Adjusting fund holdings to match planned drawing profile?

Linton

Albermarle said:

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.

All monthly income sufficient to pay the basics comes from dividends and interest.  This makes the important stuff pretty stable - so far Covid has not had a major impact.  It is also zero effort as it happens automatically and there is no requirement to choose specific investments to be sold. The portfolio is rebalanced once a year with a second minor tweak months later (tied in with annual drawdowns from SIPPs) and, as part of these, lump sums of cash can be freed up for known major expenditures and for keeping our bank current accounts healthy.  Again, no need to choose the investments to be sold - the target allocations remain fairly constant.

I would agree there is no place for multi-asset funds here.  Every fund is focussed with a reason to be there.  A multi-asset fund is ideal in many circumstances eg when you are continuously contributing to a relatively small pension pot for your retirement decades away .  Where you have multiple potentially competing objectives differing in both type and timescale it is very helpful to be able to allocate resources precisely.

michaels

How reliable are dividends though?  'Stalwarts' can have their markets disrupted, see for example utilities and the oil sector.

There was a suggestion that I should read more widely, are there any suggested websites or books?

On the other linked thread there was discussion of whether 'pots' was any different to holding a correct 'blend' portfolio of the VLS80/60/40 type - I contend that these rebalance automatically whereas when holding 'pots' you might chose not to do so.

Thanks

Notepad_Phil

michaels said:

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

Unfortunately I doubt that there has ever been a simple rule on how to structure yourself for drawdown from non-defined income, though I'm sure it was undoubtedly simpler in pre-QE and pre-covid days. You have to take a long hard realistic look as to what your income needs are and how you can use your assets to satisfy them in an unknown world of future inflation and investment returns.

I'm with those who are not fans of bonds in the current environment so we've decided to go down the route of taking the natural yield from our globally invested pension portfolio with a chunk of cash held to deal with times like now where dividends are likely to be cut. We're lucky and can afford for our chunk of cash to be big enough to cover many years of zero yield, whilst having enough in the equities so that the lowish yield from them will cover our modest needs. Others will not be as lucky and will need to use other strategies.

Inflation is an issue that could definitely rear its head, but I think the outlook for general inflation is going to be subdued for a long time yet and I like having the safety of the chunk of cash as it means that I can hold everything else as equities and sleep easily at night regardless of any market falls.

As to reliability of dividends, although we do have some cash in higher yielding funds the majority of our money in funds are held in passive trackers. Others may need to invest a higher ratio in those higher yielding funds to match their income requirements, in which case they need to realise that the yield from them will from time to time likely be hit in a manner greater than if they just invested in something like VWRL.

Thrugelmir

michaels said:

How reliable are dividends though?  

In 12-24 months time we'll have a much better idea as to the financial damage caused by Covid. The interim does look bleak for some sectors of the market. UK traditionally pays out a higher % of earnings. US for tax reasons does not give the same importance to dividends. Europe is generally a lower yield. The future may well lie out East but not currently. 

shinytop

michaels said:

How reliable are dividends though?  'Stalwarts' can have their markets disrupted, see for example utilities and the oil sector.

There was a suggestion that I should read more widely, are there any suggested websites or books?

On the other linked thread there was discussion of whether 'pots' was any different to holding a correct 'blend' portfolio of the VLS80/60/40 type - I contend that these rebalance automatically whereas when holding 'pots' you might chose not to do so.

Thanks

As a relative (compared to some on here) novice, I decided I wanted 50% equities, 20-25% cash and the rest in something else.  I decided to let Vanguard and HSBC decide what the something else should be, via their multi-asset funds; I figure that the respective fund managers are better placed than I to decide what that is - bonds, gilts, property or more cash.  It may not end up being the best choice but I doubt it's a terrible one. But then again, most of our income comes from DB pensions and even just matching inflation would be OK.  

Linton

michaels said:

How reliable are dividends though?  'Stalwarts' can have their markets disrupted, see for example utilities and the oil sector.
........

Generally on a month by month basis interest and dividends are very stable.  With a well diversified portfolio you wont get a significant part of your income suddenly stopping.  Over a longer frame time returns will vary and so you will need some maintenance, perhaps annually.

Companies try to avoid cutting the dividend since the shareholders dont like it and people may assume the company is in serious difficulty. Bonds wont suspend payment unless the issuer is going bust.  If a company issuing a bond does go bust the bond holders are well ahead of the shareholders in the queue for the remaining assets, though of course there may not be any.

It is essential to diversify across as many different sources as possible,  companies, company sectors, and types of asset.  If you are using individual shares I suggest you will need 15 at the very least.  Dividend paying companies can have a high yield because they are at a justifiably low price so you will need some understanding of company finances and be able to spend the time and effort to keep in touch with the financial data if you are to avoid the Carillions.  For this reason you may well prefer just to use funds, which is what I do.

Albermarle

I'm with those who are not fans of bonds in the current environment 

There were similar negative comments about bonds circulating on this forum before Covid ( although not everyone agreed of course ) I do not have the knowledge to get in a detailed discussion of the rights and wrongs of bond investments. All I know is the one 100% bond fund I have is 6.5% up since January 1st and the 40:60 multi asset fund I have has now recovered back to Jan 1st position , despite equity markets still being down.

Maybe the next few months will be different .

Thrugelmir

Albermarle said:

I'm with those who are not fans of bonds in the current environment 

There were similar negative comments about bonds circulating on this forum before Covid ( although not everyone agreed of course ) I do not have the knowledge to get in a detailed discussion of the rights and wrongs of bond investments. All I know is the one 100% bond fund I have is 6.5% up since January 1st and the 40:60 multi asset fund I have has now recovered back to Jan 1st position , despite equity markets still being down.

Maybe the next few months will be different .

An easy read that explains the long term movement in bond markets. 
https://www.vanguard.co.uk/documents/adv/literature/why-own-bonds-when-yields-are-low-tlor.pdf

AnotherJoe

Linton said:

Companies try to avoid cutting the dividend since the shareholders dont like it and people may assume the company is in serious difficulty. Bonds wont suspend payment unless the issuer is going bust.  If a company issuing a bond does go bust the bond holders are well ahead of the shareholders in the queue for the remaining assets, though of course there may not be any.

Except that now is an excellent time to cut dividends, because everyone else is doing it.

IMNSHO this will blind many people to the fundamental issues in the oil sector, where previously unsustainable levels of dividends which were propping up the share price were difficult to get away from for that reason you mentioned, but now they've got a great opportunity and are taking it. A bit like that govt minister who said on 911 "today's a great day to release bad news".

ISTRR in the past week that 46 of the FTSE100 had cut their dividends in the last month or two?

[Deleted User]

Bonds are worrying me too (after reading a lot on the forums), but I am invested in this https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR061E7
The performance has been quite stellar