Planning a portfolio

bostonerimus

JohnWinder said:

I'll concur with that. But to assist others with less certainty/experience than you or some of us might have, do you have any specific 'simple rules' that might guide us? Doesn't have to be a comprehensive list, just something for folk who are thinking 'yes, but what are they?'. And it doesn't matter if it repeats what's been written many times before; there's enough sub-optimal advice on offer repeatedly that needs countering - not saying in this forum.

Do a budget. Pay off expensive debt. Spend less than you earn, keep 6 months' to a year's spending in the bank. Invest regularly (at least 10% of gross income), maximize your tax advantaged opportunities (work place pension, ISA etc), use inexpensive index trackers (I would limit to a max of 4 or 5) or just buy a multi-asset fund, rebalance when your asset allocation diverges from target by a set amount, I used +/-5%. An 80/20 mix is ok if you are young, maybe adjusting to around 60/40 in middle age. As you approach retirement it becomes a bit more complicated as drawdown needs to be considered as well as growth.

Use any of the reputable companies who do trackers or multi-asset funds, Vanguard, iShares, Fidelity etc I like Vanguard because I've used Vanguard for many years, but there are now even less expensive funds in the UK. I have mostly followed a basic 4 fund Boglehead type tracker fund portfolio for the last 30 years. That worked well, but I don't know how well it will work in the next 30 years, but I think it's as good as any other approach and easy to implement and follow.

Bobziz

bostonerimus said:

OP, I'm in a similar situation to you. I retired early 7 years ago and now my DB pension covers my spending and I don't need my invested money. So I have it in an aggressive 80/20 allocation, mostly in 3 inexpensive tracker funds and my 10 year average rate of return is 9% which is just fine with me.

I would simply forget about constructing a portfolio. Don't worry about Shimano or semi-conductor fab fires, that's not the way to be successful over what might be 30 years. Make sure you keep at least year's worth of spending in the bank and then put what remains into one of the many multi-asset funds that will give you an asset allocation designed for your age and circumstances. As you have DB pensions you can probably afford to take on a bit more risk than someone I imagine is around 60, so something like VLS60 or VLS80 would give you a great selection of passive funds at a low cost. The only active thing you will have to do is to make the decision to buy and then come up with a withdrawal strategy. Sit back and enjoy retirement. It really is not difficult if you follow a few simple rules and don't get drawn into a lot of the hype around portfolio construction.

I'm guessing 9% would suit most people. Seems very unlikely that a soley passive approach will achieve that over the next 10 years though.

Any active investors care to share their average return over the last 10, 20 years ? 

Linton

bostonerimus said:

OP, I'm in a similar situation to you. I retired early 7 years ago and now my DB pension covers my spending and I don't need my invested money. So I have it in an aggressive 80/20 allocation, mostly in 3 inexpensive tracker funds and my 10 year average rate of return is 9% which is just fine with me.

I would simply forget about constructing a portfolio. Don't worry about Shimano or semi-conductor fab fires, that's not the way to be successful over what might be 30 years. Make sure you keep at least year's worth of spending in the bank and then put what remains into one of the many multi-asset funds that will give you an asset allocation designed for your age and circumstances. As you have DB pensions you can probably afford to take on a bit more risk than someone I imagine is around 60, so something like VLS60 or VLS80 would give you a great selection of passive funds at a low cost. The only active thing you will have to do is to make the decision to buy and then come up with a withdrawal strategy. Sit back and enjoy retirement. It really is not difficult if you follow a few simple rules and don't get drawn into a lot of the hype around portfolio construction.

If you dont need your invested money you can be pretty unconcerned about what happens to your investments.  Index trackers wont go bust and will probably give a reasonable return unless the markets are unable to provide a reasonable return so it makes sense to use them.  You can then live your life thinking about other things.

Investing is rather different if your money matters.  Then you have a balance between return and risk and between the short and long term. Insufficient return and you miss out, possibly unpleasantly so when it's too late to do anything about it.  Too much risk and you dont sleep at night, possibly with good cause.  In the short term you need secure, though not necessarily 100% guaranteed, income.  In the long term you must have protection against inflation.  There is also the balance between capital and income.  Too little capital and your flexibility in expenditure is severely limited in that you cannot afford expensive items that would improve your quality of life.  Too little reasonably secure income and you worry about the volatility of the markets.

These considerations have led to my relatively complex portfolio construction.  Putting a significant % of my portfolio into short and medium term income protection removes all concerns about taking measured higher risk for the long term.  WIthin the growth investments by focussing on reducing the risks from over-reliance on individual companies, geographies or sectors I am happy to invest in higher risk and hopefully higher return areas than would otherwise be the case.

Nebulous2

Linton said:

bostonerimus said:

OP, I'm in a similar situation to you. I retired early 7 years ago and now my DB pension covers my spending and I don't need my invested money. So I have it in an aggressive 80/20 allocation, mostly in 3 inexpensive tracker funds and my 10 year average rate of return is 9% which is just fine with me.

I would simply forget about constructing a portfolio. Don't worry about Shimano or semi-conductor fab fires, that's not the way to be successful over what might be 30 years. Make sure you keep at least year's worth of spending in the bank and then put what remains into one of the many multi-asset funds that will give you an asset allocation designed for your age and circumstances. As you have DB pensions you can probably afford to take on a bit more risk than someone I imagine is around 60, so something like VLS60 or VLS80 would give you a great selection of passive funds at a low cost. The only active thing you will have to do is to make the decision to buy and then come up with a withdrawal strategy. Sit back and enjoy retirement. It really is not difficult if you follow a few simple rules and don't get drawn into a lot of the hype around portfolio construction.

If you dont need your invested money you can be pretty unconcerned about what happens to your investments.  Index trackers wont go bust and will probably give a reasonable return unless the markets are unable to provide a reasonable return so it makes sense to use them.  You can then live your life thinking about other things.

Investing is rather different if your money matters.  Then you have a balance between return and risk and between the short and long term. Insufficient return and you miss out, possibly unpleasantly so when it's too late to do anything about it.  Too much risk and you dont sleep at night, possibly with good cause.  In the short term you need secure, though not necessarily 100% guaranteed, income.  In the long term you must have protection against inflation.  There is also the balance between capital and income.  Too little capital and your flexibility in expenditure is severely limited in that you cannot afford expensive items that would improve your quality of life.  Too little reasonably secure income and you worry about the volatility of the markets.

These considerations have led to my relatively complex portfolio construction.  Putting a significant % of my portfolio into short and medium term income protection removes all concerns about taking measured higher risk for the long term.  WIthin the growth investments by focussing on reducing the risks from over-reliance on individual companies, geographies or sectors I am happy to invest in higher risk and hopefully higher return areas than would otherwise be the case.

I suppose there is a difference between not foreseeing a need for it, and being happy to see it disappear. 


I have always been aware that my DB pension was valuable. My last career move involved a significant drop in pay, and was driven by the fact my employer took us out of the DB scheme. I moved and got an additional 9 years in the LGPS which topped off my pension nicely.  Reading this and the pension forum has reinforced how valuable that pension is. 

Instead of building a complex portfolio with more graduation or different pots, like your wealth preservation portfolio, I've kept everything I expect to need over the next 8 years until SPA in cash (premium bonds mainly) and I'm only discussing investing the rest. 

bostonerimus

Linton said:

bostonerimus said:

OP, I'm in a similar situation to you. I retired early 7 years ago and now my DB pension covers my spending and I don't need my invested money. So I have it in an aggressive 80/20 allocation, mostly in 3 inexpensive tracker funds and my 10 year average rate of return is 9% which is just fine with me.

I would simply forget about constructing a portfolio. Don't worry about Shimano or semi-conductor fab fires, that's not the way to be successful over what might be 30 years. Make sure you keep at least year's worth of spending in the bank and then put what remains into one of the many multi-asset funds that will give you an asset allocation designed for your age and circumstances. As you have DB pensions you can probably afford to take on a bit more risk than someone I imagine is around 60, so something like VLS60 or VLS80 would give you a great selection of passive funds at a low cost. The only active thing you will have to do is to make the decision to buy and then come up with a withdrawal strategy. Sit back and enjoy retirement. It really is not difficult if you follow a few simple rules and don't get drawn into a lot of the hype around portfolio construction.

If you dont need your invested money you can be pretty unconcerned about what happens to your investments.  Index trackers wont go bust and will probably give a reasonable return unless the markets are unable to provide a reasonable return so it makes sense to use them.  You can then live your life thinking about other things.

Investing is rather different if your money matters.  Then you have a balance between return and risk and between the short and long term. Insufficient return and you miss out, possibly unpleasantly so when it's too late to do anything about it.  Too much risk and you dont sleep at night, possibly with good cause.  In the short term you need secure, though not necessarily 100% guaranteed, income.  In the long term you must have protection against inflation.  There is also the balance between capital and income.  Too little capital and your flexibility in expenditure is severely limited in that you cannot afford expensive items that would improve your quality of life.  Too little reasonably secure income and you worry about the volatility of the markets.

These considerations have led to my relatively complex portfolio construction.  Putting a significant % of my portfolio into short and medium term income protection removes all concerns about taking measured higher risk for the long term.  WIthin the growth investments by focussing on reducing the risks from over-reliance on individual companies, geographies or sectors I am happy to invest in higher risk and hopefully higher return areas than would otherwise be the case.

Like most people I started with a very small pot and had to grow it. I used a simple 3 fund tracker portfolio and was not passive in its management as I followed a easy rebalancing strategy; multi-asset funds will now do that for you.I kept fees to a minimum. I also planned ahead and early on I bought an annuity type product that is now a solid foundation, that it turns out I don't really need, bought a rental property for retirement income and paid both US social security and UK NI so that I would get both state pensions. Now, as you say, I have the luxury of not really worrying about having 80% in equities. A legacy of my planning is that annuity and about 10 years before I retired I put some money into an inexpensive active income fund that is 40% dividend stocks and 60% bonds, but I got there by mostly using passive funds and a simple strategy...not no strategy or management at all. Investing does become more challenging when you don't have a surplus of money for your requirements, but there are plenty of passive short and medium term bond funds, dividend biased funds, regular equity funds and multi-asset funds that will work with a total return strategy, a cash buffer and something like a GK withdrawal strategy. Drawdown is trickier than the accumulation phase, but doing sensible things early on makes the retirement phase a lot easier.

bostonerimus

Nebulous2 said:

Linton said:

bostonerimus said:

OP, I'm in a similar situation to you. I retired early 7 years ago and now my DB pension covers my spending and I don't need my invested money. So I have it in an aggressive 80/20 allocation, mostly in 3 inexpensive tracker funds and my 10 year average rate of return is 9% which is just fine with me.

I would simply forget about constructing a portfolio. Don't worry about Shimano or semi-conductor fab fires, that's not the way to be successful over what might be 30 years. Make sure you keep at least year's worth of spending in the bank and then put what remains into one of the many multi-asset funds that will give you an asset allocation designed for your age and circumstances. As you have DB pensions you can probably afford to take on a bit more risk than someone I imagine is around 60, so something like VLS60 or VLS80 would give you a great selection of passive funds at a low cost. The only active thing you will have to do is to make the decision to buy and then come up with a withdrawal strategy. Sit back and enjoy retirement. It really is not difficult if you follow a few simple rules and don't get drawn into a lot of the hype around portfolio construction.

If you dont need your invested money you can be pretty unconcerned about what happens to your investments.  Index trackers wont go bust and will probably give a reasonable return unless the markets are unable to provide a reasonable return so it makes sense to use them.  You can then live your life thinking about other things.

Investing is rather different if your money matters.  Then you have a balance between return and risk and between the short and long term. Insufficient return and you miss out, possibly unpleasantly so when it's too late to do anything about it.  Too much risk and you dont sleep at night, possibly with good cause.  In the short term you need secure, though not necessarily 100% guaranteed, income.  In the long term you must have protection against inflation.  There is also the balance between capital and income.  Too little capital and your flexibility in expenditure is severely limited in that you cannot afford expensive items that would improve your quality of life.  Too little reasonably secure income and you worry about the volatility of the markets.

These considerations have led to my relatively complex portfolio construction.  Putting a significant % of my portfolio into short and medium term income protection removes all concerns about taking measured higher risk for the long term.  WIthin the growth investments by focussing on reducing the risks from over-reliance on individual companies, geographies or sectors I am happy to invest in higher risk and hopefully higher return areas than would otherwise be the case.

I suppose there is a difference between not foreseeing a need for it, and being happy to see it disappear. 


I have always been aware that my DB pension was valuable. My last career move involved a significant drop in pay, and was driven by the fact my employer took us out of the DB scheme. I moved and got an additional 9 years in the LGPS which topped off my pension nicely.  Reading this and the pension forum has reinforced how valuable that pension is. 

Instead of building a complex portfolio with more graduation or different pots, like your wealth preservation portfolio, I've kept everything I expect to need over the next 8 years until SPA in cash (premium bonds mainly) and I'm only discussing investing the rest. 

Yes, I also have a DB pension and I'm very grateful that I do. It's only covers half of my spending, but it allows me to sleep a little easier at night when the stock markets are falling. It also allowed be to cash in another small DB pension at a good transfer value without too much worry.

Linton

Deleted_User said:

Linton said:

Investing is rather different if your money matters.  Then you have a balance between return and risk and between the short and long term. Insufficient return and you miss out, possibly unpleasantly so when it's too late to do anything about it.  Too much risk and you dont sleep at night, possibly with good cause.  In the short term you need secure, though not necessarily 100% guaranteed, income.  In the long term you must have protection against inflation.  There is also the balance between capital and income.  Too little capital and your flexibility in expenditure is severely limited in that you cannot afford expensive items that would improve your quality of life.  Too little reasonably secure income and you worry about the volatility of the markets.

These considerations have led to my relatively complex portfolio construction.  Putting a significant % of my portfolio into short and medium term income protection removes all concerns about taking measured higher risk for the long term.  WIthin the growth investments by focussing on reducing the risks from over-reliance on individual companies, geographies or sectors I am happy to invest in higher risk and hopefully higher return areas than would otherwise be the case.

I am also living off my capital, and I'm not specifically investing for income. I have a target of 5% cash, which is very roughly 2 years' spending. The natural income on my overall assets is probably somewhere near what I spend (I don't even know exactly), but it doesn't matter if it falls short, because I have that 5% cash buffer. Once a year, I can trim a few investments if necessary to replenish the cash to 5%. Or if my investments have fallen, making my cash more than 5% (of smaller total assets), I can add a little to investments (though I would not want to let cash fall below 1 year's spending).

There's more than one way to do it.

Yes there are many ways to manage one's finances in retirement. But unless one has more than enough money to support ones desired lifestyle and occasional major expenditure under most conceivable eventualities it makes a lot of sense to put some thought into how to cope with the vagaries of the market.  The aim is a strategy that allows one to sleep easily whilst maximising one's quality of life.  If taking a steady-ish 2.5% of assets per year with a 2 year buffer does that for you, fine.  You have solved the problem.

However, in 2000 the FTSE World Index with dividends re-invested fell by 50% and had barely recovered by 2006.  In 2008 it fell again by about 40%.  Would you have been able to cope? Perhaps you would have been a little worried.  Some people may think your 5% cash buffer is a little small. The past 10+ years do not provide a safe model for the future.

bostonerimus

Linton said:

Deleted_User said:

Linton said:

Investing is rather different if your money matters.  Then you have a balance between return and risk and between the short and long term. Insufficient return and you miss out, possibly unpleasantly so when it's too late to do anything about it.  Too much risk and you dont sleep at night, possibly with good cause.  In the short term you need secure, though not necessarily 100% guaranteed, income.  In the long term you must have protection against inflation.  There is also the balance between capital and income.  Too little capital and your flexibility in expenditure is severely limited in that you cannot afford expensive items that would improve your quality of life.  Too little reasonably secure income and you worry about the volatility of the markets.

These considerations have led to my relatively complex portfolio construction.  Putting a significant % of my portfolio into short and medium term income protection removes all concerns about taking measured higher risk for the long term.  WIthin the growth investments by focussing on reducing the risks from over-reliance on individual companies, geographies or sectors I am happy to invest in higher risk and hopefully higher return areas than would otherwise be the case.

I am also living off my capital, and I'm not specifically investing for income. I have a target of 5% cash, which is very roughly 2 years' spending. The natural income on my overall assets is probably somewhere near what I spend (I don't even know exactly), but it doesn't matter if it falls short, because I have that 5% cash buffer. Once a year, I can trim a few investments if necessary to replenish the cash to 5%. Or if my investments have fallen, making my cash more than 5% (of smaller total assets), I can add a little to investments (though I would not want to let cash fall below 1 year's spending).

There's more than one way to do it.

Yes there are many ways to manage one's finances in retirement. But unless one has more than enough money to support ones desired lifestyle and occasional major expenditure under most conceivable eventualities it makes a lot of sense to put some thought into how to cope with the vagaries of the market.  The aim is a strategy that allows one to sleep easily whilst maximising one's quality of life.  If taking a steady-ish 2.5% of assets per year with a 2 year buffer does that for you, fine.  You have solved the problem.

However, in 2000 the FTSE World Index with dividends re-invested fell by 50% and had barely recovered by 2006.  In 2008 it fell again by about 40%.  Would you have been able to cope? Perhaps you would have been a little worried.  Some people may think your 5% cash buffer is a little small. The past 10+ years do not provide a safe model for the future.

I entirely agree. There are many approaches to retirement drawdown with a range of complexities, but whatever you do you have to plan for a range of eventualities. Of course the 4% rule and a 60/40 portfolio was designed to work for a 30 year retirement in the vast majority of cases. But being cautious I advocate going into retirement with no debt if you can as that takes pressure off your portfolio. I don't have a mortgage or any other debt so my income needs are relatively modest and that's the other half of a successful drawdown strategy.

Despite what Pfau etc say about increasing the equity allocation as you get older I think that’s difficult psychologically for many people so the old standbys of investment grade bonds and dividend stocks can form the base of a total return approach so you have enough cash, dividends, short term bonds and flexibility in your spending to ride out the down turns. I wish annuities were better value as using some money to buy an annuity would guarantee some income and might prove helpful to some people's blood pressure.

coastline

In the real world it looks like there ain't many with a substantial pot to make much difference to their retirement. Might be six figure sums on here but the links below show pots between £50-100K. Even those with Final Salary pensions ( DB pensions ) you need to be employed in the same job decades. One family member with a LGPS pension has been there since school 16 yo and now 55 yo. Latest report shows Lump sum + £13,000 a year at 60 yo and he's on a salary of £32,000. Yes I understand posters would much prefer a DB pension as DC.

 Highest average pension pot is less than £90,000 (actuarialpost.co.uk)

What is a good pension pot? - The Telegraph

Here it shows a fair few are taking 8% out of the pot. Can't blame them really as what difference would it make taking £1,500 or £1,200 out of a 50 grand pot?. Kids get more pocket money these days. Looks like many will be needing to make healthy monthly contributions in the future. I'm sure the governments main aim is to simply reduce the number of people on benefits in retirement. Not much else.

Retirement income market data 2019/20 | FCA

Nebulous2

coastline said:

In the real world it looks like there ain't many with a substantial pot to make much difference to their retirement. Might be six figure sums on here but the links below show pots between £50-100K. Even those with Final Salary pensions ( DB pensions ) you need to be employed in the same job decades. One family member with a LGPS pension has been there since school 16 yo and now 55 yo. Latest report shows Lump sum + £13,000 a year at 60 yo and he's on a salary of £32,000. Yes I understand posters would much prefer a DB pension as DC.

 Highest average pension pot is less than £90,000 (actuarialpost.co.uk)

What is a good pension pot? - The Telegraph

Here it shows a fair few are taking 8% out of the pot. Can't blame them really as what difference would it make taking £1,500 or £1,200 out of a 50 grand pot?. Kids get more pocket money these days. Looks like many will be needing to make healthy monthly contributions in the future. I'm sure the governments main aim is to simply to reduce the number of people on benefits in retirement. Not much else.

Retirement income market data 2019/20 | FCA

Your post highlights what I said previously I'm very lucky to have my DB pension.  I moved mine several times when I moved job, which may or may not have been the best approach. What it means however is that I have no lump sum but will have a bigger pension. 

This forum is certainly a bubble of sorts with a lot of people with very good provision, but that doesn't stop us (me) trying to make sure that we eke as much as we can out of what we have. 

Much of the position people find themselves in is as a result of lifestyle choices - often decades earlier.  There are people here who were following a FIRE approach and living very frugally before anyone had heard the term. 

My approach was more balanced. We brought up a family and bought a house on one income - which meant there was a great deal of investment in our children. We managed to holiday abroad regularly, but driving and camping rather than flying somewhere expensive. In my opinion I've earned well, but I've never hit higher rate tax. 

That also meant apart from the LGPS pension and the mortgage there wasn't very much to invest. 

I now - with a little fortune, but largely by the choices I have made, find myself able to stop work at 59, with a good chance I am secure for the rest of my life. 

I'm still way behind many of the posters here - but as I said I'm happy that I've achieved a balance. 

One absolutely startling figure from that FCA data is that more than half of pensions accessed for the first time were fully withdrawn - if I am reading that correctly.