Ideas for your Income Portfolio

ColdIron

JohnWinder said:

ColdIron said:

JohnWinder said:

Linton said:

To pick up on another point - a portfolio which focuses on income can be just as diversified as one that focuses on long term return, if not more so.  Income can be gained from a very wide range of world wide investments, often in areas which would not appear if one's objective was Total Return.

I wonder if you can give an example, as this seems counter-intuitive. If one chose a global stock and bond tracker for total return, what portfolio focused on income might be more diversified than that?

Infrastructure, property, commodities, private equity, perhaps high yield fixed interest?

Let's cross out high yield fixed interest, since I nominated bonds, and those are bonds by the sound of it.

I think it should remain. As noted above, high yield fixed interest isn't a sizeable or even typical component of an equity and bond tracker, especially one geared towards total return. It will likely contain investment grade bonds. Not all fixed income or bonds are the same

Now I'll choose a portfolio for total return which, well diversified, holds stocks, bonds, infrastructure, property and commodities and private equity. And if you think I've changed the goal posts, my original bonds are clearly income type assets compared with four you suggested, yet they belong in a total return portfolio.

I think you have switched the goal posts, you were talking about a global stock and bond tracker. A bespoke portfolio can contain anything you choose

Linton

JohnWinder said:

NedS said:

That's certainly the case for me, where I need to front load income for a 10 year period between early retirement and DB/state pensions, after which essential spending is covered and I can revert to drawing a more sustainable long-term income to support discretionary spending. At that point, a switch to a growth strategy may make more sense to me for years 65 - 95.

A switch at that pont seems unnecessary to me. Whichever of either approach you take, the one you described or a 'total market' approach from start to finish (don't try to separate the 'income' assets from the 'growth' assets or agonise over the ones that seem to be both, or worse pay someone to make that distinction for you), then you want a portfolio that will give you the best return for the amount of risk you're comfortable to take. The way to do that, with the most certainty, is to choose the most diverse portfolio of stocks and bonds (or real estate etc), not to try to pick out the ones that will win in this period and the others that will win in the latter period, I would have thought.  I'll acknowledge that using your approach with well diversified strategies for the two periods in question would likely be as effective as the approach I'm suggesting, but why bother?

The problem with going for a total market approach in retirement is short or medium term volatility.  When the overall market crashes do you carry on drawing down the income you need for day to day living regardless, selling excess fund units and then worry whether you will outlive your investments?  firesim type simulations show that this along with inflation represent the biggest risks for long term retirement.

One could reduce the risk by holding a cash buffer.  However this cash buffer is part of your overall portfolio effectively behaving as a zero return bond alongside the near to zero return bonds you would in any case be holding under a total market approach.

So one may ask the question of whether holding a large % of close to zero return assets is an optimal allocation strategy.

The other factor is ongoing management time and effort.  Is continually making the active decision of which assets to sell and then running your platforms process to extract the cash the best use of your time?  Would it not be better if the cash just turned up regularly and automatically in your bank account?

bostonerimus

Linton said:

JohnWinder said:

NedS said:

That's certainly the case for me, where I need to front load income for a 10 year period between early retirement and DB/state pensions, after which essential spending is covered and I can revert to drawing a more sustainable long-term income to support discretionary spending. At that point, a switch to a growth strategy may make more sense to me for years 65 - 95.

A switch at that pont seems unnecessary to me. Whichever of either approach you take, the one you described or a 'total market' approach from start to finish (don't try to separate the 'income' assets from the 'growth' assets or agonise over the ones that seem to be both, or worse pay someone to make that distinction for you), then you want a portfolio that will give you the best return for the amount of risk you're comfortable to take. The way to do that, with the most certainty, is to choose the most diverse portfolio of stocks and bonds (or real estate etc), not to try to pick out the ones that will win in this period and the others that will win in the latter period, I would have thought.  I'll acknowledge that using your approach with well diversified strategies for the two periods in question would likely be as effective as the approach I'm suggesting, but why bother?

The problem with going for a total market approach in retirement is short or medium term volatility.  When the overall market crashes do you carry on drawing down the income you need for day to day living regardless, selling excess fund units and then worry whether you will outlive your investments?  firesim type simulations show that this along with inflation represent the biggest risks for long term retirement.

One could reduce the risk by holding a cash buffer.  However this cash buffer is part of your overall portfolio effectively behaving as a zero return bond alongside the near to zero return bonds you would in any case be holding under a total market approach.

So one may ask the question of whether holding a large % of close to zero return assets is an optimal allocation strategy.

The other factor is ongoing management time and effort.  Is continually making the active decision of which assets to sell and then running your platforms process to extract the cash the best use of your time?  Would it not be better if the cash just turned up regularly and automatically in your bank account?

An inflation linked "safe withdrawal rate" should include market variability and sequence of return risk, but withdrawing the same planned amount from a portfolio that has dropped by 25% might make some people nervous. So there should always be some slack in the budget to allow for withdrawal modulation. The cash buffer is a useful tool at any stage of life and should be part of any portfolio for emergencies and to manage cash flow. Studies have shown that variable withdrawal strategies like Klinger Guyton can support slightly greater lifetime withdrawal rates, but what they make plain to me is that controlling what you spend is just as important as how you invest your money. 

Thrugelmir

bostonerimus said:

Linton said:

JohnWinder said:

NedS said:

That's certainly the case for me, where I need to front load income for a 10 year period between early retirement and DB/state pensions, after which essential spending is covered and I can revert to drawing a more sustainable long-term income to support discretionary spending. At that point, a switch to a growth strategy may make more sense to me for years 65 - 95.

A switch at that pont seems unnecessary to me. Whichever of either approach you take, the one you described or a 'total market' approach from start to finish (don't try to separate the 'income' assets from the 'growth' assets or agonise over the ones that seem to be both, or worse pay someone to make that distinction for you), then you want a portfolio that will give you the best return for the amount of risk you're comfortable to take. The way to do that, with the most certainty, is to choose the most diverse portfolio of stocks and bonds (or real estate etc), not to try to pick out the ones that will win in this period and the others that will win in the latter period, I would have thought.  I'll acknowledge that using your approach with well diversified strategies for the two periods in question would likely be as effective as the approach I'm suggesting, but why bother?

The problem with going for a total market approach in retirement is short or medium term volatility.  When the overall market crashes do you carry on drawing down the income you need for day to day living regardless, selling excess fund units and then worry whether you will outlive your investments?  firesim type simulations show that this along with inflation represent the biggest risks for long term retirement.

One could reduce the risk by holding a cash buffer.  However this cash buffer is part of your overall portfolio effectively behaving as a zero return bond alongside the near to zero return bonds you would in any case be holding under a total market approach.

So one may ask the question of whether holding a large % of close to zero return assets is an optimal allocation strategy.

The other factor is ongoing management time and effort.  Is continually making the active decision of which assets to sell and then running your platforms process to extract the cash the best use of your time?  Would it not be better if the cash just turned up regularly and automatically in your bank account?

Studies have shown that variable withdrawal strategies like Klinger Guyton can support slightly greater lifetime withdrawal rates,

The data used has never been published, nor the impact on the level of drawdown as a result of the rules being applied. Many unanswered questions. 

Prism

Thrugelmir said:

bostonerimus said:

Linton said:

JohnWinder said:

NedS said:

That's certainly the case for me, where I need to front load income for a 10 year period between early retirement and DB/state pensions, after which essential spending is covered and I can revert to drawing a more sustainable long-term income to support discretionary spending. At that point, a switch to a growth strategy may make more sense to me for years 65 - 95.

A switch at that pont seems unnecessary to me. Whichever of either approach you take, the one you described or a 'total market' approach from start to finish (don't try to separate the 'income' assets from the 'growth' assets or agonise over the ones that seem to be both, or worse pay someone to make that distinction for you), then you want a portfolio that will give you the best return for the amount of risk you're comfortable to take. The way to do that, with the most certainty, is to choose the most diverse portfolio of stocks and bonds (or real estate etc), not to try to pick out the ones that will win in this period and the others that will win in the latter period, I would have thought.  I'll acknowledge that using your approach with well diversified strategies for the two periods in question would likely be as effective as the approach I'm suggesting, but why bother?

The problem with going for a total market approach in retirement is short or medium term volatility.  When the overall market crashes do you carry on drawing down the income you need for day to day living regardless, selling excess fund units and then worry whether you will outlive your investments?  firesim type simulations show that this along with inflation represent the biggest risks for long term retirement.

One could reduce the risk by holding a cash buffer.  However this cash buffer is part of your overall portfolio effectively behaving as a zero return bond alongside the near to zero return bonds you would in any case be holding under a total market approach.

So one may ask the question of whether holding a large % of close to zero return assets is an optimal allocation strategy.

The other factor is ongoing management time and effort.  Is continually making the active decision of which assets to sell and then running your platforms process to extract the cash the best use of your time?  Would it not be better if the cash just turned up regularly and automatically in your bank account?

Studies have shown that variable withdrawal strategies like Klinger Guyton can support slightly greater lifetime withdrawal rates,

The data used has never been published, nor the impact on the level of drawdown as a result of the rules being applied. Many unanswered questions. 

For me the main problem with Guyton's decision rules is that they were back tested with US equities and US bond, both of which behaved differently to UK equities and bonds over the time tested. UK data that far back is harder to get hold of.

JohnWinder

Linton said:

The problem with going for a total market approach in retirement is short or medium term volatility.  When the overall market crashes do you carry on drawing down the income you need for day to day living regardless, selling excess fund units and then worry whether you will outlive your investments?
The other factor is ongoing management time and effort.  Is continually making the active decision of which assets to sell and then running your platforms process to extract the cash the best use of your time?  Would it not be better if the cash just turned up regularly and automatically in your bank account?

Yes, I like the comfort in having less volatility. But I'd be concerned I was putting my head in the sand by drawing the same income during medium or even short term volatility. If an 'income' portfolio, or the half that is, won't in the long run provide better returns than a total return portfolio, it would seem to me wrong to ignore the volatility we are talking about. Unless of course, the portfolio is big enough to be comfortably sustainable however it's constructed.

As to agonising over which assets to sell if dividends/coupons aren't enough, one approach is to use that to keep your portfolio at the highest risk level you're comfortable with: if the equity fraction has gone too high, sell them; if they've dropped below your '60%' level, sell some bonds. It's a challenge, whatever way, to make a pot of uncertain returns last you for a lifetime of uncertain length, but there we are.

JohnWinder

ColdIron said:

I wonder if you can give an example, as this seems counter-intuitive. If one chose a global stock and bond tracker for total return, what portfolio focused on income might be more diversified than that?

Infrastructure, property, commodities, private equity, perhaps high yield fixed interest?

Let's cross out high yield fixed interest, since I nominated bonds, and those are bonds by the sound of it.

I think it should remain. As noted above, high yield fixed interest isn't a sizeable or even typical component of an equity and bond tracker, especially one geared towards total return. It will likely contain investment grade bonds. Not all fixed income or bonds are the same

Yes, I now see the distinction you're making - I can be slow. But to my mind, slanting the portfolio (too far; modest leaning one way or the other is neither here nor there) to income by choosing those assets simply takes one a long way from a sensible mix. For example, high yield bonds are not unlike equities in their riskiness, but do provide income without growth if they don't fail, so not much to quibble about there. Commodities, a lump of gold or block of copper, don't earn any interest or pay any dividends, but their values do go up and down. Private equity is an expensive, opaque investment with the managers' interests high on the agenda, and infrastructure can lack some liquidity but that shouldn't be a problem for the long term and might give some return reward for that disadvantage. I'm unconvinced that a big slant to your income type assets is an improvement on stocks and bonds.

bostonerimus

Prism said:

Thrugelmir said:

bostonerimus said:

Linton said:

JohnWinder said:

NedS said:

That's certainly the case for me, where I need to front load income for a 10 year period between early retirement and DB/state pensions, after which essential spending is covered and I can revert to drawing a more sustainable long-term income to support discretionary spending. At that point, a switch to a growth strategy may make more sense to me for years 65 - 95.

A switch at that pont seems unnecessary to me. Whichever of either approach you take, the one you described or a 'total market' approach from start to finish (don't try to separate the 'income' assets from the 'growth' assets or agonise over the ones that seem to be both, or worse pay someone to make that distinction for you), then you want a portfolio that will give you the best return for the amount of risk you're comfortable to take. The way to do that, with the most certainty, is to choose the most diverse portfolio of stocks and bonds (or real estate etc), not to try to pick out the ones that will win in this period and the others that will win in the latter period, I would have thought.  I'll acknowledge that using your approach with well diversified strategies for the two periods in question would likely be as effective as the approach I'm suggesting, but why bother?

The problem with going for a total market approach in retirement is short or medium term volatility.  When the overall market crashes do you carry on drawing down the income you need for day to day living regardless, selling excess fund units and then worry whether you will outlive your investments?  firesim type simulations show that this along with inflation represent the biggest risks for long term retirement.

One could reduce the risk by holding a cash buffer.  However this cash buffer is part of your overall portfolio effectively behaving as a zero return bond alongside the near to zero return bonds you would in any case be holding under a total market approach.

So one may ask the question of whether holding a large % of close to zero return assets is an optimal allocation strategy.

The other factor is ongoing management time and effort.  Is continually making the active decision of which assets to sell and then running your platforms process to extract the cash the best use of your time?  Would it not be better if the cash just turned up regularly and automatically in your bank account?

Studies have shown that variable withdrawal strategies like Klinger Guyton can support slightly greater lifetime withdrawal rates,

The data used has never been published, nor the impact on the level of drawdown as a result of the rules being applied. Many unanswered questions. 

For me the main problem with Guyton's decision rules is that they were back tested with US equities and US bond, both of which behaved differently to UK equities and bonds over the time tested. UK data that far back is harder to get hold of.

Yes. This is part of the problem, but modulating your withdrawals downwards in response to falls in the markets seems like common sense to me and a bit more protection over the inflation linked percentage SWRs that Monte Carlo algorithms spit out. Anyway it isn't completely hopeless as a diverse retirement portfolio should contain a fair allocation to non-UK assets. You might have 50% US equites so the US studies will be somewhat applicable even with exchange rate issues.

I have let my equity percentage increase in retirement so that I'm now at 80/20 for a few reasons; bonds aren't attractive right now; there have been some studies that show that a rising equity allocation through retirement will support higher withdrawals and give larger ending balances with the same success rate as more conservative portfolios; even if that isn't true, I can afford to take the risk. 

Here is a Wade Pfau study of several withdrawal strategies, obviously using US numbers, but it might be instructive. 

Making Sense Out of Variable Spending Strategies for Retirees

NedS

I thought I'd post an update...

The plan was to build a diversified income portfolio within my SIPP of around £200k which would produce sufficient income to utilise my tax free allowance (£12570). Over the past 6 months I've built a portfolio with book price of £199997.61 giving a yield to book price of 6.5% and a predicted income of £13008 for next year (2022). The portfolio as it stands:

British American Tobacco (BATS) 7.53%

Bluefield Solar Income Fund (BSIF) 3.19%

City of London IT (CTY) 31.97%

Civitas Socail Housing REIT (CSH) 9.04%

ContourGlobal (GLO) 4.59%

Direct Line (DLG) 2.66%

Foresight Solar Fund (FSFL) 3.42%

GCP Asset Backed Income Fund (GABI) 2.86%

Gore Street Energy Fund (GSF) 3.39%

Greencoat UK Wind (UKW) 4.17%

Henderson Far Eastern Income (HFEL) 10.09%

JLEN Environmental Assets Group (JLEN) 4.05%

CQS New City High Yield Fund (NCYF) 4.01%

NextEnergy Solar Fund (NESF) 3.87%

Target Healthcare REIT (THRL) 5.16%

I have a watch list of things I'd like to add at the right price, and will be reinvesting dividends for the next couple of years until I'm ready to start drawing the income. I built my core position in CTY during the covid crash and have built what I feel is a good position in renewables during the last few months on price weakness. I missed out on starting positions in LGEN and NG that I would have liked to have had in the portfolio but both (especially NG) are too pricey now for me, but they remain on the watch list. CSH is overweight having taken advantage of a high discount to NAV and I plan to trim the position on any price recovery (or keep accepting the 6% yield). As I redeploy dividend income, I'm thinking of adding some more growth orientated holdings which also pay income such as JAGI, JCGI and EAT. Fixed income / debt just doesn't look that attractive to me at the moment with the prospects of rising interest rates.

adindas

Many of my portfolio are growth oriented. I hardly ever invest for Income/dividend. So, to me dividend is just a bonus.

But having said that I invest in this stock Vale S.A. (VALE) which has a good Fundamental  with reasonable growth year after year, but it also pays a fat dividend of 17.33%. This is one of the long holding in my DIY Portfolio, do not intend to trade it.

https://uk.finance.yahoo.com/quote/VALE?p=VALE&.tsrc=fin-srch