail. If only there were a dummies guide.......