High Yield Defensive Stocks

Apodemus

Linton said:

I split my investments into 3 completely separate portfolios. Growth 3/7, Income 2/7, Wealth Preservation 2/7.

I have a similar structure but with a fourth strand (in cash, gilts and WP funds) representing five years forward drawdown income (currently 12.5% of portfolio value in total).

Audaxer

Linton said:

I split my investments into 3 completely separate portfolios. Growth 3/7, Income 2/7, Wealth Preservation 2/7.

The income portfolio is targeted at 6% return through dividends and interest and includes global equities, corporate bonds, em bonds, and infrastructure.  I doubt whether it will match inflation in the long term so the Growth portfolio is necessary to provide top ups through rebalancing and to provide cash lump sums for major one-off expenditure.

Linton, I know you top up your income funds from the growth portfolio from time to time. Rather than selling growth funds to buy more of the income funds, I was thinking of just selling enough of the growth funds to top up my actual income. Is there a long term advantage from using more of the growth portfolio to top up your income funds like you do, rather than just selling enough of the growth portfolio funds to take extra income when needed?

Prism

Audaxer said:

Linton said:

I split my investments into 3 completely separate portfolios. Growth 3/7, Income 2/7, Wealth Preservation 2/7.

The income portfolio is targeted at 6% return through dividends and interest and includes global equities, corporate bonds, em bonds, and infrastructure.  I doubt whether it will match inflation in the long term so the Growth portfolio is necessary to provide top ups through rebalancing and to provide cash lump sums for major one-off expenditure.

Linton, I know you top up your income funds from the growth portfolio from time to time. Rather than selling growth funds to buy more of the income funds, I was thinking of just selling enough of the growth funds to top up my actual income. Is there a long term advantage from using more of the growth portfolio to top up your income funds like you do, rather than just selling enough of the growth portfolio funds to take extra income when needed?

Surely that would come down to your rebalancing rules? It seems that Linton doesn't need to sell the growth pot at all to provide any income but I guess most of us will need to top up the income like you say with sales from growth if they have done well or cash/wp if growth has not done well. After that decision then I guess it comes down to do you want to rebalance back to a set %, or are you happy to allow the split to glide for a while. I am leaning towards only rebalancing when things get significantly out of whack - maybe about 20% above the starting allocation which is probably means every 2-3 years rather than each year.

Audaxer

Prism said:

Audaxer said:

Linton said:

I split my investments into 3 completely separate portfolios. Growth 3/7, Income 2/7, Wealth Preservation 2/7.

The income portfolio is targeted at 6% return through dividends and interest and includes global equities, corporate bonds, em bonds, and infrastructure.  I doubt whether it will match inflation in the long term so the Growth portfolio is necessary to provide top ups through rebalancing and to provide cash lump sums for major one-off expenditure.

Linton, I know you top up your income funds from the growth portfolio from time to time. Rather than selling growth funds to buy more of the income funds, I was thinking of just selling enough of the growth funds to top up my actual income. Is there a long term advantage from using more of the growth portfolio to top up your income funds like you do, rather than just selling enough of the growth portfolio funds to take extra income when needed?

Surely that would come down to your rebalancing rules? It seems that Linton doesn't need to sell the growth pot at all to provide any income but I guess most of us will need to top up the income like you say with sales from growth if they have done well or cash/wp if growth has not done well. After that decision then I guess it comes down to do you want to rebalance back to a set %, or are you happy to allow the split to glide for a while. I am leaning towards only rebalancing when things get significantly out of whack - maybe about 20% above the starting allocation which is probably means every 2-3 years rather than each year.

I was just thinking that if an income portfolio generated less income than you needed this year, say £1,000 income less than expected, you could sell £1,000 of growth from the growth portfolio to provide that extra income. Whereas you would need top up the income portfolio with a lot more than that to provide the extra income. I'm sure Linton has a good reason for topping up the income funds, I'm just trying to understand why just selling less growth to top up the income wouldn't work as well?

Linton

Lots of questions to answer:
On one detail - If the income happened to be £1000 short and there was insufficient in my current account I would take it from the PBs and cash reserves.  However in practice the income has been remarkably stable and inflation very low over several years with no need for major top-ups.

Now why:
The answer is strategic, not tactical.  The main driver is control:

Control: 
Short term: Aim for zero control activity.  Sufficient money to meet all day to day wants and commitments should regularly come into my bank account automatically to be there as and when I need it with zero effort on my part independently of what is happening with the economy.

Long term:To be able to easily implement strategic decisions.  For example, supposing I wanted to increase  investment income by 50%.  To do that it is necessary to change in some way the %s assigned to growth and wealth preservation.  I want to be able to make that decision in a rational way.  As the years go by the less the need to generate the growth for income in the distant future so the answer would probably be to cut back on Growth more than Wealth Preservation.  Implementation is easy, adjust the overall allocations to the three portfolios and and rebalance, job done.  At the bottom underlying asset level all allocations alter in line with the new objectives.

A further benefit of the approach is that as each portfolio is focussed on a single objective one can be singled minded in its design.  Growth can be as cautious or adventurous as I want it to be with too much worry about volatility, the Income portfolio need not be too worried about long term sustainability, and the WP portfolio need not aim for returns greater than inflation.  Once one has made the top level allocation there are few compromises required.

I do not see how one can have this level of control of strategic changes and visibility of the consequences with a single portfolio  from which one takes some level of income by selling assets. 

Audaxer

Thanks Linton for the detailed response.  For my income portfolio, I am happy with income of around 3.5% to 4% if I can get that growing each year with inflation, and hopefully preserve the capital. But as I currently have too much UK Equity Income, I'm thinking of changing at least one of the UK Equity Income funds for a Global Growth Fund for a bit more diversification. I already have a couple of Global Equity Income Funds, as well as some Strategic Bond and Infrastructure funds.

Replacing the UK Equity fund with a Growth fund will reduce my dividend income, but to make up for that I would intend to sell around 4% of the growth fund per year.

darkidoe

Linton said:

I split my investments into 3 completely separate portfolios. Growth 3/7, Income 2/7, Wealth Preservation 2/7.

The income portfolio is targeted at 6% return through dividends and interest and includes global equities, corporate bonds, em bonds, and infrastructure.  I doubt whether it will match inflation in the long term so the Growth portfolio is necessary to provide top ups through rebalancing and to provide cash lump sums for major one-off expenditure.

Interesting Linton.
Is there significant overlap in the underlying holdings between the 3 separate portfolios if you run them separately?
To run one portfolio is already a daunting task but for you to run 3 concurrently with 3 different objectives! You must have a lot of experience with this! I can see how it can work if the portfolios are well built.