Cash buffer

Sea_Shell

We'd be looking at something like the 7IM Cautious S Acc.   

Looking at the performance over the last 12 months, it dropped by 7% in mid-March, and is now up 6% on the year.   A swing (recovery) of 13%

Comparing this to our 7IM Balanced C Acc, (20-60%) this dropped 14% mid-March and is now up 8% on the year, a swing of 22%.

So on the face of it, we are seriously considering a fund like that instead of hard cash.

green_man

michaels said:

Modelling using actual historic returns by asset class gives a higher no failure swr for a portfolio with 30% cash than for all equities as a result of its smoothing effect even without trying to time the market by withdrawing from different asset classes based on performance.

Really?   Do you have a source for that?

ive posted several times on the subject trying to clarify this and similar claims, my research and several sources I have posed suggests that in fact 100% equities gives the best returns in all analysis based on historic data.  Of course it is possible to dream up a scenario whereby a 30% cash buffer would be preferable,  but you could also dream up a scenario where you would need a 40%, 50% or even 100% cash.

Prism

green_man said:

michaels said:

Modelling using actual historic returns by asset class gives a higher no failure swr for a portfolio with 30% cash than for all equities as a result of its smoothing effect even without trying to time the market by withdrawing from different asset classes based on performance.

Really?   Do you have a source for that?

ive posted several times on the subject trying to clarify this and similar claims, my research and several sources I have posed suggests that in fact 100% equities gives the best returns in all analysis based on historic data.  Of course it is possible to dream up a scenario whereby a 30% cash buffer would be preferable,  but you could also dream up a scenario where you would need a 40%, 50% or even 100% cash.

It looks like it varies based upon the market, and all of the tests I have seen are based on bonds not cash. McClung did a whole series of testing for a 100% SWR (which few people actually aim for - its usually 90%ish). The US markets maximized around 40% to 55% equities but the UK markets were around 80% to 90% equities. This seems to be based upon the historical strength of US bonds rather than a major difference in equities. It is also difficult to see how this process repeats in this world of low yield. The whole system works because bonds went up when equities went down. Cash won't work the same and bonds might not either.

pip895

Sea_Shell said:

We'd be looking at something like the 7IM Cautious S Acc.   
Looking at the performance over the last 12 months, it dropped by 7% in mid-March, and is now up 6% on the year.   A swing (recovery) of 13%
Comparing this to our 7IM Balanced C Acc, (20-60%) this dropped 14% mid-March and is now up 8% on the year, a swing of 22%.
So on the face of it, we are seriously considering a fund like that instead of hard cash.

My concern with doing this is how can you predict whether it will do as well in the next crash..  Some of the funds I had going into the last crash didn't do as well as expected despite holding out relatively well in previous corrections.

kinger101

green_man said:

michaels said:

Modelling using actual historic returns by asset class gives a higher no failure swr for a portfolio with 30% cash than for all equities as a result of its smoothing effect even without trying to time the market by withdrawing from different asset classes based on performance.

Really?   Do you have a source for that?

ive posted several times on the subject trying to clarify this and similar claims, my research and several sources I have posed suggests that in fact 100% equities gives the best returns in all analysis based on historic data.  Of course it is possible to dream up a scenario whereby a 30% cash buffer would be preferable,  but you could also dream up a scenario where you would need a 40%, 50% or even 100% cash.

That might depend on how the historic return data is used.  If you use a moving window on the right markets, then 100% equities might appear safer.  If you use a Monte Carlo simulation based on historic mean and standard deviation, it won't.  I think the former is rather imprudent, as you're relying on the black swan fallacy - i.e. no sequence of returns in the future will look worse than the past.  A bold assumption if you need to live off your pension pot for 40-odd years.

Both models have limited value, and are what-ifs rather than predictors. But I think people who'd opt for a 100 % equity portfolio are in a very small minority.  Though partly because they wouldn't trust themselves to stick to 100% equities if markets took a >50% dip for example.  

jamesd

michaels said:

Modelling using actual historic returns by asset class gives a higher no failure swr for a portfolio with 30% cash than for all equities as a result of its smoothing effect even without trying to time the market by withdrawing from different asset classes based on performance.

Maybe. It depends on drawdown rules, success rate if not 100%, retirement duration and how sequences are arrived at.

Highest for a UK investor using global equities and bonds rather than cash for 40 years using Guyton-Klinger rules was around 65% equities at 99% success. Some approaches can suggest 100% equities as optimal, particularly at the longer life end of things.

jamesd

green_man said:

ive posted several times on the subject trying to clarify this and similar claims, my research and several sources I have posed suggests that in fact 100% equities gives the best returns in all analysis based on historic data.  Of course it is possible to dream up a scenario whereby a 30% cash buffer would be preferable,  but you could also dream up a scenario where you would need a 40%, 50% or even 100% cash.

Cash usually has a fairly high penalty compared to bonds so if it is equity:cash rather than equity:bonds then 100% equities beating any cash wouldn't be surprising. In general the things I've seen with 100% equities beating equity:bond mixes seem to show no more than around 0.2 added to the SWR for getting rid of the last 20% or so of bonds.

Bengen's Small-Cap Withdrawal Magic article worked out the highest paying mix of large and small cap equities with bonds for 61 years. The safe withdrawal rate with that perfect hindsight increased from 4.47% to 4.61%, with a chart showing the extreme allocation swings. He observes:

"about one-third of all retirees could have safely withdrawn 13% or better over their lifetimes. And another one-half of all retirees could have safely withdrawn between 8% and 12%.

One source of this plenty is, of course, the strong long-term returns of small-cap stocks, which have exceeded the returns of large-cap stocks by 2 full percentage points over the last 90 years. And, of course, the elimination of bonds, a low-return asset, also dramatically elevates portfolio returns and, consequently, withdrawal rates."

But that's not the bit to pay most attention to at the moment, which is:

"1. Bonds rarely proved useful in portfolios seeking to maximize the safe withdrawal rate for a 30-year period. Of the 61 portfolios, only 11 contained any degree of bonds. The average bond exposure over the 61 portfolios was only about 7%. However, the actual exposure deviated wildly from the average—between half the portfolio and zero.

2. Bonds appeared in the mix only immediately before major stock market meltdowns, such as in the late 1920s, in 1937 and in the late 1960s."

With cyclically-adjusted price-earnings ratios suggesting substantial drop potential at present in many markets now looks like a bad time to be in 100% equities. Not horrendously bad, but still imprudently so.

Sea_Shell

pip895 said:

Sea_Shell said:

We'd be looking at something like the 7IM Cautious S Acc.   
Looking at the performance over the last 12 months, it dropped by 7% in mid-March, and is now up 6% on the year.   A swing (recovery) of 13%
Comparing this to our 7IM Balanced C Acc, (20-60%) this dropped 14% mid-March and is now up 8% on the year, a swing of 22%.
So on the face of it, we are seriously considering a fund like that instead of hard cash.

My concern with doing this is how can you predict whether it will do as well in the next crash..  Some of the funds I had going into the last crash didn't do as well as expected despite holding out relatively well in previous corrections.

It would be part of a larger overall portfolio, with some 100% equity funds, some 60/40, and some 20-60% funds.

We only need our fund to provide a 3% return overall, (SWR) to give us the income we need.

shinytop

Sea_Shell said:

pip895 said:

Sea_Shell said:

We'd be looking at something like the 7IM Cautious S Acc.   
Looking at the performance over the last 12 months, it dropped by 7% in mid-March, and is now up 6% on the year.   A swing (recovery) of 13%
Comparing this to our 7IM Balanced C Acc, (20-60%) this dropped 14% mid-March and is now up 8% on the year, a swing of 22%.
So on the face of it, we are seriously considering a fund like that instead of hard cash.

My concern with doing this is how can you predict whether it will do as well in the next crash..  Some of the funds I had going into the last crash didn't do as well as expected despite holding out relatively well in previous corrections.

It would be part of a larger overall portfolio, with some 100% equity funds, some 60/40, and some 20-60% funds.

We only need our fund to provide a 3% return overall, (SWR) to give us the income we need.

It sounds like you will be OK whichever way you do it then.  We are in a similar position in that we don't need to push the withdrawal rate too high and are opting for a largeish cash buffer for the peace of mind.  That is, a little potential loss of growth in exchange for not constantly worrying about fund prices. But we are still nudging 60% equities overall.

michaels

green_man said:

michaels said:

Modelling using actual historic returns by asset class gives a higher no failure swr for a portfolio with 30% cash than for all equities as a result of its smoothing effect even without trying to time the market by withdrawing from different asset classes based on performance.

Really?   Do you have a source for that?

ive posted several times on the subject trying to clarify this and similar claims, my research and several sources I have posed suggests that in fact 100% equities gives the best returns in all analysis based on historic data.  Of course it is possible to dream up a scenario whereby a 30% cash buffer would be preferable,  but you could also dream up a scenario where you would need a 40%, 50% or even 100% cash.

It was from running my details through the swr spreadsheet which is on google docs - not sure how I would share this?  For me there is a long period of drawdown before SP which then provide about 60% of income so the results may differ with other withdrawal profiles.  I have also added an assumption that 'cash' can be invested to return minus 1.5% in real terms, no idea how accurate this is over historical inflationary periods.  This model uses historic monthly returns by asset class to run every historic scenario of the last 100 plus years and I run it for a 45 year time horizon. I believe this model rebalances regularly to keep the preferred proportions but does not 'draw from cash when markets are low'