Spreadsheet for 3 pot asset management?

bostonerimus

aroominyork wrote: »

, Your post #2 says you can shortcut a three pot approach, but your new post essentially describes it. It is discussed here - scroll down about two-thirds of the way to "How to invest for the three pot strategy" https://www.telegraph.co.uk/investor/ideas/the-three-pot-trick-to-make-you-pension-investments-last/, obviously ignoring the nonsense about suggested funds.

PS This crossed with your post #9. I still think you are describing three pots but that you do not feel the need to use a concept which may be useful for people with less experience of managing a retirement portfolio.

Asset Allocation is a basic concept....pots or buckets is a bit of a rebranding that folds in a time scale and has been used by many financial authors to sell a lot of books. If it helps you in your planing then that's good, but you don't really need to go beyond thinking in terms of an equity/bond/cash allocation ratio. It's all the same really.

Audaxer

aroominyork wrote: »

Sensible. I do mine too (and enjoy nothing more than a good spreadsheet!) but this one seems very complex. I will take your good advice but first can I check I understand the process correctly (while noting others' misgivings about the three pot process)?

Say I want to withdraw £38k in Year 1, and allow for 2.5% growth for inflation. I start with:
Pot 1, £80k in a 1% cash account
Pot 2, £300k which I estimate will return average 3%
Pot 3, £700k which I estimate will return average 8%.

In Year 1 my 1%, 3% 8% returns go to plan and my pots earn £800, £9000 and £56,000 respectively.
To rise with inflation going into Year 2 I want my pots to have no less than £82k, £307.5k and £717.5k respectively. So:
I move £1200 from Pot 2 to Pot 1 (Pot 2 now has an £7800 net gain)
I withdraw £300 from Pot 2 for living costs (bringing it down to the target £307.5k)
I withdraw £37,700 from Pot 3 (bringing it down to £718,300, above my target £717,500).

Before I look at scenarios where returns are lower than expected, can I please hear whether this is correct?

It sounds complicated. Alternatively I suppose you could have all of the £1m invested in the one pot and draw out £38,000 a year, which would probably be safe withdrawal rate of 3.8% per year. The £80k cash is the buffer to cover 2 bad years. I'm not sure which would work out best in the long run.

bostonerimus

All you have to do is set your withdrawal rate and then on a quarterly, biannual, or whatever frequency you like, sell some bonds and some equities to get you the amount you want in a ratio that will rebalance your portfolio. Then just replenish the cash account. In years of bad returns you might spend the cash account down a bit to avoid selling at a loss and also reduce spending.

aroominyork

bostonerimus wrote: »

All you have to do is set your withdrawal rate and then on a quarterly, biannual, or whatever frequency you like, sell some bonds and some equities to get you the amount you want in a ratio that will rebalance your portfolio. Then just replenish the cash account. In years of bad returns you might spend the cash account down a bit to avoid selling at a loss and also reduce spending.

Yes, I see that - and it's what Dunston suggested too. So where is the difference from having three pots - there must be one, mustn't there...?

bostonerimus

aroominyork wrote: »

Yes, I see that - and it's what Dunston suggested too. So where is the difference from having three pots - there must be one, mustn't there...?

Three pots is just another way of thinking about asset allocation and it sort of replaces risk/volatility with a time scale. It's a way for personal finance authors to market a simple old idea in a new package. Think of it however you want, I just find it easier to keep doing in retirement what I did when I was working ie have an asset allocation that I manage.

aroominyork

Thanks. That's been a helpful exchange.

aroominyork

I'm re-opening this thread to post this article about buckets which reiterates boston's point that's it's all just asset allocation. The author makes the point that buckets "appeal more naturally to our tendency towards mental accounting".

It's only recently that I also realised how a VLS-type fund rebalances on a continuous basis - essentially selling high and buying low each day to maintain the equity allocation. That might not be quite up their with Einstein calling compound interest the eight wonder of the world, but the more I think about it the more I see it as a beautiful thing!

Annually rebalancing a portfolio of say a dozen funds seems a messy business compared to single VLS which self-manages the process. Also, given that a moderately aggressive active portfolio will tend to underperform the index in a falling market and, during withdrawal years, most people would sacrifice growth for stability, there seems to be a strong case for moving to a VLS-type fund when you retire and move from accumulating to withdrawing.

Thrugelmir

aroominyork wrote: »

Also, given that a moderately aggressive active portfolio will tend to underperform the index in a falling market

The larger the capitalisation of a Company. The greater the impact on a market index, i.e. Apple in the past month. Active portfolios may well hold less popular shares or private equity investments for example. Resulting in miminal change / voltality in market price.

Linton

aroominyork wrote: »

I'm re-opening this thread to post this article about buckets which reiterates boston's point that's it's all just asset allocation. The author makes the point that buckets "appeal more naturally to our tendency towards mental accounting".

It's only recently that I also realised how a VLS-type fund rebalances on a continuous basis - essentially selling high and buying low each day to maintain the equity allocation. That might not be quite up their with Einstein calling compound interest the eight wonder of the world, but the more I think about it the more I see it as a beautiful thing!

Annually rebalancing a portfolio of say a dozen funds seems a messy business compared to single VLS which self-manages the process. Also, given that a moderately aggressive active portfolio will tend to underperform the index in a falling market and, during withdrawal years, most people would sacrifice growth for stability, there seems to be a strong case for moving to a VLS-type fund when you retire and move from accumulating to withdrawing.

A VLS-type fund is fine, provided you like the asset allocation. VLS100 has underperformed the FTSE World index every year for the last 5 years. Over 5 years VLS100 returned 64.6% compared with the index's 79%. On a £500K retirement pot that's a cost of £75K. The benefits of rebalancing are only a minor factor compared with the asset allocation.

I am very much in favour of multiple pots. My retirement strategy requires a balance of:
- long term higher risk growth
- steady inflation adjusted income to help meet ongoing basic expenditure
- cover for occasional major expenditures even during a market downturn
- some fairly safe investments in case very high interest rates make it necessary to pay off some of the lifetime mortgage

At the top level I can allocate my wealth to each of the 4 objectives, invest appropriately for each objective, and monitor progress against each objectives reallocating resources if required. How does one do this with VLSxxx? What is the value of xxx and why? How does one monitor progress against the objectives?

One consequence of not having multiple pots in an environment of multiple conflicting objectives is that the lack of control against the objectives would, or should, lead to a significantly lower risk acceptance with the resultant reduction in returns.