Question re 700K investment

Audaxer

bowlhead99 wrote: »

For example, say you wanted to take £24k a year (real terms) from your £700k pot because you think 3.5% on top of inflation is sustainable long term Imagine markets crashed 30%, your £700k becomes £490k, you put your withdrawals on hold and take nothing out, three years later, markets go back up +42.85%, you have your £700k back (ignoring inflation for the moment).

Whereas if you did three years of taking £24k from the £490k, you would only have £418k, so when the £442k bounces back by 42.85%, you only have £597k, not £700k. So the three years of refusing to moderate your withdrawals downwards at times of low fund value, and just going ahead and taking the £72k anyway ... has 'cost' you £103k from the original investment. Ouch- only three years into a forty year spending phase, with markets no lower than when they started, but you've used up more than a seventh of the capital.

By contrast if the markets had stormed upwards towards £800k or £900k in real terms, you can easily take out that £24k per year in real terms while they markets are booming and be left with more than you started with after the fund portfolio falls back. Because £24k in a bull market is a much smaller slice of the pie than £24k in a bear market.

There are different ways to approach this (more than one way to skin a cat) but many people would advocate having at least a couple of year's money in cash rather than investments, so that you can keep drawing from that cash pot even if markets are bad for a while, and then when markets are relatively better, top up the cash with some investment sales.

I think another point to add to the above is that with a significant investment portfolio of £700k, rather than having it all in a multi asset fund like a VLS60, it may be better to hold separate equity and bond funds. The reason being that if equities fall by 30% and do not recover for a few years, you can withdraw from the bond fund(s) if your cash buffer is low. I do like the VLS funds as I hold VLS60 myself, but I am now thinking it might be better holding a global equity tracker and a separate global bond fund, so that I won't need to draw from equities at all if there is a long bear market.

sixpence.

I reffered to some of the points you made in this post here

sixpence. wrote: »

Thanks for this reply. It’s very informative. Okay so 6000 -10,000 shares is still a pretty extraordinary amount.

A recesssion honestly sounds so stressful in this situation. I actually got a bit tense reading about it. What do people do in a recession? If it’s your income then you can’t just live off air for two years.

I thought you were supposed to keep 1-2 years in cash. Anymore than that feels like quite lot of cash. My savings account is approximately 0.5-.0.75% interest so even by keeping cash one is losing money according to inflation.

If the markets increased by 8% per year for five years that would leave approximately £850,000 (if I was withdrawing 3.5% per year) - note: my maths isn’t very good so this is an approximation - if the value of the fund then dropped 30% in a recession it would be worth £595,000. So it doesn’t seem like growth protects one from a recession? Bearing in mind, the market didn’t fully recover from the 2008 recession until 2013.

Also I know from researching my stocks and shares ISA (which contains a VLS 60) that you always want to keep 10% of your investments in cash in case there is a recession so that you can achieve optimum growth during "recovery".

Alexland

atush wrote: »

You have a cash fund of 1-3 years spending, and spend that if markets correct/crash. Top up the funds spent when the market recovers.

Yup and remember that in addition to this 10% / circa 3 year cash buffer you should also receive fund distributions (from dividends) during the period which might cover you a further year or two. Then if it's still bad you could start drawing from your bonds before crystallising losses in your equities.

Audaxer wrote: »

I think another point to add to the above is that with a significant investment portfolio of £700k, rather than having it all in a multi asset fund like a VLS60, it may be better to hold separate equity and bond funds. The reason being that if equities fall by 30% and do not recover for a few years, you can withdraw from the bond fund(s) if your cash buffer is low. I do like the VLS funds as I hold VLS60 myself, but I am now thinking it might be better holding a global equity tracker and a separate global bond fund, so that I won't need to draw from equities at all if there is a long bear market.

I used to have six-digits in multi asset funds (and still use them in the children's accounts) but having different asset types in separate funds offers a number of advantages including cost optimisation, getting a more desirable asset allocation, taking advantage of equity market dips, etc.

Alex

sixpence.

Alexland wrote: »

Yup and remember that in addition to this 10% / circa 3 year cash buffer you should also receive fund distributions (from dividends) during the period which might cover you a further year or two. Then if it's still bad you could start drawing from your bonds before crystallising losses in your equities.

Well the current dividens for a VLS 60 is 1.51% I suppose that during a recession this would go down to 0.75% or less? Are you suggesting that I get income rather than accumulation fund in this instance so I can withdraw the dividends?

seacaitch

sixpence. wrote: »

A recesssion honestly sounds so stressful in this situation. I actually got a bit tense reading about it.

This is a good response, because it's causing you to think about these things up-front, now, while you are otherwise calm. That's the time to construct a robust that plan you believe in. If/when the SHTFan, as it will occasionally from time to time over an investing lifetime, you'll really want to have thought this stuff through very carefully indeed.

Have a read of the first pages of this thread from Oct '08, when the financial world looked like it might be ending:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=25126


Bear markets can be very stressful experiences, triggering fight or flight responses by the amygdala, overriding your usual thoughtful, rational behaviour. Lots of people say and think they wouldn't panic (capitulate), but plenty do, selling low during the late stages of market declines.

Knowing that your plan is realistic, considered and robust is very important in reducing these feelings of stress. As is trying to keep the market at a distance from you as much as possible, to limit the extent to which adverse price movements induce emotions in you, because as noted, in this field emotions are generally your big enemy, causing you to act irrationally at just the wrong moments.

Multi-asset funds can help "keep the market at a distance", because they mask some of the volatility in the underlying holdings, but with the disadvantage as noted by others above of losing granularity of control. You need to weigh these things up.

Even more so, advisors (eg. IFAa) can help "keep the market at a distance" because they remove you from the frontline hands-on role of account management, but with the disadvantage of greater costs (unless you're an HL customer already paying advised-like costs ). Again, weigh up the options carefully.

Until you have experience under your belt, I'd suggest generally erring on the side of caution.

sixpence.

Would you suggest investing the 700K in a different platform? HL charge 0.45%
I just really like website everything is shiny... clear... neat. But I like money more lol
What investing platform would you suggest?

Thanks for your post. Yeah, I think 2 years cash is necessary. A recession is basically an unnatural disaster which inevitably takes place every 10-25 years imo.

EDIT: okay I read some of that 2008 thread and had a cold hard think about this. I think the best thing to do re emergency fund is to have enough money that I could live off for 3.5 lean years. So like no eating out or ordering pizza (instead you get a pizza off the tesco reduced shelf), no buying coffee. And maybe try to drink as little alcohol as possible. Sorry this is a massively middle class way of viewing a recession. Don't want to detract from how serious they are as people die due to cuts and strain wrt public services etc, but just saying I think a 3.5 year fund is the best way forward as it really too the SNP that long to recover and it wasn't even full recovery.

Audaxer

sixpence. wrote: »

Well the current dividens for a VLS 60 is 1.51% I suppose that during a recession this would go down to 0.75% or less? Are you suggesting that I get income rather than accumulation fund in this instance so I can withdraw the dividends?

Dividends are said to be a lot less volatile than share/unit prices, so I doubt dividends would half in a recession. If the VLS fund value lost 30%, then I think it would feel better taking a dividend from the INC fund than selling the equivalent amount of capital from the ACC fund. However if you did sell the equivalent amount of capital from the ACC fund, I think you would be left with the same fund value if you had taken a dividend from the INC fund.

Alexland

sixpence. wrote: »

Well the current dividens for a VLS 60 is 1.51% I suppose that during a recession this would go down to 0.75% or less? Are you suggesting that I get income rather than accumulation fund in this instance so I can withdraw the dividends?

Even if your distributions drop to 0.75% that's 2.25% in the 3 years you are drawing from the 10% cash and a further 0.75% during the 4th year you are spending the distributions. If the dividends didn't drop you could possibly get a 5th year. It seems neater to have income funds during drawdown but it doesn't really matter.

sixpence. wrote: »

Would you suggest investing the 700K in a different platform? HL charge 0.45%

If this £700k is a high proportion of your net worth then I would suggest spreading across a couple of unrelated platforms.

If holding high value funds (rather than ETFs, ITs or Shares) then the HL percentage charge gets very expensive. Consider fixed price platforms such as Halifax SD/iWeb or switching to ETFs for capped fees at HL, Fidelity or AJ Bell YouInvest. However you don't get the £85k FSCS protection with ETFs and if this is important to you consider reinsured personal pensions.

Alex

sixpence.

Going to chat to the IFA about the £85K thing. A few people on here said it wasn't that big a deal and was even a bit paranoid to have money on 3-4 platforms to save money. I will look into different platforms to save money though.

Edit: quick look at fidelity who only seem to charge 0.2% per year versus HL 0.45% So that's saving £1575 per year on 700K. Enough to buy a new laptop with when mine eventually breaks or put into my emergency fund for a rainy day/recession. Definitely not going to invest HL if Fidelity is a decent platform and this is all they charge.

ffacoffipawb

sixpence. wrote: »

Going to chat to the IFA about the £85K thing. A few people on here said it wasn't that big a deal and was even a bit paranoid to have money on 3-4 platforms to save money. I will look into different platforms to save money though.

Edit: quick look at fidelity who only seem to charge 0.2% per year versus HL 0.45% So that's saving £1575 per year on 700K. Enough to buy a new laptop with when mine eventually breaks or put into my emergency fund for a rainy day/recession. Definitely not going to invest HL if Fidelity is a decent platform and this is all they charge.

HL charge drops to 0.25% between £250k and £1m.