Want to try and achieve 4% income and retain value of portfolio

frugal90

As the thread title suggests I want to start drawing 4% income from my portfolio in 3 years time. I would like to try and retain the portfolio value during that time.

The portfolio has been put together in a rather haphazard ( to say the least) sort of manner and is all in IT's.

As we will have DB pensions and cash we can afford to ride out the ups and downs.

How would you change it, portfolio value currently about £300K

FGT: 16%
HSL: 3%
JPGI: 8%
MRC: 5%
MRCH: 16%
CTY: 26%
HNE: 4%
HFEL: 22%

talexuser

I have CTY and FGT which with yields of 4.2% and 2% will be the backbone of your interest, with FGT having more potential of growth (at least historically). I also have JPGI which is a high yield alternative with a majority of US holdings. Not familiar with Mercantile, but Merchants again is UK only high yield. So you have Europe, small companies and Far East.

4% might be a stretch to keep capital with many predicting dividend reductions worldwide. I would try for a little less and go for a capital protection fund like CGT because a correction of sorts has to come sometime? Perhaps a bit light on the US? but I don't have the exact pie chart of your holdings.

If Brexit goes bad it might dampen us and Europe, there's a lot of UK dividends in there?

Linton

For a start:
FGT: 84% UK Large companies

HSL: 100% UK Small companies

JPGI:10% UK
MRC: 96% UK Small Companies

MRCH: 100% UK Large companies

CTY: 86% UK Large companies

HNE:4% UK
HFEL: 2% UK


I make that about 60% of your portfolio is invested in the UK. Do you think this is a good idea? There will be much the same companies in all the UK large company funds. Your only fund with significant US holdings is JPGI with 58% US. But it only represents 8% of your portfolio - 60% UK vs 4% US. Does that look a trifle unbalanced?


You have a fundamental problem of lack of diversification. Too many of the funds will rise and fall together and there are large sectors of the world economy you are missing.

londoninvestor

Linton wrote: »

I make that about 60% of your portfolio is invested in the UK. Do you think this is a good idea? There will be much the same companies in all the UK large company funds.
...

You have a fundamental problem of lack of diversification. Too many of the funds will rise and fall together and there are large sectors of the world economy you are missing.

This is difficult to avoid when taking a "natural yield" approach - when you look how high yielders are distributed across markets, you see a lot of them are listed in the UK - and to some extent in APAC, viz the heavy chunk of HFEL in here.

So requiring the dividends to cover the whole of your regular income tends to push your portfolio in a certain direction, perhaps to the detriment of its long-term return and certainly to the detriment of its diversification.

I too started out my planning with this kind of approach, but by the time I retired I'd come to the conclusion that I should take a total return approach, diversify the portfolio better and accept that some of my cash would be generated by selling stock. (Or to be precise, regularly rebalancing back to target allocation...which in a flat or rising market means you end up periodically selling stocks to top up the cash/bonds that you've been regularly spending from.)

Thrugelmir

frugal90 wrote: »

As the thread title suggests I want to start drawing 4% income from my portfolio in 3 years time. I would like to try and retain the portfolio value during that time.

What's the natural yield on the portfolio currently?

bostonerimus

I assume your 4% will grow with inflation. A simple 60% global equity and 40% global bonds portfolio has a good chance of meeting your criteria, Use low cost index trackers and keep fees to a minimum.

Marine_life

As well as some geographic diversification I see that you have a high proportion in equities whereas I would be tempted to switch some of your holdings to strategic bond funds, particularly if maintaining income is important. There are plenty of such funds yielding 4% of more.

Linton

londoninvestor wrote: »

This is difficult to avoid when taking a "natural yield" approach - when you look how high yielders are distributed across markets, you see a lot of them are listed in the UK - and to some extent in APAC, viz the heavy chunk of HFEL in here.

So requiring the dividends to cover the whole of your regular income tends to push your portfolio in a certain direction, perhaps to the detriment of its long-term return and certainly to the detriment of its diversification.

.....

Agreed but I think it would be a mistake to let the wish for dividend income to compromise basic investing principles.


So I suggest the OP looks also at funds that return interest from corporate bonds or higher risk government bonds, infrastructure funds, REITS etc and also has a tranche of investments aimed at capital growth. Diversify wherever possible. Even if the OP stays mainly in dividends, the diversification could be improved - eg much higher % in Far East.

Thrugelmir

bostonerimus wrote: »

I assume your 4% will grow with inflation. A simple 60% global equity and 40% global bonds portfolio has a good chance of meeting your criteria, Use low cost index trackers and keep fees to a minimum.

With bond yields currently extremely low. The equity part of the portfolio is going to have perform extremely well on a consistant basis to achieve inflation linking.

Marine_life

Thrugelmir wrote: »

With bond yields currently extremely low. The equity part of the portfolio is going to have perform extremely well on a consistant basis to achieve inflation linking.

Lower than historically but still plenty of bond funds yielding more than 4% (but not without some risk attached)

frugal90

Have been looking at these model portfolios from ii who we have our ISA's with. Any comments. I was considering moving my ISA to the managed income and my wife to the low cost income. Any views?

https://www.ii.co.uk/model-portfolios#low-cost-income