Is this pound cost ravaging?

smjxm09

I am just trying to get my head around one of my long term investments that I took out just under a year ago. It is a Fidelity multi asset income fund that can pay a variable monthly income into my bank account or the monthly income can be reinvested to buy more units. The income comes purely from the returns on the investments.


I am happy with the variably income it produces each month but the buy/sell price for the units has dropped from a maximum high of £1.11 per unit to around £1.06 per unit the last time I looked. Most of my units were bought at £1.10.

This has put my fund into negative territory as well as the total return including monthly income payments. At the moment I have switched the income to re-invest as my situation has temporarily changed so I don't need the income but that will change again soon.

As my investment has been running for just under a year I have read that pound cost ravaging is important in the early years but I don't know if my scenario would be classed as pound cost ravaging, as I could continue to take an income and the unit price could just go back up to where it started. I believe that no units are sold to provide the income apart from the monthly fees. As I don't intend to sell the units the unit total will remain the same apart from the fee deduction which I could top up once a year by buying units to replace the sold fee units.


The question is should I not take an income as the unit price has dropped despite this appearing to have no impact on the number of units I own and it is these units that produce the income. Is this classed as pound cost ravaging?

dunstonh

pound cost ravaging comes when you have to sell the capital each month to generate the withdrawal. If the averaged growth can sustain the withdrawal that is fine. However, if it cant and you enter the spiral of drawing more than its making, then you are suffering pound cost ravaging.

Natural yield cant suffer pound cost ravaging.

Linton

OEICs/Unit Trusts like the Fidelity multi-asset fund can only pay out the money which they have received as income from their investments. They cant sell assets to create income. Many investments have fallen in price recently. Moving from £1.10 to £1.06 is just noise. You will need to become used to larger falls than that.

I had never heard the term "pound cost ravaging" before. It seems to refer more to individual investors withdrawing money from their pension pot at a faster rate than can be sustained.

bowlhead99

"Pound cost averaging" is a phrase referring to the effect of continuously buying investments through a reasonably steady level of monthly investment (similar amount of pounds each month) but acquiring a variable amount of units for the same amount of money as the price changes. As such, you will aquire units at a variety of prices.

It is often used to illustrate how you should not fear price decreases within your portfolio because if you start investing and the price reduces, you will be acquiring an increased amount of units with each of your constant monthly contributions and therefore you can actually come out OK despite the prices being kinda rocky.

That's basically because the same amount of pounds flowing into the acquisition of investments each month from your pocket, allows you to buy even more units at the low prices and as such, you end up with more units bought at low prices than you bought at high prices, improving your average price of acquisition.

So that's Pound Cost Averaging, a generally recognised industry term.

What you are referring to is 'pound cost ravaging', which is simply a play on words on the standard industry-wide accepted term above, meaning basically the opposite. As it's not a well recognised term, it could literally mean anything contrary to the original term. It's just a joke made by someone being ironic. Like someone will say 'diworsification' is a play on words for your portfolio getting worse as you add things to it it instead of getting better through diversification; and then bandying it around as if it were an industry standard term that everyone uses.

Still, if 'pound cost averaging' means that under certain conditions you could improve your portfolio by putting a reasonably constant amount of money into it as the price takes a dive ; 'pound cost ravaging' refers to the fact that if you continue to take a reasonably constant amount of money out of it each month (e.g. the income generated) while the price takes a dive, you will damage your portfolio - because the days when prices are low are exactly the days when you should be putting more money in rather than taking money off the table back to your own bank account, and spending it instead of reinvesting it.

In your case, you had set up the portfolio for it to generate income and for you to have that money (whatever it amounts to each month) taken out of the investments back to your own bank account rather than reinvested. So, if valuations are reducing, and you take money out of the portfolio, you will end up with a reducing level of assets, unless you try to stem the flow by putting money right back into the portfolio to avoid depleting it (i.e., by reinvesting). If you take the natural income away from the fund and put it in your own bank account, the number of units you hold will not fall, but the value of each of those units might fall because you are pulling money out of the units and taking the money away. In any given year, the amount of income the fund receives from its investee companies might not be as much as the amount by which the capital value falls due to market conditions. So if you take money out of the fund and walk away with it - saying 'hey that's my income I'm going to take it away and spend it' - then your remaining capital value could fall significantly.

You have said that due to your recent changed circumstances you have started to reinvest the natural income rather than taking it away from the fund and spending it on stuff. So, that will help stop the value of your portfolio reducing, because now if the asset value falls your reinvested income will help top it back up again.

Thrugelmir

smjxm09 wrote: »

I am just trying to get my head around one of my long term investments that I took out just under a year ago.

If the investment is long term then you should be reinvesting the income. Otherwise you may well be disappointed with the return.

Audaxer

I actually remember your thread from last year as I was interested in the fund when I looked at it. I've just had a look at the recent performance and the total return value has dropped less than 1% in the last month, which I think is what you would expect from a low risk/volatility fund as it has only around 20% equities. Most of my funds with more equities have fallen by more than that. If you don't need the income just now I think it would be best to reinvest the dividends as that will increase the income a bit in the future. That's what I am doing with my income funds at present.

As it's a low risk fund I don't think you are going to get that much capital growth as its main aim stated in the objective is to obtain an income yield of between 4% and 6%. On the plus side, hopefully it shouldn't lose that much value in an equity crash.

dunstonh

OEICs/Unit Trusts like the Fidelity multi-asset fund can only pay out the money which they have received as income from their investments. They cant sell assets to create income. Many investments have fallen in price recently. Moving from £1.10 to £1.06 is just noise. You will need to become used to larger falls than that.

Actually, most platforms do facilitate the selling of units to pay fixed regular withdrawals. So, whilst you are totally correct that the unit trust itself doesn't do that. The platform utilised can.

I had never heard the term "pound cost ravaging" before. It seems to refer more to individual investors withdrawing money from their pension pot at a faster rate than can be sustained.

its a phrase that never really caught on (good job really). I have seen it before and used it a handful of times on here in the past but its not one that really works well as it requires you to know what pound cost averaging is. Most dont.

Linton

dunstonh wrote: »

Actually, most platforms do facilitate the selling of units to pay fixed regular withdrawals. So, whilst you are totally correct that the unit trust itself doesn't do that. The platform utilised can.

Yes, but from the OP it would seem that we are talking about a monthly income fund, Fidelity Multi Asset Income, rather than something set up by the platform.

AnotherJoe

If you are worried about less than a 5% drop in a fund maybe investing isn't for you ?

smjxm09

No I am not worried about a drop as I am well aware about this being a medium to long term investment but I just wanted to get a better understanding. Even though this is a long term investment I do need to draw an income again in the coming months although I could put this day off for a while.


So this is what I understood when I made my investment, which seems what most of you are all saying. Basically there are two parts to my Fidelity investment which is the variable monthly income and the unit buying/ selling price. As the income comes from natural yield I would not suffer from “pound cost ravaging” even if the total return of income when added to the latest unit price shows me making a paper loss at the moment. The unit price, which has dropped, would only have an impact on me if I sold the units now which won’t happen as this is a long term investment. Because the unit price is dropping this would be a good time to re-invest the income to buy more units which is happening now.

Does that summarise everything nicely or have I missed something. I suppose in an ideal world over time the unit price would gradually increase with inflation so the value of the capital sum invested would remain the same.

bowlhead99

smjxm09 wrote: »

I suppose in an ideal world over time the unit price would gradually increase with inflation so the value of the capital sum invested would remain the same.

In an ideal world the unit price would increase with inflation.

However, you mentioned it is a multi asset fund so it will hold different types of assets like company shares, bonds etc.

Sure, company shares will hopefully go up in value with the fact that the companies' revenues and profits go up with inflation. However, the bonds pay fixed amounts of income each year until they mature. So there is no particular reason for them to increase in value each year with inflation. For example if a bond pays £2 a year. If inflation is higher then you will still get your £2 and the £2 will buy less than it bought last year. That doesn't make the bond inherently more attractive. If anything, the fact that prices are rising means that the central bank might put up interest rates to stop the economy overheating, and if interest rates generally rise, your £2 a year fixed income is going to be less desirable, people would rather buy a new bond for the same price paying £3 a year instead.

So, bonds do not typically protect against inflation, other than certain 'index-linked' bonds which pay a variable interest rate linked to inflation but such bonds have a very low return at the moment and are very expensive.

If the fund does well, or if it does get more valuable at the same pace as inflation, you are right that you may see it stay the same value even though you're taking money from it. However, generally if you take the natural income out of it, and it is a lower-risk, lower-return fund anyway, you may struggle to retain its value in real terms even if the share price is broadly staying the same in pound terms. For positive growth of the capital to keep up with inflation and not lose value in real terms, while all the income is being taken away and spent, you sometimes need to use higher risk / higher growth assets.