Retirement Planner - Importance of Inflation?

BritishInvestor

Steve182 said:

My very simplistic view which I use to calculate the minimum size of my own retirement pot has been -

FTSE100 normally produces annual dividends of 3.5 to 4%

In the long term, say 20 to 30 years, share prices and dividends can normally both be expected to at least match inflation. So for equities it's fair to assume an annual growth of 3.5% to 4% above inflation.

So for the element in equities you might expect to draw down 3.5 to 4%/year and the value of your pot would increase with inflation indefinitely.

Of course this is no reason to invest in FTSE100,  but I use the FTSE100 as worst case scenario to base my numbers on. 

Fees do need to be considered too of course. I'm DIY so don't pay much in the way of fees, but also you don't need to maintain pot value forever....

So for the element in equities you might expect to draw down 3.5 to 4%/year and the value of your pot would increase with inflation indefinitely."
This unfortunately doesn't always work

BritishInvestor

Steve182 said:

Deleted_User said:

FTSE 100 isn’t “worst case” scenario. Country indices can under/outperform for decades and then catch up. S&P500 underperformed between 2000 and 2010. Would have been a bad idea to reduce US allocation. Many did. Its called “recency bias”. 

Looks similar 2000-2010 to me...

Besides, it's not really the point which index performs better or worse than X, Y or Z.
I didn't mention concentrating investments in one index. I simply said I base my own projections on 3.5 to 4% above inflation which I consider a likely worst case 20-30 year scenario. I derive this from the FTSE100 which I consider to be a good example of a poorly performing benchmark to create a cautious or pessimistic projection.

". I simply said I base my own projections on 3.5 to 4% above inflation which I consider a likely worst case 20-30 year scenario"
You've got to be careful with straight-line assumptions - they don't necessarily map onto real-world outcomes.

BritishInvestor

Steve182 said:

pensionpawn said:

Fundsmith Equity class 1 accumulation has been meandering along with growth of 12% pa on average since it's launch. Lindsell Train Global Equity growth of 11.5% pa on average since launch. Of course, past performance is no guarantee of future performance. If you are concerned about draw-down in a year of poor growth just keep 12-24 months worth of normal withdrawal in cash.

I hold them both, and others such as SMT and direct shareholdings which have done much better recently following Covid. I'm targeting the sort of growth rate you mention above in building up my own pot and I've exceeded those numbers over the past couple of years. Whether I actually continue to achieve that sort of growth rate in the short to medium term just determines whether I retire in 3, 5 or 7 years.  

I think it would unrealistic to expect returns in that ballpark to be sustained in the long term. Therefore it's important that you take a cautions approach with any forecasts. That does not mean you cannot continue to invest in Fundsmith, LTGE, SMT etc in retirement, but I would certainly not rely on a forecast above 4 or 5% in drawdown. If you do make 10-15%, which is entirely possible, then great, buy a yacht or second home or whatever you want!

"That does not mean you cannot continue to invest in Fundsmith, LTGE, SMT etc in retirement,"
"If you do make 10-15%, which is entirely possible, then great, buy a yacht or second home or whatever you want!"
I would suggest the downside/drawdown if/when their investing style goes out of favour might mean the yacht purchase might be unwise

Linton

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

Are you sure of your data? Trustnet tells me that Fundsmith Equity has been around for 10 years. It easily outperformed the FTSE World index every year for the past 5 years.  Over 10 years it has returned 437% against the FTSE Worlds 194%.
If your data is correct for what I guess is the US version of the fund it would be an interesting exercise to find out why.

BritishInvestor

Linton said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

Are you sure of your data? Trustnet tells me that Fundsmith Equity has been around for 10 years. It easily outperformed the FTSE World index every year for the past 5 years.  Over 10 years it has returned 437% against the FTSE Worlds 194%.
If your data is correct for what I guess is the US version of the fund it would be an interesting exercise to find out why.

Perhaps he's comparing it to a more appropriate benchmark.

Linton

BritishInvestor said:

Linton said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

Are you sure of your data? Trustnet tells me that Fundsmith Equity has been around for 10 years. It easily outperformed the FTSE World index every year for the past 5 years.  Over 10 years it has returned 437% against the FTSE Worlds 194%.
If your data is correct for what I guess is the US version of the fund it would be an interesting exercise to find out why.

Perhaps he's comparing it to a more appropriate benchmark.

Could be - in which case it would be helpful to know of a passive fund that follows that benchmark. There is no point in comparing returns if there is no alternative fund to compare with.

BritishInvestor

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

Are you sure of your data? Trustnet tells me that Fundsmith Equity has been around for 10 years. It easily outperformed the FTSE World index every year for the past 5 years.  Over 10 years it has returned 437% against the FTSE Worlds 194%.
If your data is correct for what I guess is the US version of the fund it would be an interesting exercise to find out why.

Perhaps he's comparing it to a more appropriate benchmark.

Could be - in which case it would be helpful to know of a passive fund that follows that benchmark. There is no point in comparing returns if there is no alternative fund to compare with.

As discussed before, it's quite a concentrated approach that historically hasn't performed that well vs the overall market over the very long term hence little demand from "evidence-based" investors, that, rightly or wrongly, tend to cluster around the small-cap value space (or broad market).

Prism

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

I'm not sure which stats you have seen but Fundsmith has been around for 10 years and outperformed MCSI World every year except for 2016 when it equalled it. Trustnet is giving a total return of 436.9% over those 10 years. Global Index funds have done around 152% over that time. The GBP drop has certainly helped returns but 10% isn't really here nor there over the last 5 years - its around 20% over 10 years.

Question marks over if MCSI World is a fair benchmark since Fundsmith only really invests in three sectors but I can't think of a better one, partly since those three sectors are not fixed weights. Impossible to know if that performance continues but I have a large chunk of my money betting on it

DT2001

Missed the start of this thread so apologies for back tracking to some earlier responses.

Inflation is very relevant IMO to retirement planning. High inflation could have a drastic effect on ones income. I have a DB pension with an element of GMP. When I reach 65 roughly 1/3rd will increase annually by RPI (Max 5%), 1/3 rd by CPI and 1/3rd will not increase at all. So different inflation scenarios change the real buying power quite differently.

I then looked at my SIPP/ISA pots and used a simplistic SWR as I would hope for a real return on these irrespective of inflation. I agree with Mordko that you have to apply inflation to funds and withdrawals and look at the real value.

My attention was then focused on a strategy for coping  with various inflation/investment return outcomes. If you split your expenditure between minimum required (lockdown helped analysis), desired and optimum, this can then be allocated against different income sources. When SP is in payment it will cover all of my minimum requirements so as long as there is a link between RPI and the SP inflation is much less of an issue. Thereafter I am looking at just taking natural income (I know this will not utilise my ‘funds’ to the maximum however it will allow for inheritance/care and allow us to do what we want) and will adjust my ‘luxury’ spend accordingly. Having been self employed for 20+ years with variable income I am used to adjusting expenditure. This approach will, I think, allow me to cope with ups and downs in performance. Forecasts tend to have a fixed figure for expenditure (adjusted for inflation) and linear increases for inflation, growth etc. Whilst it is necessary to start somewhere I think a flexible approach is key. 

Linton

Prism said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

I'm not sure which stats you have seen but Fundsmith has been around for 10 years and outperformed MCSI World every year except for 2016 when it equalled it. Trustnet is giving a total return of 436.9% over those 10 years. Global Index funds have done around 152% over that time. The GBP drop has certainly helped returns but 10% isn't really here nor there over the last 5 years - its around 20% over 10 years.

Question marks over if MCSI World is a fair benchmark since Fundsmith only really invests in three sectors but I can't think of a better one, partly since those three sectors are not fixed weights. Impossible to know if that performance continues but I have a large chunk of my money betting on it

According to Morningstar Fundsmith uinderpeformed the "MSCI ACWI Large Cap Growth Index " in 2019 and in 2020 to date.  Prior to then it wildly out-performed it. 

10 year perfomance
Fundsmith 18.3% annually=437% cumulative
Index: 13.87% annually=267% cumulative

But the question is only of academic interest anyway as it seems that according to MSCI there are no ETFs that track the index.

See: https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LK2Q&tab=1