Fire

Audaxer

jamesd wrote: »

It should help in those scenarios because the portfolio natural income will be much of income and if there's not cash the extra would come from bonds if equities are down. More invested means more natural income and bonds so a bigger buffer.

I know that natural income in the form of dividends is less volatile that the capital, but in a really bad equity crash, how much are fund dividends likely to be affected?

When there is an equity crash I am more likely to reinvest the dividends anyway so that the capital balance recovers quicker, and use my cash buffer for income. Is there anything wrong with that strategy?

Anonymous101

Thanks James, I understand those points.


On the first point I probably wouldn't be on a 60/40 split if I was holding years worth of cash. I'd think the cash holding would offset a lot of the risk therefore could handle much more exposure to equities. So pretty much agreeing with what their point is.


And of course the second point correct. The SWR, whatever you decide on, has already factored in declines. I just think it would be incredibly difficult psychologically to maintain spending in the face of a 50% reduction in portfolio value which held for 3-5 years. Even subconsciously most people would look to reduce spending in some way, its a survival mechanism to feel like you're taking action.


Perhaps worth listening to the whole podcast. I've heard Kitces on various other podcasts, MadFIentist for example and I like his style so I'll have a listen.

Anonymous101

Sea_Shell wrote: »

So are they basically saying go all in and invest 60/40, rather than hold cash specifically for a downturn? As the SWR has that "built in"?

I read it as cash and the 40% bonds are effectively doubling up on the risk mitigation front. Which I agree with. I wouldn't have gone 3 years+ cash and 40% bonds, although I know a lot of people do.

westv

Sea_Shell wrote: »

Those two love their "you know"s, don't they!;)

Well, you know, you're right you know.

Terron

jamesd wrote: »

Incidentally, "gold plated" DB scheme members could suffer more from a few years of high inflation than those using drawdown. No increases for those retired were needed for accruals before 1997, from then a cap of 5% can be used and from 2005 a cap of 2.5%. The PPF usually cuts to legal minimums and I assume uses those caps.

"Gold-plated" usually refers to public sector pensions which give full inflation rises with no cap.Some have been reduced from RPI to CPI so the plating is a little thinner.
I have a pre-1997 private one and one with the 5% cap.

coyrls

Well you know the 2% overall yield can be achieved with less risk with retail fixed term deposits that you know have a higher yield than you know a high quality bond allocation with around a duration of one. I think you know that there's a difference.


The falacy is using the money market for cash rates and not retail deposit rates.

Thrugelmir

Sea_Shell wrote: »

So are they basically saying go all in and invest 60/40, rather than hold cash specifically for a downturn? As the SWR has that "built in"?

You would have needed to be holding US Treasuries to obtain a sufficient bond yield. Though rates have tumbled since Trump instigated his trade war with China. Yesterday's rate cut by the Fed would likewise have impacted on yields .

Sea_Shell

I've just calculated that our cash (held in retail accounts) is currently earning an average rate of 2.18%. that's due to drop when some Reg Savers mature, and some rates are pulled. So we'll keep an eye on it.

If you were fully invested, in say an 60/40 split, no cash. Which fund would you access (assuming you had access to all) if you're drawing down? The one performing best/worst, or on a split equal to your holding for each say £1000 withdrawn??

Andyed201

Sea_Shell wrote: »

Those two love their "you know"s, don't they!;)

I still don’t know who they are!

jamesd

Sea_Shell wrote: »

So are they basically saying go all in and invest 60/40, rather than hold cash specifically for a downturn? As the SWR has that "built in"?

Yes, sort of, though Kitces, Guyton and Bengen (read the Bill Bengen reddit Q&A) and others recognise that people like some cash. Guyton observed that cash should be counted as part of the bond cut so 60:40 would be say 60:35:5 with 5% cash.

You're likely to need about a year of cash just to smooth income from interest, dividends and asset selling as well as emergency fund so that's a reasonable sort of low bound if you want to act only once or twice a year.

I also wrote "sort of" because:

1. Abraham Okusanya in The golden rule: working out a safe withdrawal rate, based on working with Kitces, came up with 65% as UK optimal equities for a 40 year Guyton-Klinger plan.
2. Bengen added some small caps and increased his US SWR before costs from 4% to 4.5%. So inside the equity cut should be some small caps. 4.5% used 35% large cap, 20% small cap and 45% intermediate duration bonds for a 30 year plan.
3. As long as you keep equities no lower than 50% the SWR cut at 100% success rate is in the 0.1-0.4 range so it's not a huge issue to be a bit off ideal.
4. Guyton's sequence of returns risk reduction method temporarily reduces equity percentage sometimes.
5. There are times with low interest rates when cash can beat bonds for a while, because the bond rate isn't high enough to cover the capital risk to bond values as rates rise. At a prosaic level, cash paying 0% beats bonds at -0.5%.

As always, Drawdown: safe withdrawal rates has more writing and reference to help to understand why to do things, not just what to do.