Vanguard LS60 risks ?

[Deleted User]

Linton wrote: »

Because the idea of a cash buffer is to use it for your income instead of selling equities when selling equities is a bad idea. If your "cash" is linked as a fixed % of your equity you cannot sell one without selling the other. Better to start of with say 60% in an equity fund and 40% in cash or a bond fund and then in the bad times for equity let the bonds or cash fall as a % of the total. Once equities are returning more than bonds you can replenish the buffer.

That’s timing the market, which isn’t a good idea in most cases.

Two exceptions:

1. During early accumulation period - one shouldn’t really have any FI at all.
2. If the portfolio value is very high and the FI portion is so large it can last forever (say 10 years). Then keeping a steady amount in FI and drawing only from FI during bears should work.

On the issue of diversification - VLS funds have as much diversification as anyone can possibly need.

Linton

Deleted_User wrote: »

That’s timing the market, which isn’t a good idea in most cases.

....
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Timing the market means acting on one’s predictions of the future. It is not a good idea because they are frequently inaccurate leading to losses being larger than the gains.

Income switching from equity to non equity investments in a crash is acting on what has actually happened. The Guyton-Klinger withdrawal strategy does the same.

Thrugelmir

Audaxer wrote: »

Although VLS60 is a bit more volatile and will fall more in a crash than VLS40, do you think they would take approximately the same time to recover from a crash?

Depends how overvalued the stocks are at the time of purchase. Never forget that income reinvestment is also a key factor not just capital growth.

With interest rates low. Increasingly likely the bond segment will simply disappoint rather crash.

[Deleted User]

Linton wrote: »

Timing the market means acting on one’s predictions of the future. It is not a good idea because they are frequently inaccurate leading to losses being larger than the gains.

Income switching from equity to non equity investments in a crash is acting on what has actually happened. The Guyton-Klinger withdrawal strategy does the same.

The strategy of having a fixed pot of cash rather than % allocation would be a great idea ONLY if one knew the future. It is based on an assumption that the market crash would last X years - enough for the cash pot to cover. Unfortunately we don’t know the future. This strategy drives investors in drawdown to keep investing in equities most of the time rather than allocating a % to FI.

The reason it’s timing is that one doesn’t actually know when the equities are “cheap” or “expensive” at any specific point in time. The cheapness depends on future profits and is only really known in hindsight. Say the market drops 20%. Who is to say it’s cheap? Should I be using the cash pot? What if it drops 50% more a year later and stays there while I no longer have any FI?

Now... If someone is sitting on 10M and has a constant pot of 1M in FI, then I won’t be too worried about poor timing.

Linton

Deleted_User wrote: »

The strategy of having a fixed pot of cash rather than % allocation would be a great idea ONLY if one knew the future. It is based on an assumption that the market crash would last X years - enough for the cash pot to cover. Unfortunately we don’t know the future. This strategy drives investors in drawdown to keep investing in equities most of the time rather than allocating a % to FI.

The reason it’s timing is that one doesn’t actually know when the equities are “cheap” or “expensive” at any specific point in time. The cheapness depends on future profits and is only really known in hindsight. Say the market drops 20%. Who is to say it’s cheap? Should I be using the cash pot? What if it drops 50% more a year later and stays there while I no longer have any FI?

Now... If someone is sitting on 10M and has a constant pot of 1M in FI, then I won’t be too worried about poor timing.

The criterion to switch to using safe buffer investments isnt whether prices are cheap which is subjective, but rather whether there has been a major fall in equity with no immediate recovery, which is not. Another reasonable criterion is whether the return in the past year has been less than that of the cash/bond/safe investment buffer.


(c)firesim analysis shows that such strategies are sufficient to make a major improvement to the historically safe withdrawal rate. Of course one 50% fall doesnt preclude another one following immediately with no recovery, but its extremely rare and in any scenario which exhausted the buffer ones retirement plan would be doomed anyway. The object of the exercise isnt to safeguard against all possible eventualities, just most of them.

[Deleted User]

a major fall in equity with no immediate recovery

Exactly. The system works great as long as you know the future.

Linton

Deleted_User wrote: »

Exactly. The system works great as long as you know the future.

No you merely have to observe the past.

Audaxer

Deleted_User wrote: »

The strategy of having a fixed pot of cash rather than % allocation would be a great idea ONLY if one knew the future. It is based on an assumption that the market crash would last X years - enough for the cash pot to cover. Unfortunately we don’t know the future. This strategy drives investors in drawdown to keep investing in equities most of the time rather than allocating a % to FI.

The reason it’s timing is that one doesn’t actually know when the equities are “cheap” or “expensive” at any specific point in time. The cheapness depends on future profits and is only really known in hindsight. Say the market drops 20%. Who is to say it’s cheap? Should I be using the cash pot? What if it drops 50% more a year later and stays there while I no longer have any FI?

Now... If someone is sitting on 10M and has a constant pot of 1M in FI, then I won’t be too worried about poor timing.

I think I agree it would be a better strategy to keep cash as a fixed percentage of your portfolio rather than keeping it as a fixed sum of money. So if my portfolio was £100k, split by 60% equities, 20% bonds and 20% cash, and I want to drawdown say 4% each year rising with inflation.
Year 1 example - Equities lose 10%, Bonds Gain 4% and Cash interest is 1%. Equities now £54,000, Bonds £20,800, Cash £20,200 resulting in a portfolio balance of £95,000. To draw £4,000 and get back to the original percentages on the remaining £91,000 you need to draw £2,000 cash, sell £2,600 bonds and buy £600 equities.
I think that strategy removes any need for judgement about when is the best time to sell equities, or how much to sell, or when to use a cash buffer. Instead you just use cash like any other portfolio asset, and always keep it at the same percentage cash in your portfolio.

Am I missing any flaws in that strategy?

[Deleted User]

Audaxer wrote: »

I think I agree it would be a better strategy to keep cash as a fixed percentage of your portfolio rather than keeping it as a fixed sum of money. So if my portfolio was £100k, split by 60% equities, 20% bonds and 20% cash, and I want to drawdown say 4% each year rising with inflation.
Year 1 example - Equities lose 10%, Bonds Gain 4% and Cash interest is 1%. Equities now £54,000, Bonds £20,800, Cash £20,200 resulting in a portfolio balance of £95,000. To draw £4,000 and get back to the original percentages on the remaining £91,000 you need to draw £2,000 cash, sell £2,600 bonds and buy £600 equities.
I think that strategy removes any need for judgement about when is the best time to sell equities, or how much to sell, or when to use a cash buffer. Instead you just use cash like any other portfolio asset, and always keep it at the same percentage cash in your portfolio.

Am I missing any flaws in that strategy?

The one possible issue is that In 2008 global high-yield corporate bond investors experienced a 33% decline in the value of their investments. Global broad market corporate bonds had a drawdown of 10%. At the same time government bonds appreciated by 5%.

To me it was a lesson that one needs to be picky about “bonds”. I only have them for bears, so the quality of bonds is very important.

Audaxer

Deleted_User wrote: »

The one possible issue is that In 2008 global high-yield corporate bond investors experienced a 33% decline in the value of their investments. Global broad market corporate bonds had a drawdown of 10%. At the same time government bonds appreciated by 5%.

Maybe that would be a good reason for holding separate funds for different bond types, especially if high yield corporate bonds and government bonds are not correlated and sometimes move in opposite directions. Then you would benefit from rebalancing back to your original percentages with all other asset classes.