Best investments for a drawdown account?

semiplural

Aged said:

If it's REALLY possible to have your cake and eat it (as I have been led to believe) that's fine

Apologies that this response is 90% pedantic (the 10% is how you use the thought to frame what you want to do.
It is absolutely possible to "have your cake and [then] eat it"; what we all really want to achieve is to eat the cake and still have it afterwards!

AnotherJoe

Aged said:

AnotherJoe said:

Why do you think an income based portfolio can't suffer from capital depletion?

I dont think it would  be anywhere near the level of trouble you seem to think it would be to drawdown from a portfolio not aimed at income*, and since you are worried about depleting capital, check out how much capital would have been depleted if you bought a portfolio full of high income stocks like BP, Shell, BT, Lloyds etc etc a year ago.

* I do this, i draw down from a portfolio of what most would call growth stocks. Once or twice a year i sell some funds and draw down from the cash pool monthly. which also builds a little from the odd dividend or two. I'm not selling investments every month as perhaps you might imagine ?

To my simple mind, 'withdrawing the natural yield' means you withdraw income but not capital. With my existing drawdown arrangement investments are being sold on an ongoing basis to cover charges and withdrawals. It makes no sense to me. 

There's an inherent assumption in your post that neither capital nor dividends can go down if you chose investments biased for income.

Maybe you had £10k in BP and a 6% yield.

Now its £5k and 1% yield (or whatever, made up numbers)

How is that better than holding (say) SMT which went up 50% and you sold 6% to end up with 144% of your capital instead of 50%?

LHW99

AnotherJoe said:

Aged said:

AnotherJoe said:

Why do you think an income based portfolio can't suffer from capital depletion?

I dont think it would  be anywhere near the level of trouble you seem to think it would be to drawdown from a portfolio not aimed at income*, and since you are worried about depleting capital, check out how much capital would have been depleted if you bought a portfolio full of high income stocks like BP, Shell, BT, Lloyds etc etc a year ago.

* I do this, i draw down from a portfolio of what most would call growth stocks. Once or twice a year i sell some funds and draw down from the cash pool monthly. which also builds a little from the odd dividend or two. I'm not selling investments every month as perhaps you might imagine ?

To my simple mind, 'withdrawing the natural yield' means you withdraw income but not capital. With my existing drawdown arrangement investments are being sold on an ongoing basis to cover charges and withdrawals. It makes no sense to me. 

There's an inherent assumption in your post that neither capital nor dividends can go down if you chose investments biased for income.

Maybe you had £10k in BP and a 6% yield.

Now its £5k and 1% yield (or whatever, made up numbers)

How is that better than holding (say) SMT which went up 50% and you sold 6% to end up with 144% of your capital instead of 50%?

Great if you chose SMT - not so good if you went for Woodford! All equity investments have potential, if not actual risk, hence diversification in sectors (gilt, corporate bond, property, perhaps even inc / acc units) if you are staying invested, rather than buying an annuity.

BritishInvestor

AnotherJoe said:

Aged said:

AnotherJoe said:

Why do you think an income based portfolio can't suffer from capital depletion?

I dont think it would  be anywhere near the level of trouble you seem to think it would be to drawdown from a portfolio not aimed at income*, and since you are worried about depleting capital, check out how much capital would have been depleted if you bought a portfolio full of high income stocks like BP, Shell, BT, Lloyds etc etc a year ago.

* I do this, i draw down from a portfolio of what most would call growth stocks. Once or twice a year i sell some funds and draw down from the cash pool monthly. which also builds a little from the odd dividend or two. I'm not selling investments every month as perhaps you might imagine ?

To my simple mind, 'withdrawing the natural yield' means you withdraw income but not capital. With my existing drawdown arrangement investments are being sold on an ongoing basis to cover charges and withdrawals. It makes no sense to me. 

There's an inherent assumption in your post that neither capital nor dividends can go down if you chose investments biased for income.

Maybe you had £10k in BP and a 6% yield.

Now its £5k and 1% yield (or whatever, made up numbers)

How is that better than holding (say) SMT which went up 50% and you sold 6% to end up with 144% of your capital instead of 50%?

I'm not sure SMT would be a good example given the concentration risk (sector and number of holdings) from what I can see - 13% in Tesla for example!!

AnotherJoe

LHW99 said:

AnotherJoe said:

Aged said:

AnotherJoe said:

Why do you think an income based portfolio can't suffer from capital depletion?

I dont think it would  be anywhere near the level of trouble you seem to think it would be to drawdown from a portfolio not aimed at income*, and since you are worried about depleting capital, check out how much capital would have been depleted if you bought a portfolio full of high income stocks like BP, Shell, BT, Lloyds etc etc a year ago.

* I do this, i draw down from a portfolio of what most would call growth stocks. Once or twice a year i sell some funds and draw down from the cash pool monthly. which also builds a little from the odd dividend or two. I'm not selling investments every month as perhaps you might imagine ?

To my simple mind, 'withdrawing the natural yield' means you withdraw income but not capital. With my existing drawdown arrangement investments are being sold on an ongoing basis to cover charges and withdrawals. It makes no sense to me. 

There's an inherent assumption in your post that neither capital nor dividends can go down if you chose investments biased for income.

Maybe you had £10k in BP and a 6% yield.

Now its £5k and 1% yield (or whatever, made up numbers)

How is that better than holding (say) SMT which went up 50% and you sold 6% to end up with 144% of your capital instead of 50%?

Great if you chose SMT - not so good if you went for Woodford! All equity investments have potential, if not actual risk, hence diversification in sectors (gilt, corporate bond, property, perhaps even inc / acc units) if you are staying invested, rather than buying an annuity.

just choosing some extreme examples to make the point that income based investment on the grounds your capital is safe is a seriously flawed idea and that "growth" funds can bring in more income than income funds. 

And as Dunston has pointed out, by choosing income based investments you are selecting investments that ironically almost certainly will bring in less income overall and do not have any more assurance of capital preservation than a more general selection of investments. 

The traditional "live off the income whilst the capital remains (and probably  grows slowly)" is now many years out of date and seriously flawed. It's just as likely to fall as any other investments. 

Gary1984

You need to figure out your drawdown strategy and the book you've ordered should help with that. 

You could consider something like the Guyton Klinger method where you start by annually withdrawing a set % of your fund (say 4%) and subsequently increase this for inflation. However you employ guardrails where you need to increase/decrease your annual withdrawals by 10% to keep your annual withdrawal rate within +/- 20% of your original chosen withdrawal rate. So if you started taking 4% you would make any adjustment if your annual withdrawal rate becomes less than 3.2% or more than 4.8% of your total pot. There are other rules about investments to choose and cash buffer etc but the guardrails are probably the key feature.

There's a safe withdrawals thread here somewhere where Jamesd goes into all this in great detail. Anyway to answer the question use Acc units so you can take control of disinvestment when it suits you. Taking natural yield only from Inc units ensures you'll die with a lot of pension left untaken. 

kinger101

Aged said:

BritishInvestor said:

It might seem like an easy question but it's surprisingly tricky:

“The only way you can look at the retirement problem is through probability. You can’t look at it not with probability. Everywhere you turn there are probabilities: of inflation, of market performance, or mortality. It’s true that you don’t know the range of possible outcomes for next year, let alone 40 years from now. But you try to come up with the most credible set of probabilities that you can.”

This is a good book to read around the subject

https://www.amazon.co.uk/Beyond-4-Rule-retirement-portfolios/dp/1985721643/ref=sr_1_1?=8-1

Thanks for that, I have ordered the book.

I wouldn't rely on a single book.  Investing is not a science, and the past isn't always a good predictor of the future.  
https://monevator.com/beyond-the-4-rule-abraham-okusanya/

BritishInvestor

Gary1984 said:

You need to figure out your drawdown strategy and the book you've ordered should help with that. 

You could consider something like the Guyton Klinger method where you start by annually withdrawing a set % of your fund (say 4%) and subsequently increase this for inflation. However you employ guardrails where you need to increase/decrease your annual withdrawals by 10% to keep your annual withdrawal rate within +/- 20% of your original chosen withdrawal rate. So if you started taking 4% you would make any adjustment if your annual withdrawal rate becomes less than 3.2% or more than 4.8% of your total pot. There are other rules about investments to choose and cash buffer etc but the guardrails are probably the key feature.

There's a safe withdrawals thread here somewhere where Jamesd goes into all this in great detail. Anyway to answer the question use Acc units so you can take control of disinvestment when it suits you. Taking natural yield only from Inc units ensures you'll die with a lot of pension left untaken. 

While creating a withdrawal policy strategy/statement is important, and these spending/inflation rules can form part of this, it's key not to skip (what I believe are) the first three stages of retirement planning to ensure a cohesive retirement strategy
1. Cost of desired retirement lifestyle
2. Financial plan
3. Investment plan

BritishInvestor

kinger101 said:

Aged said:

BritishInvestor said:

It might seem like an easy question but it's surprisingly tricky:

“The only way you can look at the retirement problem is through probability. You can’t look at it not with probability. Everywhere you turn there are probabilities: of inflation, of market performance, or mortality. It’s true that you don’t know the range of possible outcomes for next year, let alone 40 years from now. But you try to come up with the most credible set of probabilities that you can.”

This is a good book to read around the subject

https://www.amazon.co.uk/Beyond-4-Rule-retirement-portfolios/dp/1985721643/ref=sr_1_1?=8-1

Thanks for that, I have ordered the book.

I wouldn't rely on a single book.  Investing is not a science, and the past isn't always a good predictor of the future.  
https://monevator.com/beyond-the-4-rule-abraham-okusanya/

"Yet his work is steeped in integrity. McClung goes to great pains to explain his guiding principles and assumptions and – unlike some financial writers – all of his recommendations can be fulfilled in real life. There’s even a spreadsheet on his website to support anyone who wants to implement his strategy."
I think this is key - something the reader can understand the logic behind any implementation.

kinger101

BritishInvestor said:

kinger101 said:

Aged said:

BritishInvestor said:

It might seem like an easy question but it's surprisingly tricky:

“The only way you can look at the retirement problem is through probability. You can’t look at it not with probability. Everywhere you turn there are probabilities: of inflation, of market performance, or mortality. It’s true that you don’t know the range of possible outcomes for next year, let alone 40 years from now. But you try to come up with the most credible set of probabilities that you can.”

This is a good book to read around the subject

https://www.amazon.co.uk/Beyond-4-Rule-retirement-portfolios/dp/1985721643/ref=sr_1_1?=8-1

Thanks for that, I have ordered the book.

I wouldn't rely on a single book.  Investing is not a science, and the past isn't always a good predictor of the future.  
https://monevator.com/beyond-the-4-rule-abraham-okusanya/

"Yet his work is steeped in integrity. McClung goes to great pains to explain his guiding principles and assumptions and – unlike some financial writers – all of his recommendations can be fulfilled in real life. There’s even a spreadsheet on his website to support anyone who wants to implement his strategy."
I think this is key - something the reader can understand the logic behind any implementation.

You're quoting the review of McClung's book, not Okusanya's.
https://monevator.com/review-living-off-your-money-by-michael-mcclung/