Best investments for a drawdown account?

BritishInvestor

kinger101 said:

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/

Yep, I was - in the context that spreadsheets to help the reader understand the theory is key - hence why I have a number for my book - screenshot was from the withdrawal planning part.

Thrugelmir

AnotherJoe said:

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.

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. 

Living off the income while maintaining the capital has never been a realistic expectation. Unless there's sufficient excess income generated to allow reinvestment. 

cfw1994

Thrugelmir said:

AnotherJoe said:

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.

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. 

Living off the income while maintaining the capital has never been a realistic expectation. Unless there's sufficient excess income generated to allow reinvestment. 

I always thought the idea was to have enough money to live off the interest of the interest?
(must keep buying a lottery ticket!!)

jamesd

Aged said:

In theory, the idea of maintaining one's pension assets in a drawdown setup seems to me to be a good one, assuming that your capital can generate enough income to meet your ongoing withdrawal requirements. With that in mind, would it not make sense to use Inc type units rather than Acc?

Aged said: '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. 

Aged said: My point is it's not possible to 'set and forget', it takes constant monitoring to make sure your not depleting your original capital and if you have to do that, it's just not worth all the trouble and charges is it? 

I think that inc are the better choice but that's mainly to allow better visibility and control of reinvestment and asset allocation. Not related to how much income to take because it's safe withdrawal rate research which is the basis for that. Part of the selling is just to extract the value added by the internal reinvesting in the acc units but drawdown usually does involve planned deliberate withdrawing of capital. Sales could happen monthly, quarterly or annually, whatever best fits the strategy and tools being used.

Aged said:Was just looking for a bit more clarity re how much it's 'safe' to withdraw without risking blowing the whole thing to smithereens. At the end of the day my pension assets are there mainly to ensure I have a sufficient and dependable income.

That's where Drawdown: safe withdrawal rates comes in. Until you've read that and the linked papers, for up to a couple of years,  you could draw 3.2% of initial capital if you want a very simple rule or 5% if you'll spend an extra hour a year and are willing to take cuts if you live through bad times..

The two year limit is because those percentages are assuming that you're not following any drawdown rules. Long enough to give you plenty of time but not to do significant harm.

Aged

jamesd that's fantastically helpful, thanks. Hopefully once I've studied the prescribed reading I'll be much the wiser, and will no doubt be back with more questions.

Aged

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 appreciate that the value of the capital element will fluctuate, it just seemed it would be easier to identify the income if you could see it being credited in the same way as interest on savings. I guess I need to learn to think like an investor.

Audaxer

Aged 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%?

I appreciate that the value of the capital element will fluctuate, it just seemed it would be easier to identify the income if you could see it being credited in the same way as interest on savings. I guess I need to learn to think like an investor.

I am retired and have an income portfolio because I also liked the idea of natural yield. It has a bias towards UK equity income funds and has therefore not recovered as well since March as the multi asset funds which I also hold, as they include more growth and are more globally diversified. So while I still like the idea of natural yield, I am now thinking more of looking at total return.

If managing a portfolio of single sector stocks for drawdown from total return seems daunting, maybe a consideration could be to select a low cost, globally diversified multi asset fund(s), and sell say 3% plus inflation each year for income. I would also suggest keeping at least a couple of years cash as a buffer to use for spending in negative growth years.

kinger101

Aged 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%?

I appreciate that the value of the capital element will fluctuate, it just seemed it would be easier to identify the income if you could see it being credited in the same way as interest on savings. I guess I need to learn to think like an investor.

The thing is not to let the tail wag the dog.  Doesn't really matter too much if you pick income or accumulation from say a global multiasset fund.  You'll still have to sell periodically, because these aren't realistically going to give sufficient income.

But if you start picking funds just because they're designed for high income (e.g., one which contains mainly FTSE 100), then diversity is going to suffer.

AnotherJoe

Aged 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%?

I appreciate that the value of the capital element will fluctuate, it just seemed it would be easier to identify the income if you could see it being credited in the same way as interest on savings. I guess I need to learn to think like an investor.

Fluctuate implies (to me anyway) about a level but not really dropping.

What we're seeing at present with income investments is it (1) "fluctuating" constantly downwards and (2) the income dropping. Unsurprising because there's a feedback effect. Many income investments stock price remained high because of the income they provided. When the income drops, then the share price does as well.

And as said, by choosing income investments specifically for a high level of income, you are biasing yourself towards a small section of the market, one that has lower growth, falling income, falling share prices.

 

Aged

AnotherJoe said:

Fluctuate implies (to me anyway) about a level but not really dropping.

What we're seeing at present with income investments is it (1) "fluctuating" constantly downwards and (2) the income dropping. Unsurprising because there's a feedback effect. Many income investments stock price remained high because of the income they provided. When the income drops, then the share price does as well.

And as said, by choosing income investments specifically for a high level of income, you are biasing yourself towards a small section of the market, one that has lower growth, falling income, falling share prices.

 

I hear you