Adjusting fund holdings to match planned drawing profile?

michaels

WE have talked a lot about the number (annual income required in retirement) and a fair bit about how risk tolerance might impact a split in holdings between 'equities' and 'bonds' in a long term growth portfolio.  There is also discussion about holding 'x years' of expenditure in 'near cash' to avoid having to divest equities when values were cyclically low. 

Is there a good starting point for looking at the best way to invest funds depending on when it is anticipated they will be drawn.  In my example I might expect to retire in 5 years time and draw at a fairly high rate for the first 12 years and then draw at a lower rate thereafter reflecting the receipt of state pension.  Is there a simple rule such as:
1) All funds for drawings post 10 years should be in equities
2) All funds for drawing between 5 and 10 years should be in a 50-50 mix of equities and bonds
3) Funds to be drawn in between 3 and 5 years should be in similar duration bonds
4) Funds to e drawn in the next two years should be in cash or very short dated gilts

Is there already a thread on this, I know people talk about bond ladders but it would seem to make sense that the short term risk is in equity cycles and the long term risk is in inflation?

[Deleted User]

This thread drifts into exactly that discussion https://forums.moneysavingexpert.com/discussion/6155094/vls100-and-60/p1

Thrugelmir

10 year Government Gilts will currently return a 32% capital loss. Bonds generally pose a major challenge. Sourcing a fixed income stream may require taking a far higher level of risk than in the past. 

michaels

Thrugelmir said:

10 year Government Gilts will currently return a 32% capital loss. Bonds generally pose a major challenge. Sourcing a fixed income stream may require taking a far higher level of risk than in the past. 

After expected inflation?

Isn't 10 years and above 'equity' territory?

Thrugelmir

michaels said:

Thrugelmir said:

10 year Government Gilts will currently return a 32% capital loss. Bonds generally pose a major challenge. Sourcing a fixed income stream may require taking a far higher level of risk than in the past. 

After expected inflation?

Isn't 10 years and above 'equity' territory?

No inflation factored in. 

You've only 5 years to you planned date. Therefore you need to start to position your portfolio now in preparation. Equities are simply shares in a Company. Companies themselves have many different activities. Not just pure trading entities. 

michaels

Thrugelmir said:

michaels said:

Thrugelmir said:

10 year Government Gilts will currently return a 32% capital loss. Bonds generally pose a major challenge. Sourcing a fixed income stream may require taking a far higher level of risk than in the past. 

After expected inflation?

Isn't 10 years and above 'equity' territory?

No inflation factored in. 

You've only 5 years to you planned date. Therefore you need to start to position your portfolio now in preparation. Equities are simply shares in a Company. Companies themselves have many different activities. Not just pure trading entities. 

Google says 10 year gilts are yielding 0.22% - how does this equate to a 32% capital loss?

Prism

michaels said:

Thrugelmir said:

michaels said:

Thrugelmir said:

10 year Government Gilts will currently return a 32% capital loss. Bonds generally pose a major challenge. Sourcing a fixed income stream may require taking a far higher level of risk than in the past. 

After expected inflation?

Isn't 10 years and above 'equity' territory?

No inflation factored in. 

You've only 5 years to you planned date. Therefore you need to start to position your portfolio now in preparation. Equities are simply shares in a Company. Companies themselves have many different activities. Not just pure trading entities. 

Google says 10 year gilts are yielding 0.22% - how does this equate to a 32% capital loss?

You will lose about 32% of the capital but will return around 3.2% for the next 10 years, giving you as you say a yield to maturity of 0.22%
The only way that returns more than cash is if the interest rates go even lower and the bond is sold on at a higher value. Difficult to know what to do for the 1-10 year part of the allocation. I don't have a lot in that bucket yet but need to start adding to it over the next few years. I am currently using a combination of cash, property and alternatives but they are just as risky as equities in many ways.

georgehere

OP: Have a look at the thread mentioned, but I also encourage you to do some wider reading on this topic.
There are a number of different approaches, but also the thinking that in fact, they all come back to: a pot of money: split into funds/buckets: each with differing (historic) levels of risk/volatility.
One alternative to 'bucket thinking', is to devise an investment mix (or buckets) coupled with a rebalancing strategy that you will use throughout your retirement.
Another alternative is to consider streams of income that you need for essentials, then nice to haves, then luxuries and plan investment funds (buckets) for each of those streams.
Just bear in mind that those advocating holding large buckets of cash 'just in case' are (a)out of the markets with a significant proportion of their money (b)just as incapable of predicting future returns/market crashes as you or I.

DairyQueen

I would have been happy to hold a conventional 60/40 allocation (plus a few years cash to suspend drawdown if required) at point of retirement until QE screwed the function of bonds. I have yet to read a drawdown strategy doesn't assume that bond prices will behave as they did in the decades before QE. Other than reducing volatility I can't see any advantage in holding gilts over cash and/or money market funds, and corporate bonds have behaved more like equities in recent years.

I reluctantly concluded that bonds had little place in our drawdown portfolio at least until QE begins to unwind. This probably won't happen in my lifetime now courtesy of Covid.

I hold 5 years drawdown in cash as, despite the inflation hit, there seems little alternative. Cash has replaced bonds for this part of the portfolio.

Years 6 and 7 are currently 20/80 in the hope that the small equity allocation will hold the value of this bucket above inflation. Small hope in the wake of Covid and likely I will transfer more of that into cash over time.

Years 8-10 are high equities (80/20) and 100%equities for years 10+. Our drawdown is front-loaded and will fall to <2% drawdown rate once SPs kick-in. We also hold sufficient unwrapped cash to suspend drawdown indefinitely from SP onward.

Drawdown strategies are a minefield to negotiate since QE screwed the markets. Equities still offer the chance of beating inflation long-term but there doesn't seem to be a drawdown strategy that offers any hope of matching inflation without taking more risk than I'm comfortable with over the next 7 years - a relatively short investment timeframe.

Linton

georgehere said:

OP: Have a look at the thread mentioned, but I also encourage you to do some wider reading on this topic.
There are a number of different approaches, but also the thinking that in fact, they all come back to: a pot of money: split into funds/buckets: each with differing (historic) levels of risk/volatility.
One alternative to 'bucket thinking', is to devise an investment mix (or buckets) coupled with a rebalancing strategy that you will use throughout your retirement.
Another alternative is to consider streams of income that you need for essentials, then nice to haves, then luxuries and plan investment funds (buckets) for each of those streams.
Just bear in mind that those advocating holding large buckets of cash 'just in case' are (a)out of the markets with a significant proportion of their money (b)just as incapable of predicting future returns/market crashes as you or I.

My 3 buckets are based on objective:
Growth - 100% equity growth returning double inflation in the medium/long term with maximum diversification.
Income - a steady income from dividends and high interest bonds
Wealth preservation: Inflation matching return at minimum risk

I find having 3 focussed tranches with totally different purposes adds greatly to diversification, portfolio construction and the ease of managing the overall portfolio to meet the diverse needs of someone in retirement dependent on their investments for a comfortable, stress-free life. This makes more sense to me than simply basing one's buckets on timeframes.

Cash is considered a permanent part of Wealth Preservation, not as a temporary shelter in the storms.  I disagree with the possible implication that holding cash is undesirable because one is outside the equity market.  My view is that it is poor investing to focus on maximum return.  One should aim instead for a pre-defined reasonably achievable return at minimum risk.  Holding significant cash, especially whilst safe bonds are zero return and at risk of capital falls, is an essential part of risk management.

Prediction should play no part in investing.  Better to accept the future is unpredictable and to arrange your financial affairs so that you have some chance of coping with whatever happens, disregarding any end of the world as we know it scenario.

Albermarle

My 3 buckets are based on objective:
Growth - 100% equity growth returning double inflation in the medium/long term with maximum diversification.
Income - a steady income from dividends and high interest bonds
Wealth preservation: Inflation matching return at minimum risk

Do you think the Income part has to be all from dividends/interest ? Or could some of it be say medium risk accumulating funds ( passive or active )and you sell parts of these to produce the cash for income . Hopefully you could just use the growth of these funds and they could remain approx static in values ( hopefully ) 

I am thinking this because in your three buckets , there does not seem any place for the popular multi asset funds or managed funds that are not 100% equity, that could also be used to generate an income, albeit probably less smoothly than specific income generating assets.