Drawdown Strategy: VLS60 Or VLS20 and VLS100

green_man

My intention in my drawdown SIPP was to hold HSBC Global Strategy Balanced (58% equities) as my core holding (along with cash and a couple of higher risk EM and SmallCap holdings to offset the cash drag).

The plan would be that in normal times I would take one UFPLS per year and this would normally come from liquidating some Global Strategy stock.

Would a ‘better’ plan be holding HSBC GS Cautious(24% equities) and HSBC GS adventurous(93% equities) instead. (In equal weightings).  Then when I come to liquidate for my UFPLS I simply liquidate a quantity from the most valuable holding.

This seems auto balancing and has the advantage of drawing down primarily equities when they have had a good year and primary bonds when they havn’t.

If both funds have fallen by a set amount in the year (say over 10%) then I draw from the cash. When the funds recover I liquidate some GS and replace the cash holding.

Can anyone see any obvious gaping flaw in this plan?  It seems pretty simple yet should give a better overall result than just holding GS balanced.

** I used VLS in the title as more people know those funds and they have more concise naming. Similar thinking could equality be applied to a VLS portfolio as the title.

dunstonh

Would a ‘better’ plan be holding HSBC GS Cautious(24% equities) and HSBC GS adventurous(93% equities) instead. (In equal weightings).  Then when I come to liquidate for my UFPLS I simply liquidate a quantity from the most valuable holding.

Some people do break their portfolio in to time-weighted sections. i.e. money you need in the next few years, money you need 5-15 years and money you need in 15+ years.   They increase the risk as per time cycle.  It is a viable method although not one I personally use.

Although you are not proposing that.  You are suggesting drawing from the one that has gone up the most or down the least.  Not generally a recognised strategy with multi-asset funds but rebalancing is normal on a portfolio of single sector funds.

Can anyone see any obvious gaping flaw in this plan?  It seems pretty simple yet should give a better overall result than just holding GS balanced.

It seems overly complicated and unnecessary and having the options at either end of the risk scale and not in between probably means its easier just to have the one in between.

bowlhead99

green_man said:

This seems auto balancing and has the advantage of drawing down primarily equities when they have had a good year and primary bonds when they havn’t.

If both funds have fallen by a set amount in the year (say over 10%) then I draw from the cash. When the funds recover I liquidate some GS and replace the cash holding.

Can anyone see any obvious gaping flaw in this plan?  It seems pretty simple yet should give a better overall result than just holding GS balanced.

It's not really 'auto balancing', other than it gets you a bit closer to where you would have already been if you had let the manager balance it for you as you went along.

If for example your high risk fund is 3% overweight but you want to take 6% from the pot, if you take it from the biggest holding you will now be overweight in the other one, so you are now still out by 3% and still need to do some balancing work.  Or if your high risk fund is 9% over and you want to take 6% from the pot, taking the 6% from the bigger pot still leaves 3%  'too much' in the bigger pot and more balancing work needed.  So you are going to still need to rebalance it anyway if small percentages bother you. 

If you had just used a balanced fund in the first place, the manager would have already sold some of the higher risk stuff to top up the lower risk stuff for you, and then you would just draw money out of the overall blend.  So there is no real expectation that your method 'should give a better overall result', as whether it is better to rebalance on a daily, weekly, monthly, quarterly, six-monthly, annual or biennial basis is going to depend on the exact shape of the market movements for all the various asset classes, which can't be known in advance, right?

Audaxer

green_man said:

If both funds have fallen by a set amount in the year (say over 10%) then I draw from the cash. When the funds recover I liquidate some GS and replace the cash holding.

Can anyone see any obvious gaping flaw in this plan?  It seems pretty simple yet should give a better overall result than just holding GS balanced.

I can understand where you are coming from, but if you are going to hold a cash buffer, I can't see the need to split your investment between the two HSBC GS funds. I think it would be simpler to have the one HSBC GS Balanced fund along with the cash buffer. Then in loss years of x% or more, just draw from the cash buffer.

green_man

You are suggesting drawing from the one that has gone up the most or down the least.  Not generally a recognised strategy 

Surely this is a recognised strategy!?  When you rebalance don’t you typically sell the best performing stuff and add in the worse performing.  This is surely just a version of that?

It's not really 'auto balancing', other than it gets you a bit closer to where you would have already been if you had let the manager balance it for you as you went along. 

Yes, I don’t really mean autobalancing, but the strategy does stop the portfolio getting unbalanced over the longer term (multiple years). Of course within that there may be periods that are slightly unbalanced but ‘I’ wouldn’t worry about that. But of course I could rebalance back to 50/50 at the same time if required. I would still obviously be liquidating more of the higher performing fund.

had just used a balanced fund in the first place, the manager would have already sold some of the higher risk stuff to top up the lower risk stuff for you, and then you would just draw money out of the overall blend.  So there is no real expectation that your method 'should give a better overall result'

Yes but GS Balanced for example only really changes its equity ratio by a few percent.   If say equities were up 40% in a year then I would be selling 93% equities (With a sale of Adventurous) , rather than 58% equities. Is that not preferable?  If markets were down, (let’s say not quite enough for me to draw on the cash element) then I would likely be selling just 23% equities (selling Cautious) rather than 58% equities. 

Audaxer said:

if you are going to hold a cash buffer, I can't see the need to split your investment between the two HSBC GS funds. I think it would be simpler to have the one HSBC GS Balanced fund along with the cash buffer. Then in loss years of x% or more, just draw from the cash buffer.

I see using the cash buffer only when markets drop significantly in the previous year.  So let’s say 4/5 years I won’t be using the cash buffer.  So in raising markets aren’t I better withdrawing From a high equity fund?


its interesting... first three replies are from some very experienced posters, all of whom seem to think the one fund approach is superior to the two fund approach.  That was my original plan, and it’s simpler (though not by much).  I do find it surprising though that the above doesn’t seem to match a recognised strategy.

if you are an experienced investor with (say) a 12 fund portfolio in drawdown, you withdraw and rebalance once a year. By definition you will be selling more of the higher performing assets to release capital.  Does my simplified 2 fund portfolio not do a similar thing?

AnotherJoe

green_man said:

You are suggesting drawing from the one that has gone up the most or down the least.  Not generally a recognised strategy 

Surely this is a recognised strategy!?  When you rebalance don’t you typically sell the best performing stuff and add in the worse performing.  This is surely just a version of that?

It's not really 'auto balancing', other than it gets you a bit closer to where you would have already been if you had let the manager balance it for you as you went along. 

Yes, I don’t really mean autobalancing, but the strategy does stop the portfolio getting unbalanced over the longer term (multiple years). Of course within that there may be periods that are slightly unbalanced but ‘I’ wouldn’t worry about that. But of course I could rebalance back to 50/50 at the same time if required. I would still obviously be liquidating more of the higher performing fund.

had just used a balanced fund in the first place, the manager would have already sold some of the higher risk stuff to top up the lower risk stuff for you, and then you would just draw money out of the overall blend.  So there is no real expectation that your method 'should give a better overall result'

Yes but GS Balanced for example only really changes its equity ratio by a few percent.   If say equities were up 40% in a year then I would be selling 93% equities (With a sale of Adventurous) , rather than 58% equities. Is that not preferable?  If markets were down, (let’s say not quite enough for me to draw on the cash element) then I would likely be selling just 23% equities (selling Cautious) rather than 58% equities. 

Audaxer said:

if you are going to hold a cash buffer, I can't see the need to split your investment between the two HSBC GS funds. I think it would be simpler to have the one HSBC GS Balanced fund along with the cash buffer. Then in loss years of x% or more, just draw from the cash buffer.

I see using the cash buffer only when markets drop significantly in the previous year.  So let’s say 4/5 years I won’t be using the cash buffer.  So in raising markets aren’t I better withdrawing From a high equity fund?


its interesting... first three replies are from some very experienced posters, all of whom seem to think the one fund approach is superior to the two fund approach.  That was my original plan, and it’s simpler (though not by much).  I do find it surprising though that the above doesn’t seem to match a recognised strategy.

if you are an experienced investor with (say) a 12 fund portfolio in drawdown, you withdraw and rebalance once a year. By definition you will be selling more of the higher performing assets to release capital.  Does my simplified 2 fund portfolio not do a similar thing?

I'm an experienced investor and I don't rebalance in that sense. I think rebalancing only/mainly  applies when looking at bonds vs equities. If it's investments, then I'd  tend to  top up lower amount good performers and replace investments that have been poor performers, rather than add to them. And sell out of investments that are good performers if they get too high a % of overall investments. In my case for example Apple is now 1/4 my net wealth.  So,  much as it hurts, I'll be selling it down indefinitely. 

In your case though, if you beleive bonds are worthwhile (I don't)  I don't see too much wrong with your suggested strategy. Eg it's not terrible or catastrophic. Pick the funds that meet your level of risk tolerance trying to err on the side of riskier if you will be withdrawing for a long time (hopefully ! ). Talking with an old friend yesterday, she has much less money than she "should" in her retirement because she was far too cautious in her investments the past 30 years. She's comfortable but she could have been rich,  and without running the sort of silly risks I do. But then again I can run those risks because I have enough basic income to allow me to. As per another poster here recently, you can be so cautious it's actually risky. 

shinytop

green_man said:

My intention in my drawdown SIPP was to hold HSBC Global Strategy Balanced (58% equities) as my core holding (along with cash and a couple of higher risk EM and SmallCap holdings to offset the cash drag).

The plan would be that in normal times I would take one UFPLS per year and this would normally come from liquidating some Global Strategy stock.

Would a ‘better’ plan be holding HSBC GS Cautious(24% equities) and HSBC GS adventurous(93% equities) instead. (In equal weightings).  Then when I come to liquidate for my UFPLS I simply liquidate a quantity from the most valuable holding.

This seems auto balancing and has the advantage of drawing down primarily equities when they have had a good year and primary bonds when they havn’t.

If both funds have fallen by a set amount in the year (say over 10%) then I draw from the cash. When the funds recover I liquidate some GS and replace the cash holding.

Can anyone see any obvious gaping flaw in this plan?  It seems pretty simple yet should give a better overall result than just holding GS balanced.

** I used VLS in the title as more people know those funds and they have more concise naming. Similar thinking could equality be applied to a VLS portfolio as the title.

I'm doing almost exactly the same as your original idea, although I've split the core part 50-50 between HSBC Balanced and VLS60.  I am trying to keep the cash outside the SIPP to generate at least a small amount of return. Currently about 50% equities overall although I may look to increase that a bit.

dunstonh

Surely this is a recognised strategy!?  When you rebalance don’t you typically sell the best performing stuff and add in the worse performing.  This is surely just a version of that?

No. It is not a recognised strategy with multi-asset funds covering different risk profiles.

Rebalancing is to sell assets in a certain area that are overweight of your target allocation to put into assets that are underweight of your target allocation.   

If the OP had a time weighted strategy for risk, then selling down on the most appropriate one to realign with that strategy would be sensible.   However, just picking the one that has gained the most in that period is not.    It may be that the best one in the current period lost more in the previous period and by taking money from that one, you handicap its recovery.   But the OP is not looking at that as they suggesting two multi-asset funds at both end of the risk scales with nothing in between.  Time weighted portfolios typically look at immediate (i.e. next couple of years).  So cash.  Then short, medium and long and then you factor your life expectancy into that timescale to see how you spread the risk.  

Another time weighted option is to build your portfolio to your target allocations based on your life expectancy.  Again, you need a cash buffer for the immediate years.  But your target allocations at age 65 will be longer term than your target allocations at age 70-75 where you move towards medium term.

Or you just do what most do and stick with the chosen risk level that they are comfortable with.

green_man

I'm an experienced investor and I don't rebalance in that sense. I think rebalancing only/mainly  applies when looking at bonds vs equities

Well my strategy is in effect a bonds vs equity portfolio. ‘Cautious’ being the bond fund and ‘Adventurous’ being the equity fund. So surely rebalancing here a recognised strategy?.  In addition even in a case of 100% equities then don’t most rebalance to meet their requiredto profile, that may be geographically, industry, smaller larger companies etc.?

I'm doing almost exactly the same as your original idea, although I've split the core part 50-50 between HSBC Balanced and VLS60.  I am trying to keep the cash outside the SIPP to generate at least a small amount of return

You aren’t doing quite the same. You are in effect hedging your bets on the fund manager approaches, there being a fundamentally different strategy between the two funds. (In reality I expect performance of both to be very close).  I on the other hand are using the funds differently one as a proxy for a bonds fund and one as an equity fund, and trying to convince myself (or as it seems possibly not) that it gives an advantage over just using ‘Balanced’.

No. It is not a recognised strategy with multi-asset funds covering different risk profiles.

Rebalancing is to sell assets in a certain area that are overweight of your target allocation to put into assets that are underweight of your target allocation.   

Yes I see what you mean, it’s certainly not a conventional way to use Multi Asset funds.  If you look at the contents of  ‘Cautious’ and ‘Adventurous’   then you can tell that holding 50/50 gives a very close correlation to if I put 100% in ‘Balanced’.  So ‘Balanced’ matches my risk profile.   So if equities do increase largely in one year I would be unbalanced (high in equities) as ‘Adventurous’ would out perform, so I rebalance by selling ‘Adventurous’ to release my yearly equity, so now I’m Balanced again and have released my capital having sold mainly equities when they have done well.

It may be that the best one in the current period lost more in the previous period and by taking money from that one, you handicap its recovery.

That means in the previous period I would not have sold any of this fund, hence surely it will allow it to recover, that’s exactly what I’m trying to achieve.... I guess I’m not explaining this well am I


aka -Time weighting.
I hadn’t mentioned any time weighting as such in the above but briefly:
The above strategy is designed to take me from ages 55-75. It has 3 years worth of cash as a buffer then the main core is around 60% equities.
in addition I have another pot still in my works pension fund in approx 90% equities that will be used 75+.

[Deleted User]

Splitting a single fund into two as described is a “recognized strategy” with multi-asset funds in as much as it is described (positively) by professionals. Does have certain advantages, like allowing a bit more of “momentum” gains for an asset class that is doing well. I have certainly come across this from couch potato (passive) portfolio gurus. The downside is a little more complexity and opening yourself more to human decision making. Will you have the will power to withdraw from the outperforming fund? 

The only caveats:
1. Holding other bits and pieces “to offset” cash is unorthodox. If your policy calls for a 60/40 portfolio and you want 10% in cash, you could offset it by picking a multi-asset fund with slightly more shares. 

2. While withdrawing from an outperforming fund will contribute to “rebalancing”, other rebalancing may be required. Rebalancing two funds shouldn’t kill too many braincells. 

3. If you are going down this path, why not pick a 100% stock and a 100% bond fund in the appropriate proportion? 

green_man

Will you have the will power to withdraw from the outperforming fund? 

Yes I have no qualms about doing this. (And do regularly in my ‘income’ portfolio- but that’s another story)

1. Holding other bits and pieces “to offset” cash is unorthodox. If your policy calls for a 60/40 portfolio and you want 10% in cash, you could offset it by picking a multi-asset fund with slightly more shares. 

I’ve seen this approach recommended/suggested in a number of articles, so whilst it may be unorthodox it’s certainly not unique..  I like this approach in particular as it allows me to add a couple of funds where Multi asset funds don’t really cover - I.e smaller companies and Emerging markets.

2. While withdrawing from an outperforming fund will contribute to “rebalancing”, other rebalancing may be required. Rebalancing two funds shouldn’t kill too many braincells. 

Yes, as commented earlier by Bowlhead I may need a rebalance as well as just a yearly sale.