Worst average return on 60% equity portfolio over the next 20 years?

Uxb

For a really unpleasant surprise look at the Japanese stock market and think how it is and was for a local resident investing in equities.
It reached a peak of around 38900 in 1990 in the asset bubble of that time, dipped down to around 7000 in 2008 and now stands at 23000.
Now I've no idea what their dividend yield is like - but that a lot of capital loss to overcome when the last time prior to 1990 it was at 23000 was 1988. That's 30 years waiting to get your capital back. Or a quote allegedly attributed to JM Keynes: - the market can stay "irrational" longer than you can stay solvent.

Audaxer

ColdIron wrote: »

Don't forget that CTY grows its dividend in terms of pounds and pence per share. The yield is linked to the share price so it could quite conceivably decrease whilst continuing to grow its dividend

But that would be okay in my view unless you were still accumulating and purchasing more CTY shares. In retirement and just relying on dividends from the IT, I'd be happy for the share price to grow and the yield go down as long as the dividend increases. So if my original £10k investment that produced dividends of £400 pa to start with, rose in capital value to say £15k with the yield falling, as long as my dividend was still increasing at least in line with inflation that would be okay, as it would still be producing a rising 4% per annum on my original investment. Does that make sense as I know you also rely on dividends as income for at least part of your portfolio?

badger09

Uxb wrote: »

For a really unpleasant surprise look at the Japanese stock market and think how it is and was for a local resident investing in equities.
It reached a peak of around 38900 in 1990 in the asset bubble of that time, dipped down to around 7000 in 2008 and now stands at 23000.
Now I've no idea what their dividend yield is like - but that a lot of capital loss to overcome when the last time prior to 1990 it was at 23000 was 1988. That's 30 years waiting to get your capital back. Or a quote allegedly attributed to JM Keynes: - the market can stay "irrational" longer than you can stay solvent.

Or even alive:(

bostonerimus

I ran some numbers using annual S&P500 and US 10 year T bills in a 60/40 ratio starting from 1928 and doing a 20 year rolling returns without rebalancing. The worst period is from 1929 to 1949 and gives a 92% return which is 3.3% average compounded annual return. The average annual 20 year compounded return is 10%......this is all without fees or inflation or rebalancing.

seacaitch

Audaxer wrote: »

in that scenario a lot of people in retirement are going to suffer if relying on total return. It makes me think that it may be better to rely on dividends for income if you can afford to, as they seem to be more stable even in equity crashes.

In the event of very disappointing longer term returns occurring, per the minimum forecasts in the Vanguard model referenced above, I personally wouldn't be super confident that having an equity income-focused portfolio would prove much or any benefit. It might deliver worse returns. There are plenty of higher yielders that are pretty low quality businesses (weak balance sheets; serving low/no-growth markets) that might not fare so well in a challenging environment that delivered poor market returns generally. You might need to rely on the luck/skills of a canny stock-picker to avoid this dross.

Also, poor long term returns aren't predicated on crashes which trounce valuations in a short period of time - poor returns can occur in other ways, such as a market remaining largely range-bound for a very extended period.

My own suspicion is that the scale of equity market declines seen in the dotcom and GFC busts aren't actually that likely in the next decade or so. But avoiding such precipitous declines wouldn't automatically lead to equities delivering pleasing returns - they could still deliver disappointing returns sans crashes.

Audaxer

seacaitch wrote: »

In the event of very disappointing longer term returns occurring, per the minimum forecasts in the Vanguard model referenced above, I personally wouldn't be super confident that having an equity income-focused portfolio would prove much or any benefit. It might deliver worse returns.

They probably wouldn't produce better Total Returns, but if you were just relying on dividends I'm advised that dividends from equity income funds or ITs are less volatile than the capital value. I wouldn't choose funds with very high yields where dividends couldn't be sustained or likely to erode the capital.

masonic

Audaxer wrote: »

They probably wouldn't produce better Total Returns, but if you were just relying on dividends I'm advised that dividends from equity income funds or ITs are less volatile than the capital value. I wouldn't choose funds with very high yields where dividends couldn't be sustained or likely to erode the capital.

If it doesn't produce better total returns, then why would it be preferable to opt for funds that generate an income you could live off rather than funds that produced an equivalent return but with a lower income? At the end of the day selling units in a fund to crystallise a capital gain vs not reinvesting dividends leaves you in the same overall financial position. Certain ITs have demonstrated the equivalence by paying dividends out of capital to cover periods where they have received lower levels of income from their underlying holdings.

In the end, share prices and dividends are both dependent on company earnings. Dividends are controlled by the company, while share prices are controlled by investors.

Audaxer

masonic wrote: »

If it doesn't produce better total returns, then why would it be preferable to opt for funds that generate an income you could live off rather than funds that produced an equivalent return but with a lower income? At the end of the day selling units in a fund to crystallise a capital gain vs not reinvesting dividends leaves you in the same overall financial position. Certain ITs have demonstrated the equivalence by paying dividends out of capital to cover periods where they have received lower levels of income from their underlying holdings.

In the end, share prices and dividends are both dependent on company earnings. Dividends are controlled by the company, while share prices are controlled by investors.

I know what you mean, but if you had say £100k invested and you needed £4k per year, I'm just thinking there would be a more consistent flow of dividends even in loss years. If relying on the £4k per year to come from total return on a growth fund, would you not be more in need of a decent cash buffer so you didn't have to sell units in loss years?

bostonerimus

Audaxer wrote: »

I know what you mean, but if you had say £100k invested and you needed £4k per year, I'm just thinking there would be a more consistent flow of dividends even in loss years. If relying on the £4k per year to come from total return on a growth fund, would you not be more in need of a decent cash buffer so you didn't have to sell units in loss years?

Retirement income comes from dividends, capital gains and for many people eventually selling of capital. You can slice and dice it however you like, total return, income smoothing with an IT etc but the ingredients are the same. You might want to emphasize dividend paying stocks or hold some individual bonds to maturity or you might even buy an annuity, it all depends on how much income you need and your desire or need to take risk.

masonic

Audaxer wrote: »

I know what you mean, but if you had say £100k invested and you needed £4k per year, I'm just thinking there would be a more consistent flow of dividends even in loss years. If relying on the £4k per year to come from total return on a growth fund, would you not be more in need of a decent cash buffer so you didn't have to sell units in loss years?

As bostonerimus says, it's not really feasible to rely solely on dividends.

In a major recession, company earnings will fall. That will affect their share price most significantly, but it will also affect their dividend. Income funds will not be able to maintain the same level of dividend (even though the % yield of the fund might actually increase because the unit price falls more than the income). What often happens is the capital price plunges initially, causing income funds to have a very high nominal % yield, but over the following months the yield drops back to a similar level as dividends on the underlying holdings are cut. Some companies will be relatively less affected by this, but these tend to be the low growth companies that don't produce much of a return. As always, the price for low risk is low reward and you'll probably need a larger portfolio to support your needs if focusing on this area of the market.

This is a reason why people hold defensive assets like bonds and cash, so that they can draw on these rather than sell equities at a significant loss. Defensive assets are more reliable in a downturn than a stream of dividends in that you can sell them instead during the bad years and therefore wouldn't need to hold such a large amount as you would a corresponding low risk equity income fund paying a modest dividend, where you'd want to avoid selling units at a loss. Of course, there's no harm making use of both approaches.