How Much Cash Should I Keep in My Portfolio in drawdown ?

Thrugelmir

With some $30 trillion pumped into the global financial system since the beginning of the pandemic with more yet to follow. The risks you face in holding cash and short duration bonds is potentially that 

a) Central banks are benign towards short term interest rates

b) Central banks allow inflation to let rip (i.e. above their own 2% limits) in the short term

c) Investors demand a higher return for buying 10 year plus term Government stocks 

Though the challenges aren't going to end there if the entire scenario does unfold. As there's any number of headwinds that could hit some equities on a broader level as well judging by current developments. 

JohnWinder

Albermarle said:

If not done already , you should read about 'sequence of returns risk '
Basically once the drawdown starts , you should have enough cash to cover two or five years income, so you do not have to withdraw from the drawdown pot during a bad market downturn .

Too complex for a couple of lines, but, as that article alludes to, if you had so much in the drawdown pot, even all equities, that you needed only 2% of it each year I don’t think you’d need any cash reserve. Such a low drawdown, even during a bad sequence of returns, would likely do better during a 30 year investing horizon than holding 3 years of cash. But there’s a lot of moving parts there. You will get a lot out of this long series, if you can get through it: https://earlyretirementnow.com/safe-withdrawal-rate-series/

'

...liquidated half my workplace pension which was 100% in the "Scottish Equitable Overseas Equity Tracker Pension Fund" GB00B046S109 which has performed beyond my wildest expectations over the last year and half since I switched into it

......due to QE inflating assets has been something else and I was starting to feel that QE was heading towards the consumption side now

....If Europe has COVID-19 under control and travel restrictions have been lifted then aiming for an October exit otherwise will wait until after Christmas and review the situation in January 2022.

I read that as: ‘I think I know where the market is heading; I can identify influences on the market, which everyone else is seeing by the way, and thus think I know the most likely direction of the market; market directions will become clearer when something significant changes’.  If I’m right, then you might consider whether those views are valid, because there’s a widespread belief and enough evidence to indicate that even the experts can’t reliably predict those sorts of things. https://www.marketwatch.com/story/yes-100-of-economists-were-dead-wrong-about-yields-2014-10-21

As an amateur you should assume that everything you know that could guide how the markets will move is known by the countless professional investors like fund managers. Once they know it they act, prices move accordingly, and your insight is now worth nothing because the chances of it affecting market prices have been factored into those prices. Professional fund managers, as a whole, haven’t get better risk adjusted returns over the long term than those who, like you, buy and hold VLS60 or the like; or so indicates the SPIVA and Morningstar analyses of fund performances have indicated, and likely can't in future. Are you going to out-gun the professionals by following travel restrictions? I think not.

Have a look at the Darbar reports on investor behaviour, like yours of selling a fund after 18 months of great performance: 'Studies like the annual DALBAR analysis of investor behaviour regularly find a significant gap between what the market offers and what average investors receive.

'But what the Dalbar Study shows is that there’s a difference between the average investment return that an investment generates, and what the average investor in that investment receives.Often it’s because we’re trading, changing in and out.'

'People underperform the market mainly because of their own behaviour. They are more sensitive to losses than gains, they chase past winners, they fail to sufficiently diversify, and they try, in vain, to time the market. They also ignore boring, but important, factors like costs and taxes.’ https://www.evidenceinvestor.com/the-beating-the-market-myth/ 

You benefit from owning stocks because you share in their earnings and potential growth in earnings, both of which are reflected in their price. But the price can also contain a speculative element, unrelated to actual earnings and what that growth will be. We saw it as the pandemic struck, and you can see it now with cryptocurrencies. But speculative influences on stock prices, despite going up and down with bubbles and busts etc, can be expected to cancel each other out over longer terms as they have nothing to do with the intrinsic value of the stocks. So an investor gets no benefit from the speculative element of stock prices unless they can successfully time the market; very few can do it by skill, others can manage by luck. Do you want to trust part of your retirement financial well being to luck?  It’s ok to try, but know how it needs luck or skill.

A good approach is to take some time to choose the right fund(s), and then stick with them.

tacpot12 said:

 Even in the worst crash, markets seem to recover within a couple of years.

Or more less recently, more like 5 years. https://earlyretirementnow.com/2020/03/

thickasabrick

JohnWinder said:

Albermarle said:

If not done already , you should read about 'sequence of returns risk '
Basically once the drawdown starts , you should have enough cash to cover two or five years income, so you do not have to withdraw from the drawdown pot during a bad market downturn .

Too complex for a couple of lines, but, as that article alludes to, if you had so much in the drawdown pot, even all equities, that you needed only 2% of it each year I don’t think you’d need any cash reserve. Such a low drawdown, even during a bad sequence of returns, would likely do better during a 30 year investing horizon than holding 3 years of cash. But there’s a lot of moving parts there. You will get a lot out of this long series, if you can get through it: https://earlyretirementnow.com/safe-withdrawal-rate-series/

'

...liquidated half my workplace pension which was 100% in the "Scottish Equitable Overseas Equity Tracker Pension Fund" GB00B046S109 which has performed beyond my wildest expectations over the last year and half since I switched into it

......due to QE inflating assets has been something else and I was starting to feel that QE was heading towards the consumption side now

....If Europe has COVID-19 under control and travel restrictions have been lifted then aiming for an October exit otherwise will wait until after Christmas and review the situation in January 2022.

I read that as: ‘I think I know where the market is heading; I can identify influences on the market, which everyone else is seeing by the way, and thus think I know the most likely direction of the market; market directions will become clearer when something significant changes’.  If I’m right, then you might consider whether those views are valid, because there’s a widespread belief and enough evidence to indicate that even the experts can’t reliably predict those sorts of things. https://www.marketwatch.com/story/yes-100-of-economists-were-dead-wrong-about-yields-2014-10-21

As an amateur you should assume that everything you know that could guide how the markets will move is known by the countless professional investors like fund managers. Once they know it they act, prices move accordingly, and your insight is now worth nothing because the chances of it affecting market prices have been factored into those prices. Professional fund managers, as a whole, haven’t get better risk adjusted returns over the long term than those who, like you, buy and hold VLS60 or the like; or so indicates the SPIVA and Morningstar analyses of fund performances have indicated, and likely can't in future. Are you going to out-gun the professionals by following travel restrictions? I think not.

Have a look at the Darbar reports on investor behaviour, like yours of selling a fund after 18 months of great performance: 'Studies like the annual DALBAR analysis of investor behaviour regularly find a significant gap between what the market offers and what average investors receive.

'But what the Dalbar Study shows is that there’s a difference between the average investment return that an investment generates, and what the average investor in that investment receives.Often it’s because we’re trading, changing in and out.'

'People underperform the market mainly because of their own behaviour. They are more sensitive to losses than gains, they chase past winners, they fail to sufficiently diversify, and they try, in vain, to time the market. They also ignore boring, but important, factors like costs and taxes.’ https://www.evidenceinvestor.com/the-beating-the-market-myth/ 

You benefit from owning stocks because you share in their earnings and potential growth in earnings, both of which are reflected in their price. But the price can also contain a speculative element, unrelated to actual earnings and what that growth will be. We saw it as the pandemic struck, and you can see it now with cryptocurrencies. But speculative influences on stock prices, despite going up and down with bubbles and busts etc, can be expected to cancel each other out over longer terms as they have nothing to do with the intrinsic value of the stocks. So an investor gets no benefit from the speculative element of stock prices unless they can successfully time the market; very few can do it by skill, others can manage by luck. Do you want to trust part of your retirement financial well being to luck?  It’s ok to try, but know how it needs luck or skill.

A good approach is to take some time to choose the right fund(s), and then stick with them.

tacpot12 said:

 Even in the worst crash, markets seem to recover within a couple of years.

Or more less recently, more like 5 years. https://earlyretirementnow.com/2020/03/

I was surprised at my reluctance to sell those investments. Think I was making up reasons for the adjustments to my portfolio for drawdown, even though I had planned this stage quite a long time ago so shouldn't really be a "market timing" thing.

My comment about Europe having COVID-19 under control and travel restrictions being lifted wasn't specifically related to markets. We've been planning a grand tour of Europe to start at my early retirement at 55.

To quote Robert Burns "The best laid schemes o’ Mice an’ Men Gang aft agley"

The good news is now that I've started the process with the cash portion it's making it easier to complete the adjustments I had planned so have started the switch from Vanguard LifeStrategy 60 to the All World ETF. Will see if I have understood correctly how the Fidelity fee structure works.

Much appreciate the feedback from everyone, thank you.

Albermarle

 so have started the switch from Vanguard LifeStrategy 60 to the All World ETF. Will see if I have understood correctly how the Fidelity fee structure works.

Charge for buying the ETF - £10: charge for automatic dividend reinvestment if applicable £1.50.

Maximum platform charge for ETF's ( including those in SIPP + ISA + GIA)  £45pa 

SIPP, drawdown, withdrawal charges etc - Nil 

JohnWinder

Sorry to have misinterpreted your comments. Because that's too easy, and because you've given scant details of your situation which could invalidate all I say, I hesitate to say any more, but here goes....about your move from VLS60 to ?all-equity fund. A lot of people at  your age would not find that suitable.

Thirty years is a good period for investing in stocks, but if your health changes and makes that 20 years, then 10 years from now you only have 10 years of investing which is getting a bit short for all stocks, unless you have legacy intentions.

Secondly, all-equities is fine if you can stand it economically (a big drop in the market for several years), and if you can stand it emotionally (resist the urge to bail out when values are down). Both aspects can be damaging but avoidable with more bonds, or sensible planning and a strong will. Holding fast to your strategy could be the most important factor in getting achievable returns at our stage of life; as a youngster it's probably more about getting the right asset allocation and throwing money into it year after year.

Thirdly, all-equities look like great investments now because the last few years have seen great returns, especially US returns (65% of world stocks) in the last year. Beware recency bias - taking too much notice of the recent past. Yes, owning bonds look like a poor choice now (and may turn out to be) but they have a place in risk management however bad their returns look like they'll be.

bostonerimus

JohnWinder said:

Albermarle said:

If not done already , you should read about 'sequence of returns risk '
Basically once the drawdown starts , you should have enough cash to cover two or five years income, so you do not have to withdraw from the drawdown pot during a bad market downturn .

Too complex for a couple of lines, but, as that article alludes to, if you had so much in the drawdown pot, even all equities, that you needed only 2% of it each year I don’t think you’d need any cash reserve. Such a low drawdown, even during a bad sequence of returns, would likely do better during a 30 year investing horizon than holding 3 years of cash. But there’s a lot of moving parts there. You will get a lot out of this long series, if you can get through it: https://earlyretirementnow.com/safe-withdrawal-rate-series/

'

...liquidated half my workplace pension which was 100% in the "Scottish Equitable Overseas Equity Tracker Pension Fund" GB00B046S109 which has performed beyond my wildest expectations over the last year and half since I switched into it

......due to QE inflating assets has been something else and I was starting to feel that QE was heading towards the consumption side now

....If Europe has COVID-19 under control and travel restrictions have been lifted then aiming for an October exit otherwise will wait until after Christmas and review the situation in January 2022.

I read that as: ‘I think I know where the market is heading; I can identify influences on the market, which everyone else is seeing by the way, and thus think I know the most likely direction of the market; market directions will become clearer when something significant changes’.  If I’m right, then you might consider whether those views are valid, because there’s a widespread belief and enough evidence to indicate that even the experts can’t reliably predict those sorts of things. https://www.marketwatch.com/story/yes-100-of-economists-were-dead-wrong-about-yields-2014-10-21

As an amateur you should assume that everything you know that could guide how the markets will move is known by the countless professional investors like fund managers. Once they know it they act, prices move accordingly, and your insight is now worth nothing because the chances of it affecting market prices have been factored into those prices. Professional fund managers, as a whole, haven’t get better risk adjusted returns over the long term than those who, like you, buy and hold VLS60 or the like; or so indicates the SPIVA and Morningstar analyses of fund performances have indicated, and likely can't in future. Are you going to out-gun the professionals by following travel restrictions? I think not.

Have a look at the Darbar reports on investor behaviour, like yours of selling a fund after 18 months of great performance: 'Studies like the annual DALBAR analysis of investor behaviour regularly find a significant gap between what the market offers and what average investors receive.

'But what the Dalbar Study shows is that there’s a difference between the average investment return that an investment generates, and what the average investor in that investment receives.Often it’s because we’re trading, changing in and out.'

'People underperform the market mainly because of their own behaviour. They are more sensitive to losses than gains, they chase past winners, they fail to sufficiently diversify, and they try, in vain, to time the market. They also ignore boring, but important, factors like costs and taxes.’ https://www.evidenceinvestor.com/the-beating-the-market-myth/ 

You benefit from owning stocks because you share in their earnings and potential growth in earnings, both of which are reflected in their price. But the price can also contain a speculative element, unrelated to actual earnings and what that growth will be. We saw it as the pandemic struck, and you can see it now with cryptocurrencies. But speculative influences on stock prices, despite going up and down with bubbles and busts etc, can be expected to cancel each other out over longer terms as they have nothing to do with the intrinsic value of the stocks. So an investor gets no benefit from the speculative element of stock prices unless they can successfully time the market; very few can do it by skill, others can manage by luck. Do you want to trust part of your retirement financial well being to luck?  It’s ok to try, but know how it needs luck or skill.

A good approach is to take some time to choose the right fund(s), and then stick with them.

tacpot12 said:

 Even in the worst crash, markets seem to recover within a couple of years.

Or more less recently, more like 5 years. https://earlyretirementnow.com/2020/03/

We can get stuck in the mathematics of investment returns and lose sight of day to day financial practicalities. Everyone needs cash to spend...you can't spend a share. So there is the amount you need to pay the bills and have on hand for emergencies and that should be the same as you kept around when you were working, maybe 6 months to a year. If your withdrawal is low, ie below 4%, then you don't need to worry much about sequence of return risk and might not need to hold anymore cash. My retirement income comes from rent, a DB pension and some part time work, but I still keep a couple of years spending in cash for convenience. I use it to pay for big expenses and also to buy into the market if there is a big sell off.