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

System

Audaxer wrote: »

That definitely seems like a worst case scenario if it only covered inflation averaging say 2.5% total return a year. If that was the case for most medium risk 60/40 equity bond portfolios, that surely would be a big problem for a lot of retirees hoping a drawdown of 3.5% would be a safe withdrawal rate?

Not really unless they wanted to leave all of their principle fund for heirs to inherit. If it increased 2.5% a year and you drew down 3.5% or even 4% a year you'll be dead long before the money runs out.

MK62

Tarambor wrote: »

Not really unless they wanted to leave all of their principle fund for heirs to inherit. If it increased 2.5% a year and you drew down 3.5% or even 4% a year you'll be dead long before the money runs out.

If the fund increased by the rate of inflation each year, currently 2.5%, and your initial withdrawal rate was 4% (and you increase this withdrawal in line with inflation each year), you would run out of money after 25 years......you might not be dead by then...

coastline

If most investors are in 60/40 or 50/50 due to attitude to risk then safe withdrawals could well be limited who knows ? Trouble is nobody knows what their attitude to risk is until it really happens.
Lets say there's a major downturn and your 60/40 fund has fallen 20-30% but the 100% equity fund has fallen 50%. This has created an opportunity for a switch into 100% equity. Why would you do that ? Well that downturn or crash has happened and its unlikely to happen again soon going off past events.
Using the FTSE dating back to 1984 its base was 1000 and the yield was just under 4%. Today its at 7300 and still yields a similar figure.
What about inflation ? £1000 yielding £40 in 1984 is around £128 today and the FTSE at 7300 is yielding a good £280.

https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

https://www.thisismoney.co.uk/money/bills/article-1633409/Historic-inflation-calculator-value-money-changed-1900.html


Thing is a downturn would probably give an investor a 6% yield on the FTSE which gives ample room for a dividend cut back to 4%.
Now we have a safe withdrawal rate if you are really that concerned about it.? To be honest its something that never bothered me as I just cleared off from work with my pile of cash and investments and never looked back.

A few links below..this ones updated

https://www.youinvest.co.uk/our-services/free-dividend-dashboard

https://www.youinvest.co.uk/articles/investmentarticles/51254/how-need-income-could-underpin-uk-stocks

https://www.ukvalueinvestor.com/2015/05/the-ftse-100-at-5000-or-10000.html/

Audaxer

Alexland wrote: »

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.

It might but are bonds not currently as big a drag on returns as cash?

Audaxer

MK62 wrote: »

If the fund increased by the rate of inflation each year, currently 2.5%, and your initial withdrawal rate was 4% (and you increase this withdrawal in line with inflation each year), you would run out of money after 25 years......you might not be dead by then...

Even if you only withdrew 3.5% a year increasing in line with inflation the £100k would only last 28 years. As the example is an average growth rate of 2.5%, it might not even last as long as that if there is a poor sequence of returns at the start.

Alexland

Audaxer wrote: »

It might but are bonds not currently as big a drag on returns as cash?

They certainly don't look attractive in the short term but who knows what happens next? At least with bonds you stand a chance of upside when equities go down. Although we have had a few too many days with nowhere to hide recently for my liking.

Alex

A_T

Vanguard Investor have a fun tool for this sort of thing:

https://www.vanguardinvestor.co.uk/investing-explained/tools/asset-mixer

rathernot

A_T wrote: »

Vanguard Investor have a fun tool for this sort of thing:

https://www.vanguardinvestor.co.uk/investing-explained/tools/asset-mixer

How accurate is that?

Asking as the average return doesn't seem to vary that much over the last 30 years even if you dial it down to 20% equities.

Thrugelmir

Alexland wrote: »

At least with bonds you stand a chance of upside when equities go down.

Correlation has all but disappeared. What do you regard as bonds? The original scenarios were based on US Treasuries. Yields on Gilts are currently extremely low. Blue chip corporate bonds only offer 2.5% to 3%. Little different to the rate of inflation. Investors have little choice but to go for equities. Therein lies the conundrum. Portfolios are exposed to a high degree of risk. At a time in life when this may not be the option desired.

rathernot

Thrugelmir wrote: »

Correlation has all but disappeared. What do you regard as bonds? The original scenarios were based on US Treasuries. Yields on Gilts are currently extremely low. Blue chip corporate bonds only offer 2.5% to 3%. Little different to the rate of inflation. Investors have little choice but to go for equities. Therein lies the conundrum. Portfolios are exposed to a high degree of risk. At a time in life when this may not be the option desired.

This is what I'm trying to work out - is there actually any safe haven other than cash if there's a downturn?