What to do??

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k6chris said:

tcallaghan93 said:

UK equity yield 4.7% + 2% real growth -~0.4% fees (average of the FTAS and FTSE 250 funds) = 6.3% real total return net of fees, x 40% = 2.5% 

Not doubting these figures, but what are they based on??

This is Jack Bogle's approach to working out expected returns decade by decade.
Current dividend yield + reasonable expectation of future earnings growth + speculative change (I.e. the valuation going up or down)
FTSE all share current yield is 4.7%
Reasonable economic forecast is 2% inflation + 2% real GDP growth. Maybe we'll have a good decade and do 5%, maybe we'll only keep up with RPI and do 3%.
And the valuations are below average (CAPE is 14x, find that on starcapital.de or work it out for yourself, was 17.6 at start of year, index is 20% lower = 14 vs long term average 15-20, PE is 15x at the bottom end of average on low current earnings too, price to book is 1.5x, can find that on the portfolio data/characteristics section on Vanguard or iShares websites Vs long term average range 1.5-2.0x according to starcapital.de)

So the I figure an 8.7% total return over the foreseeable future, or 6.7% real total return.
I got the fees wrong though Vanguards FTSE all shares funds total fees are 0.25% and the FTSE 250's are 0.48% average out at 0.35%.
Generally the FTSE 250 at least keeps up with the FTSE all share though not every year.

83705628

DairyQueen said:

tcallaghan93 said:

SteveC3 said:

Slightly off on a tangent...
What are the views on holding fixed interest as well as cash?
Such as this, which is available in my SW pension acc.
https://documents.feprecisionplus.com/factsheet/swpoc/fs/BV56_SLG.pdf

You should always hold some it's just a case of what and how much. Right now government bond yields are less than cash, so in my post earlier I suggested you go 40% bonds, of that 20% corporate (10% UK 10% US, average yield 2%, should return 1.7% net of fees), 10% inflation linked (always good to have some of these for inflation insurance) and 10% either cash or short-term or a money market fund. Unfortunately you can't put SIPP money into a savings account so you kinda have to do this if you want to have a balance of stocks to bonds.

Highlighted and a question: why? 

QE has screwed the bond market. Inflation-linked are so expensive that capital loss is likely. Gilts are a guaranteed loss if held to maturity thanks to large financial institution competition in the primary market. Corporates are behaving more like equities and some investment grade are being downgraded to junk. Medium-and-long dated will bomb in price if inflation takes off and short-dated already return zilch. Ditto money market funds. Bonds reduce volatility but, other than this, in the current climate they appear to have zero function. Cash also reduces volatility and is exposed to inflation risk, but at least no capital risk.

I am open to persuasion re: why bonds instead of cash.

Main reason is you need something to stabilise and sell off for income in a stock market crash and unfortunately you can't put money that's in an investment account like a SIPP into a savings account. This only applies if you are in on near retirement.
So I wouldn't put cash into an investment account in order to buy just bonds, but if you already have some money in an investment account then you probably ought to own at least some.
That said:
Gov bonds yields aren't worth buying.
I avoid high yield/junk/em bonds anyway

I pick inflation linked in spite of the high valuation because I'd want to have at least some gov guaranteed assets in there and it's inflation insurance 
I pick corporate/investment grade because it's the only available compromise Vanguard offers and between the US and UK funds, the ytm averages 2%, after fees about 1.7% and maybe the credit risk brings that down to 1%, who knows. But about a quarter of those funds is quasi-gov and 44% of the UK short term investment grade bond fund is quasi-gov.
It's a crap situation but what can one do when the only near-cash assets you can buy in an investment account are likely to yield less than the best cash savings rate?
It all depends on your circumstances really. My mum and dad are 57-58 and I'm planning to use their SIPPs to top up db pension income from 60 till state pension age then have a decent amount leftover. So although there's little point holding bonds, I need a reasonably unvolatile portfolio. These SIPPs are mostly just consolidated DC pensions we haven't put much extra into them.

83705628

tcallaghan93 said:

DairyQueen said:

tcallaghan93 said:

SteveC3 said:

Slightly off on a tangent...
What are the views on holding fixed interest as well as cash?
Such as this, which is available in my SW pension acc.
https://documents.feprecisionplus.com/factsheet/swpoc/fs/BV56_SLG.pdf

You should always hold some it's just a case of what and how much. Right now government bond yields are less than cash, so in my post earlier I suggested you go 40% bonds, of that 20% corporate (10% UK 10% US, average yield 2%, should return 1.7% net of fees), 10% inflation linked (always good to have some of these for inflation insurance) and 10% either cash or short-term or a money market fund. Unfortunately you can't put SIPP money into a savings account so you kinda have to do this if you want to have a balance of stocks to bonds.

Highlighted and a question: why? 

QE has screwed the bond market. Inflation-linked are so expensive that capital loss is likely. Gilts are a guaranteed loss if held to maturity thanks to large financial institution competition in the primary market. Corporates are behaving more like equities and some investment grade are being downgraded to junk. Medium-and-long dated will bomb in price if inflation takes off and short-dated already return zilch. Ditto money market funds. Bonds reduce volatility but, other than this, in the current climate they appear to have zero function. Cash also reduces volatility and is exposed to inflation risk, but at least no capital risk.

I am open to persuasion re: why bonds instead of cash.

Main reason is you need something to stabilise and sell off for income in a stock market crash and unfortunately you can't put money that's in an investment account like a SIPP into a savings account. This only applies if you are in on near retirement.
So I wouldn't put cash into an investment account in order to buy just bonds, but if you already have some money in an investment account then you probably ought to own at least some.
That said:
Gov bonds yields aren't worth buying.
I avoid high yield/junk/em bonds anyway

I pick inflation linked in spite of the high valuation because I'd want to have at least some gov guaranteed assets in there and it's inflation insurance 
I pick corporate/investment grade because it's the only available compromise Vanguard offers and between the US and UK funds, the ytm averages 2%, after fees about 1.7% and maybe the credit risk brings that down to 1%, who knows. But about a quarter of those funds is quasi-gov and 44% of the UK short term investment grade bond fund is quasi-gov.
It's a crap situation but what can one do when the only near-cash assets you can buy in an investment account are likely to yield less than the best cash savings rate?
It all depends on your circumstances really. My mum and dad are 57-58 and I'm planning to use their SIPPs to top up db pension income from 60 till state pension age then have a decent amount leftover. So although there's little point holding bonds, I need a reasonably unvolatile portfolio. These SIPPs are mostly just consolidated DC pensions we haven't put much extra into them.

And my suggestion for SteveC3 was based on trying to come up with something close to his cautious approach, only 50% stocks pre-retirement.

Thrugelmir

tcallaghan93 said:

k6chris said:

tcallaghan93 said:

UK equity yield 4.7% + 2% real growth -~0.4% fees (average of the FTAS and FTSE 250 funds) = 6.3% real total return net of fees, x 40% = 2.5% 

Not doubting these figures, but what are they based on??

Reasonable economic forecast is 2% inflation + 2% real GDP growth. Maybe we'll have a good decade and do 5%, maybe we'll only keep up with RPI and do 3%.

Is that your forecast for the UK? 

83705628

Thrugelmir said:

tcallaghan93 said:

k6chris said:

tcallaghan93 said:

UK equity yield 4.7% + 2% real growth -~0.4% fees (average of the FTAS and FTSE 250 funds) = 6.3% real total return net of fees, x 40% = 2.5% 

Not doubting these figures, but what are they based on??

Reasonable economic forecast is 2% inflation + 2% real GDP growth. Maybe we'll have a good decade and do 5%, maybe we'll only keep up with RPI and do 3%.

Is that your forecast for the UK? 

Not a forecast, if you want forecasts ask the ONS, one, oecd, omg, world bank, or anyone offering an economic outlook. It's just a reasonable expectation based on the past 30 years.

DairyQueen

tcallaghan93 said:

Main reason is you need something to stabilise and sell off for income in a stock market crash
Cash fulfils both functions with the advantage that you don't have to sell.

and unfortunately you can't put money that's in an investment account like a SIPP into a savings account.
I believe that there is at least one interest-bearing SIPP wrapper but the platform fee is high and the alternative investment options on offer are limited.

If age 55+, you can take cash via upfront TFLS or via drawdown to cover income needs in the short-term (< 5 years) and invest at retail rates available outside of the pension wrapper. It still forms part of the portfolio. If that option isn't available or advisable, then why risk a capital loss on bonds when pension-wrapped cash will guarantee no loss. Whilst inflation is low the reduction in real value over a short investment timescale (< 5 years) is minimal.

This only applies if you are in on near retirement.So I wouldn't put cash into an investment account in order to buy just bonds, but if you already have some money in an investment account then you probably ought to own at least some.
Conventional wisdom suggests so but conventional wisdom applies to the decades before QE screwed the bond market.

That said:Gov bonds yields aren't worth buying.

I avoid high yield/junk/em bonds anyway

I pick inflation linked in spite of the high valuation because I'd want to have at least some gov guaranteed assets in there and it's inflation insurance
and that assurance is very costly and what happens if deflation becomes a reality?
 
I pick corporate/investment grade because it's the only available compromise Vanguard offers
Why not move platforms if you require other options?

and between the US and UK funds, the ytm averages 2%, after fees about 1.7% and maybe the credit risk brings that down to 1%, who knows. But about a quarter of those funds is quasi-gov and 44% of the UK short term investment grade bond fund is quasi-gov.
It's a crap situation but what can one do when the only near-cash assets you can buy in an investment account are likely to yield less than the best cash savings rate?
Perhaps don't buy them and just hold cash?

It all depends on your circumstances really. My mum and dad are 57-58 and I'm planning to use their SIPPs to top up db pension income from 60 till state pension age then have a decent amount leftover.
So, you are not investing with your own capital? Do your parents know your plan for their pensions? If they intend to remain invested over a 30+ year retirement then a current 50% equity allocation is arguably low unless they need to front-load drawdown using a large %age of the non-equity, and there will then be a corresponding increase in the equity allocation.

So although there's little point holding bonds, I need a reasonably unvolatile portfolio.
Why? presumably a %age of the portfolio will remain invested for 10+ years. If you err too much on the side of caution then you have little chance of matching, let alone beating, inflation. Dare I suggest that your caution is being driven by your fear of explaining (to your parents) the paper losses that are inevitable during periods of market dips/crashes. Volatility is part and parcel of the investment landscape. 

These SIPPs are mostly just consolidated DC pensions we haven't put much extra into them.
Is this your parents' portfolio? If so, you must be decades from retirement and are likely to have a different perspective to someone approaching/in retirement.

Equities are the only asset class that beats inflation over the medium-long term so if you (your parents?) can bear the volatility, and have sufficient flexibility to suspend drawdown in a prolonged bear, then a higher equity allocation may be worth considering.

83705628

Does your thinking factor in the raft of dividend cancellations and cuts not just in the UK but the wider global markets. Likewise where's the real growth of 2% going to come from. 

Re: dividends. Yes, but the UK's dividends are extremely resilient, the only cuts we've had since the war - and that was only an -8.5% cut - were 1948 -7.7%, 1962-3 -6.9%, 1967 -2.5%, 1992-3 -4.9%, 1998 -14.2%, 2001-2 -3.4%, and lastly 2008-9 -11%. The worst years on record are -37.8% in 1915 (guess what happens when you temporarily emigrate your prime productive population to engage in a purely destructive acvtivity) and -47% in 1919 because of the Spanish Flu, and probably some post-WWI adjustments too. Both of these years were followed by the best dividend growth years on record. Source: Barclays Equity Gilts Study.
2% real earnings growth is the average of the last 30 years and seems to me like a reasonable, perhaps mildly optimistic future earnings growth expectation based on current long-term economic forecasts/outlooks from the OBR, OECD, IMF, World Bank, Economic etc. etc. Maybe 1.5% is a tad more realistic.
If you think differently I'd love to know your thoughts.

BritishInvestor

tcallaghan93 said:

BritishInvestor said:

tcallaghan93 said:

BritishInvestor said:

tcallaghan93 said:

 and even if there is volatility the great thing about owning more UK equity is say you keep your withdrawal rate at a nice safe 4%, that's just the UK's dividend, you won't even be touching the capital. 

Happy to take questions, I'm here all week

Safe withdrawal rate of 4% without touching the capital?

Depends what you mean by safe. If you want a balanced portfolio to last indefinitely then go with 3%. 4% is fine if just for retirement.
I don't think if terms of "not touching capital" I just use the phrase because people understand it. I think in terms of the total return. So many investors chase income thinking it's unsustainable to sell capital. But all of the funds I suggested except the FTSE 250 and FTSE All World High Dividend Yield are accumulating funds, so you have to sell some of your holdings to generate income. If you want, most of those funds have an income version you can buy instead.
With the UK's dividend yield well over 4%, if you invested 100% in a FTSE 100 or FTSE All Share index fund and sell 4% a year or 1% a quarter and in effect, you would not be touching the capital. I was talking specifically about UK equity. Global equity dividend yield is ~2.5% and generally with equity it is sustainable indefinitely to only take the dividends as long as you're prepared for occasional dividend cuts. I don't think that a 4% withdrawal rate is sustainable indefinitely on my whole suggested portfolio. A safe withdrawal rate is the real return net of fees.
UK equity yield 4.7% + 2% real growth -~0.4% fees (average of the FTAS and FTSE 250 funds) = 6.3% real total return net of fees, x 40% = 2.5% 
Global equity yield 2.5% + 2% real growth -~2% speculation -~0.4% fees = 4.1% real total return in £ net of fees x 20% = 0.8%
Bonds have a habit of matching inflation so I'll call it a 0% real return, at worst -.5% net of fees, x 40% = -0.2% to 0%
So the total expected real return net of fees on the portfolio I suggested would be 3.1%-3.3%. To be safe, if you wanted this to last indefinitely a 3% withdrawal rate would make sense.

Surely a robust plan/withdrawal rate has to take into account potential tricky market conditions? I'm not sure that 4% would be fine for retirement if we were to encounter one of those - for example in the 70s when the UK market took a hammering and you were withdrawing increasing sums each year to match rapidly increasing living costs.

That 4% withdrawal is a robust plan based on comparing historical returns of different retirement portfolio allocations. In a bad year you can a. Drawdown savings til the recovery b. Drawdown bonds til the recovery c. Ride it out and assume everything's going to be fine d. Go back to work e. Equity release f. Borrow a little... The list goes on.

I think you'd need to take a closer look at historical returns to ensure the pot would last a retirement lifetime (potentially 30-40 years) - 1915 wasn't a great time to retire for a UK based investor for example.
 In response to your points:
a). Having a pot of savings just shifts the asset allocation - potentially impacting longer term growth
https://www.moneymarketing.co.uk/opinion/abraham-okusanya-why-providers-are-getting-crps-wrong/
b). Bonds can also be hit - see 1916
c). This wouldn't have worked in certain periods unless you reduced your spending
d). Potentially not possible/desired if the person is long retired
e). f). Potentially, but this might not be desirable for someone in later life.

SteveC3

Thanks all. This is a real learning curve for me!
Another dumb question:
I know that my workplace scheme will only pay into my SW pension fund, and that Vanguard do not currently provide drawdown schemes, so is the following possible?:
Whilst still working, transfer, say 350k into a Vanguard SIPP, 50:50 equities/bonds, with the intention of not touching it until SP age in 5 years, by which time they will have drawdown up and running.
When I retire in say, 6 months, use the 130k in SW to fund the 4.5 years by drawing down from a "safer" and/or cash fund in SW? And is this possible without paying their advisor charges for using their own products?

Albermarle

And is this possible without paying their advisor charges for using their own products?
I can not answer this but maybe worth pointing out that there are many other pension providers , other than Vanguard or Scottish Widows, who currently operate drawdown and no need for an financial advice.