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

Audaxer

Thanks for the replies - some good points raised.

I understand that relying on dividends totally is maybe not the best policy, but I think there is a place for them as some experienced investors use the bucket approach with separate income and growth portfolios.

Thankfully tax is not an issue for me as all my investments are in S&S ISAs.

I'm not convinced about the "no need for a cash bucket" approach, as cash itself could be classed as a non-equity asset and a useful part of a portfolio, as returns are probably as good as bonds at present, and bonds could also drop a bit in value at the next market crash. So you could still rebalance with cash as a fixed percentage. So maybe rather than have 60% equity and 40% bonds, you could have 60% equity, 20% bonds and 20% cash, taking 4% per annum and balancing back to these percentages. Do you think that strategy would work?

londoninvestor

Audaxer wrote: »

I'm not convinced about the "no need for a cash bucket" approach, as cash itself could be classed as a non-equity asset and a useful part of a portfolio, as returns are probably as good as bonds at present, and bonds could also drop a bit in value at the next market crash. So you could still rebalance with cash as a fixed percentage. So maybe rather than have 60% equity and 40% bonds, you could have 60% equity, 20% bonds and 20% cash, taking 4% per annum and balancing back to these percentages. Do you think that strategy would work?

I think that makes a lot of sense, and I agree cash deposits are attractive relative to bonds (except perhaps in a SIPP where you don't seem to have access to good cash rates).

The way I read Kitces's point isn't "don't hold cash", it's "don't think you need a separate bucket of cash that you see as separate to your portfolio and exclude from your asset allocation calculations".

bostonerimus

Audaxer wrote: »

Thanks for the replies - some good points raised.

I understand that relying on dividends totally is maybe not the best policy, but I think there is a place for them as some experienced investors use the bucket approach with separate income and growth portfolios.

Thankfully tax is not an issue for me as all my investments are in S&S ISAs.

I'm not convinced about the "no need for a cash bucket" approach, as cash itself could be classed as a non-equity asset and a useful part of a portfolio, as returns are probably as good as bonds at present, and bonds could also drop a bit in value at the next market crash. So you could still rebalance with cash as a fixed percentage. So maybe rather than have 60% equity and 40% bonds, you could have 60% equity, 20% bonds and 20% cash, taking 4% per annum and balancing back to these percentages. Do you think that strategy would work?

Buckets, be they chronological or growth vs income etc, are just another way to look at asset allocation. Also everyone needs cash as you can't spend stocks and bonds. So it all just boils down to an asset allocation exercise ie how much equity vs bonds vs long term saving vs cash do you need. I have a fairly high equity allocation (over 75% now) and I keep a couple of year's spending in cash to avoid any cash flow worries and for emergencies and big buys even though I still have regular income coming in

Alexland

Audaxer wrote: »

So maybe rather than have 60% equity and 40% bonds, you could have 60% equity, 20% bonds and 20% cash, taking 4% per annum and balancing back to these percentages. Do you think that strategy would work?

Yes but 20% cash seems a bit high and if you held that over the long term it would act as a noticeable drag on returns.

Alex

Alexland

coyrls wrote: »

[FONT=&quot]Terry Smith is the chief executive and chief investment officer of Fundsmith LLP. The views expressed are personal.[/FONT]

I remember watching one of the Fundsmith AGMs where Sir Terry (surely he has been knighted by now...?) suggested 4% was a very safe withdrawal rate from his fund in all market conditions due to the consistency and heavily compounding nature of the underlying holdings.

To be honest if you can 'get over' the concentration risk he has had an excellent set of results over the past circa 20 years of advising the Tullett Prebon pension scheme and running Fundsmith Equity fund. His investment strategy remains totally consultant to his 1992 book that sits on my bookshelf at home.

Alex

Linton

TBC15 wrote: »

Well,Terry has put that one to bed I think.

No way. Terry Smiths piece is highly partisan, based on dubious and partial facts with a failure to address major concerns which do not fit with his argument. Perhaps he has something to sell. It is far more relevant to the US where dividend rates are low compared with the rest of the world. However in the US the use of excess profits for share buy back artificially inflates valuations.

Sadly I am on holiday at the moment armed only with an iPad and so unable to write a piece of the same length.

Just some bullet points...

1) the key question is not growth or dividends but rather how much of each. About 25% of my normal annual expenditure is paid for by dividends or interest from bond funds. Selling assets only pays for a small part and will disappear entirely once we both take our SPs. However it does pay for one-off major expenditures such as holidays. It will also become more necessary in the future as generous fixed rate annuities are undermined by inflation.
2) dividend tax need not be an issue for uk investors. Our dividend income is tax free thanks to S&S ISAs.
3) Terry Smiths argument glosses over major crashes and is really based on the returns of the unsustainable bull market of the past 9 years.
4) some sectors are highly cash generative but have limited opportunity for growth, in particular utilities and nfrastructure. Some growth companies are perfectly capable of squandering their retained profits. As in all things it pays to diversify.
5) it has been suggested that cash should not be necessary, but one should use non-equity assets for diversification. Such as? 4-5 years of cash covering all the non guaranteed income required for normal expenditure enables us to sleep at night with no worries whatsoever about the next 40% crash. It also forms an intrinsic part of the asset allocation strategy being annually rebalanced against th income, growth and wealth preservation portfolios.

Prism

As the owner of my own small business I can see how inefficient paying dividends are. The tax alone lops of a large chunk of my income. However I do like a mix of dividends and growth when investing as long as the company isn't borrowing to cover its dividends and is investing in its growth wisely. I would much rather have a growing company with a small dividend than a static company with a large dividend, even during a crash. When looking for a fund I don't pay any attention to its yield to be honest. I don't invest directly but I'm sure I would if I did.

MK62

Prism wrote: »

As the owner of my own small business I can see how inefficient paying dividends are. The tax alone lops of a large chunk of my income.

As opposed to paying yourself a salary and having an even larger chunk lopped off by income tax and NI?

Prism

MK62 wrote: »

As opposed to paying yourself a salary and having an even larger chunk lopped off by income tax and NI?

Well yes there is that . However if I didn't need an income and i could grow the company by reinvesting the overall best long term way to make money would be to later sell it on to someone else.

Btw I do pay myself a salary - you could probably guess the exact amount

MK62

Haha....hmmmmm.....now let me think....