Drawdown management

ypudding

I'm still contemplating my pension options. And note there appears to be a lot of emphasis on"Investments can go down" "Investments might not perform as well as you want" etc etc.


I appreciate the advice has to be emphasised. But what I'm trying to understand is this.


If I had a sizeable amount invested in a drawdown scheme and I'd taken advice from a financial advisor as to where this money would be invested. Would the onus be on me to constantly watch the performance of those investments. Or are they managed in such a way that whoever manages the investments adopt practices to maximise their returns and earn their management fees!!! Like adopting stop loss methods on shares, off loading bad investments before they lose half their value etc


My obvious worry would be if say a million pound investment ended halving in value. What should I be looking for when choosing where to invest and who to manage my investments???

bowlhead99

ypudding wrote: »

If I had a sizeable amount invested in a drawdown scheme and I'd taken advice from a financial advisor as to where this money would be invested. Would the onus be on me to constantly watch the performance of those investments.

If you're employing an IFA, they will monitor the performance and suitability of the investments. Or they can set you up with something on a one off transactional basis and then you can research and monitor them yourself. But any regulated advice is going to involve you investing in collective investment schemes (funds) rather than individual shares.

Or are they managed in such a way that whoever manages the investments adopt practices to maximise their returns and earn their management fees!!! Like adopting stop loss methods on shares, off loading bad investments before they lose half their value etc

Fund managers are paid to manage the holdings of the funds to a strategy. That's what they get paid management fees for.

My obvious worry would be if say a million pound investment ended halving in value.

If you were worried by the potential of that happening, you wouldn't invest in a portfolio of investments where a drop of that magnitude was a significant possibility.

Or, if you didn't know much about how to construct a portfolio and were taking professional advice, you would tell the person advising you that you would not be able to handle it if the portfolio halved in value - your goal should not be trying to make the 'maximum possible return at all costs' by riding a volatile rollercoaster while drawing money down from it.

What should I be looking for when choosing where to invest and who to manage my investments???

Have some free introductory meetings with a few independent financial advisors to find someone who can explain what they do for their money and how they would construct a portfolio that meets your needs. Being able to explain how it all works and how to manage your concerns is a good starting point, as ultimately you will have to be able to trust that they know what they are doing. And that they won't cost you more than they save you in financial and emotional terms.

MarkCarnage

At least two strands to this....

Firstly, if you took advice on a 'transactional' basis only, and paid a one off fee, the onus would be on you to manage them. 'Constantly watch' may not be the right way to look at it, as it implies an approach which might be too active. Go for collective investments whether they be funds, ETFs or investment trusts, active or passive, unless you really believe you can manage your own portfolio of shares. Go passive in most cases unless you think you have the ability to do better in fund selection (unlikely for most).

A million pound investment could halve in value and still represent good or appropriate advice.....if the appropriate advice was to be heavily orientated to equities (I'm thinking probably not given the tone of some of your comments!), then a 50% fall when equity markets did the same or worse would be perfectly understandable, and consistent with the portfolio chosen. What matters more is what you do then. A loss is only a loss when it is crystallised - the worst thing to do, and often done by private investors, is to sell near the bottom, thereby locking in their loss. If you are well advised, and viewing it as a long term portfolio, you should neither need to sell, nor be advised to sell after a major market decline.

Therefore, think hard about your risk appetite, your expectations for taking tax free lump sums and income, and the timing of these. Also, what investment return do you need?

Who to manage them? Once you've answered the above questions, and done some homework, many feel comfortable to do it themselves. Others don't, and shouldn't. The danger is those who think that they can, but actually can't....There is a cost saving and decent outcome for those who do it well, but for those who don't, like any bad DIY it can be an expensive and dangerous mistake.

If you decide that you need someone to do it, go to a genuinely independent financial adviser. If it were me, I'd go for someone recommended by someone I trust, maybe with a good established local reputation rather than a national chain.

I would also get worried if an adviser told me he was going to 'constantly watch' the performance of my investments and adopt stop losses. In a drawdown portfolio, this would suggest poor initial portfolio construction. Not that changes will never need to be made, but they shouldn't be that frequent, and made for good strategic reasons rather than responding to short term market 'noise'.

OldMusicGuy

ypudding wrote: »

If I had a sizeable amount invested in a drawdown scheme and I'd taken advice from a financial advisor as to where this money would be invested. Would the onus be on me to constantly watch the performance of those investments. Or are they managed in such a way that whoever manages the investments adopt practices to maximise their returns and earn their management fees!!! Like adopting stop loss methods on shares, off loading bad investments before they lose half their value etc

The onus is more on you. IFAs are not investment managers, they are not managing your personal wealth. They do not do any of the things you mention. Using an IFA does not mean your investments will perform any better than someone who does not use an IFA, nor will it protect you from market crashes.

If you use an IFA they will advise you on which investment funds or other vehicles are the best match to your risk appetite to achieve your long term goals for your pension. If you pay for ongoing advice then you will get periodic reviews with the IFA who will help you decide if you need to switch your investments around.

IFAs do not have a crystal ball, they don't know any more about what is happening in the world than you or I do. What they do know is what investment funds/vehicles are out there and how they might suit your needs. You can educate yourself to do this (I have, and I have a very large DC pot which is my only pension) or you can save time to get an IFA to do this for you.

You will pay for this service. IMO the fees are too high for what you get but that's why I do it myself. Typical fees on a large portfolio are .5% every year, but you can pay a lot more if you go for a fancy "wealth management" company (beware of these). You will also pay an upfront fee of several thousand pounds for the initial portfolio setup. You pay all the fees regardless of how your portfolio does. So if it halves in value, you still pay the IFA their percentage.

There are good IFAs, indifferent IFAs, bad IFAs and downright fraudulent ones. I've worked with three over the years (one was an FA rather than IFA but was only employed for transactional advice). Two were pretty good, one was fraudulent. Finding the good ones can be tough, so like others said, going by personal recommendation is the way to go IMO.

You can also do all of this yourself, it needn't be complicated. However, it took me about 5 years to get to a position where I am comfortable in doing this myself. Even if you don't want to do it yourself, I would suggest you do some research. Your statement about "getting someone to manage my investments" implies you might be easy prey for a high cost "wealth management" company. I know I was before I started learning more about how pensions and investing in SIPPs works.

gm0

Your initial post suggests discomfort with the levels of volatility that are "normal" for having pension funds heavily in equity markets. While long term positive trend returns are there in the historic data. A 50% swing down and back is an entirely normal thing to happen (A crash and a recovery - great when you are saving, needs care when you are selling down).

You get no insurance of performance outcome at all from the IFA for their fees. The equity, bond and other funds they help you pick (or that you pick yourself) *may* perform well in the full business cycle or they may not. When they don't - they will review them with you and perhaps recommend changes. You have no comeback for fund manager outcomes unless the original investment advice was demonstrably innappropriate to the circumstances - risk appetite, fund, needs, objectives.

Risk appetite

The right portfolio for each of us is the one that takes the minimum risk (including volatility issues) which delivers the desired outcomes. Can be a complex thing to work out. You need a good view of real income needs, additional income desires (if markets are good to you), how well these income requirements match size of pot (how hard it has to work), assumptions on longevity, on return and inflation. And a point of view on money left at the end (inheritance) is it OK to run the fund down to a low level in your mid 90s or do you want to take a bit more risk in hope that there is something left for heirs.

A good IFA can help you work this out. But they will also have to play a "forced by the regulator" game with you to establish your risk appetite and document it. This is changing at the moment to introduce "Investment Pathways" a government "fix" to an issue they perceive that too many consumers "default" too much into cash and stay there for too long and are "eaten up" by inflation in the long term. So we are all shortly to be hectored by letter if more than 50% is in cash.

An IFA will likely run the current version of the risk and pathways game with you and then will likely step over it and fit you into one of their range of "typical customer scenarios" for which they handily have a template - a platform, funds etc. They can then set that up and do periodic reviews for you.

Now some people will find an IFA excellent value to not have to think about it or do the admin turning assets into income, balancing things up, worrying over tax rules etc.

But be clear. For £1m fund - 55-95 so (40 years) - half the fund value (for an average given you plan to deplete it) x 0.5% annually = £100,000 fee on top of platform and fund costs. Scale to your circumstances). Others commenting on the thread who like me find that a bit steep or have trust issues have forced themselves up the learning curve to feel safe enough to attempt DIY.

The effort level is non-trivial but there are books and web resources which can help. Take a look. Invest time either in finding and building a relationship with an independent advisor you can trust or in education on long term investing in drawdown. Good luck.

cfw1994

gm0 wrote: »

<snip>

Now some people will find an IFA excellent value to not have to think about it or do the admin turning assets into income, balancing things up, worrying over tax rules etc.

But be clear. For £1m fund - 55-95 so (40 years) - half the fund value (for an average given you plan to deplete it) x 0.5% annually = £100,000 fee on top of platform and fund costs. Scale to your circumstances). Others commenting on the thread who like me find that a bit steep or have trust issues have forced themselves up the learning curve to feel safe enough to attempt DIY.

The effort level is non-trivial but there are books and web resources which can help. Take a look. Invest time either in finding and building a relationship with an independent advisor you can trust or in education on long term investing in drawdown. Good luck.

Great reply (& OMG before!)
That point in bold was a key driver for me to properly investigate things further.
I realised long ago that many FAs (not all!) are basic sales people - witness any interaction with your bank, when they might ask if you have other needs - but equally that even the good ones (& there are a few who regularly help contribute here) clearly need paying, and take a chunk of your wealth in return for helping you.

As gm0 said, there are many for whom an IFA is excellent value, which is absolutely fine....but for those interested in taking a more active role in their finances, you can, as illustrated in bold by gm0, save yourself a potential chunk of money.
You can, of course, equally make a mess and lose money.

Life isn't a rehearsal - I am reminded by attendance at too many funerals of the wedge of death - and money isn't everything: I ardently believe that the best person with your interests truly at heart will always be yourself. The question is whether you can rely on yourself to make good decisions and/or when to call on professional help. The internet enables you to have access to a vast sea of information in order to narrow things down, provided you are suitably interested.


gm0 (& others) - are there any particular books and web resources you would recommend?

I like following (ie, occasionally stumbling upon rather than regularly reading!) a few blog pages:

• https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ - perhaps the one I read the most of & that focussed my attention most
• https://simplelivingsomerset.wordpress.com
• https://meaningfulmoney.tv/enjoy-your-money (some good podcasts)
• https://diyinvestoruk.blogspot.com
• This forum of course
• Pistonheads finance subforum (check the IM sticky thread)

Read a few books:

• Beyond The 4% Rule: The science of retirement portfolios that last a lifetime ( Abraham Okusanya - fairly good, also follow him on twitter)
• DIY Pensions: A Simple Guide to Pensions, SIPPs & Retirement Planning (John Edwards - relatively basic and not too heavy, but well written)
• Enough (Paul Armson) - trite, glad it was an IFA freebie handout!

...but always very happy to have more recommendations!

Albermarle

As gm0 said, there are many for whom an IFA is excellent value, which is absolutely fine....but for those interested in taking a more active role in their finances, you can, as illustrated in bold by gm0, save yourself a potential chunk of money.
You can, of course, equally make a mess and lose money.

Or be somewhere in the middle , where you do not pay an IFA , or make a big DIY mess, but you are not an expert.
In this case you are never quite sure if by saving the 0.5% fee , you are losing out by one or two per cent because your situation is not fully optimised.

gm0

cfw1994 - Thank you for your kind words.

Books

Living off your money (McClung). Mechanics of setting a % draw rate and then drawing (what to sell) and managing investments. Impact of more or less equities on "success" (not running out).
A good background to choosing a plan you intend to stick to and how to track it. Best I have found so far. Not "the answer" but a helpful building block for choosing something you view as "good enough" and understanding its likely behaviour. The magic of this book is it helps you understand if the competing academic and public ideas are meaningfully better/worse than each other in the historical data (envelope of known "has already happened" risk). Attempting the book also tests if you are getting up to speed yet. As it is not the easiest read.

Web

FIRE blogger and options trader - "Early Retirement Now" is useful for the safe withdrawal rate series and US backtesting. While not everything he says is 100% or UK specific he has gone to the trouble to do a lot of scenario tests and document in a blog. His list of questions and ideas to explore (and mostly eliminate) is useful.

Monevator is often a good read especially the comments section


Permanent Portfolio (for a contrarian view) on much received wisdom about stock market investment and "sustainability".

cfw1994

More light reading for me :rotfl:
Thanks!
(edit to add - flipping 'eck, that McClung book is one mighty tome - 355 pages! I can see why you say it might not be easy reading!)

I clean forgot my number 1 place for some solid basics - http://kroijer.com

I'd thoroughly recommend people listen to the short videos on his website.

In a nutshell, don't even hope to 'beat the market' - no-one can sustainably do that over more than a few years: instead, just ride it as broadly and globally as possible.

Yes, it will have ups and downs, but being globally spread means if Japan or Tech or the UK or Europe individually suffers a downturn, you are not 100% impacted.

Of course we live in an always increasingly global market, so that may not hold as easily as I say it there!

Lars Kroijer also has a bunch of youtube videos I've just noticed and started flipping idly through.....IMHO, he speaks an awful lot of sense.

Albermarle - not sure whether you meant being in that middle ground is good or bad: to me, if I save 0.5-1% pa (including in a downturn, when that charge is still applied regardless whether my funds have only gone down - double ouch!), I feel that is a saving worth having

OldMusicGuy

The McClung book was really helpful for me in confirming my strategy. It's hard going in places and a lot of it went over my head but I picked up enough to be very comfortable with my strategy. The thing I liked is that it appears to be by far the most comprehensive review of global data, not just US.

gm0

Oh (also aimed at OP) a few more things.

Pension Craft Youtube channel videos. Some of these are a good introduction on relevant topics and product reviews SIPP, multi-asset funds etc. He is trying to monetise hand holding - calls, web chat while still staying out of the personal advice business. But his free (marketing) youtube channel has some useful stuff on it whether you approve or not of his "specialist guidance" but not an IFA game. While I haven't read his book. I respect his approach and ability to explain things crisply on video/powerpoint. It's a skill. Work has gone in. He doesn't sit there and ramble like many a vlogger.

Lars Kroijer - has done a lot to publicise himself and a passive investing philosophy i.e. the "hold the whole market at capitalisation weight as cheaply as you can" if you don't think you have an "edge". His interviews and videos help explain the active vs passive debate very much from the "arguing for passive" end. This leads to holding either a multi-asset fund (Vanguard Lifestrategy or alternative e.g. VLS40 (40% equities) or more likely in deaccumulation (warning - my view) at least one equity and one bond fund so you can decide what to sell each time this is done (if you have bought into the managed extraction ideas in McClung etc.).

Final thought - Lifetime allowance and tax resources on this forum and elsewhere (monevator). If the fund size is magnitude £1m then the LTA (Lifetime allowance) is relevant and I am afraid this will influence what it is sensible to do and not do particularly around drawing income and making sensible use of annual tax allowances 55-75. Drawdown and Self Assessment are uneasy bedfellows. Emergency tax codes with strange assumptions. Reclaim forms. Nothing terrible but traps for the unwary. There are quite a few threads on this if you search.

It takes a fair bit of effort to get to grips with LTA as you first need to understand what crystallisation and marked for drawdown are and how this interacts with the tax code (pensions, IHT, income tax) and "benefit crystallisation events" (BCE). So if you have anything close to £1m do search and read the other threads.