Investment Trusts / REITS for retirement income.

Notepad_Phil

AsifM068 said:

Is it too risky to go all in with an Investment Trust for a retirement to supplement my pension with income dividend, and have say 25% in cash as a hedge / emergency fund 

I personally wouldn't put everything into just the one anything, but I guess it depends on how much you're talking about, what percentage the dividend income is of the pension income, and finally what Investment Trust you're talking about.

AsifM068

It will be around 200K with hopefully 5% dividend yield to supplement my defined benefit pension at 60 (currently valued at 10K p/a plus a 26K lump sum payment) ; I'm looking at CTY (City and London Trust) and MRCH (The Merchant's Trust).

50K will be also be reserved in premium bonds for liquidity / cash emergency. 

I will be 53 in October so no need to do anything rash at present and open to all ideas.

Any thoughts very much appreciated? 

JohnWinder

AsifM068 said:

Is it too risky to go all in with an Investment Trust for a retirement to supplement my pension with income dividend, and have say 25% in cash as a hedge / emergency fund 

A lot would depend on whether the IT was all equity, or a mix of bonds etc. Because investing risk shows up in asset price volatility, as one measure, and you need a mix of assets to somewhat match your tolerance to volatility. To be 25% cash, and in the IT have 20% equities and 80% bonds might not be as much risk as you're comfortable with or offer the return you might otherwise get.

One 'problem' with choosing a fund for its 'income' potential is that the manager is now reducing diversification because they are limiting choices to those with better income. That'd be fine if it remained widely diversified, but the wider you go the more you have to choose stocks with less favourable income potential, and the narrower you go the less diversification and the more exposure to getting some of those choices of stocks wrong.

It's the same old problem: diversify well, get market returns; narrower your stock choices and get better or worse than market returns. Taken as a whole group, those who narrow their choices can only get market returns anyway but they take more risk (of over- or under-performing), which translates to lower risk adjusted returns.

If I understand it, once upon a time income funds had the merit of regular income to you without needing to speak to a broker in order to sell some stocks (for your income) and pay through the nose for the privilege and inconvenience. Those days are largely gone I think, or perhaps not for you.

Are IT's the ones that are 'close ended'? You can only buy/sell to others holding them? There's no redemption by the fund manager or market maker? As a consequence you forfeit some liquidity, and face the prospects of buying/selling at premia and discounts. One would want some compensation for taking on that risk; what is it?  At a time I want to sell some it's trading at a bigger discount than when I bought it; yuk.

bostonerimus

Have you considered just using a Total Return approach with a few open ended funds of your own. Also be careful that you don't become too risk averse as you approach retirement. You could easily spend 30 years in retirement and will probably need your assets to grow to keep up with inflation.

AsifM068

A Total Return approach does have its merits as it will mean that I do not have to seek out dividend income instruments, for in doing so, I may make a mistake as a new investor.

In the event that I do transfer my active funds ISA to my Vanguard Global Index Tracker fund, it will all depend how this fund is performing in around 6 years time, as I approach 60.

Thank you again for your thoughts and ideas for it is what is I need to avoid any pitfalls.

AsifM068

From my research any IT that I choose to invest in will have to be equity focused to achieve around 5% dividend yield.
It would appear to me that the real cost with some of these IT's is a lack of capital growth for whilst past performance is no predictor of future performance, some of the ITs have track records of 20 or so years in delivering their dividends without default, pandemic notwithstanding.

If I'm reading things wrong or missing something please say so.

ColdIron

AsifM068 said:

From my research any IT that I choose to invest in will have to be equity focused to achieve around 5% dividend yield.

Not necessarily, just from the list in my OP above, HDIV and BIPS (high yield bonds) and HICL (infrastructure) achieve around 5%

It would appear to me that the real cost with some of these IT's is a lack of capital growth for whilst past performance is no predictor of future performance, some of the ITs have track records of 20 or so years in delivering their dividends without default, pandemic notwithstanding.

You can't have your cake and eat it, high yield or high growth, pick one or the other or something in between

You could dial down your yield target to 3% or even 4% and you would have a wider choice with a higher likelihood of some growth

bostonerimus

AsifM068 said:

A Total Return approach does have its merits as it will mean that I do not have to seek out dividend income instruments, for in doing so, I may make a mistake as a new investor.

In the event that I do transfer my active funds ISA to my Vanguard Global Index Tracker fund, it will all depend how this fund is performing in around 6 years time, as I approach 60.

Thank you again for your thoughts and ideas for it is what is I need to avoid any pitfalls.

How do you think ITs derive their dividends? They are just paying you out of money they make from their investments. 

Thrugelmir

AsifM068 said:

It would appear to me that the real cost with some of these IT's is a lack of capital growth for whilst past performance is no predictor of future performance, 

Reinvestment of income is a longstanding way of generating returns. Hasn't been popular for some years due to the returns being generated by investing in growth companies. Every investment cycle has it's day. 

maxsteam

AsifM068 said:

50K in Premium Bonds for emergencies

Haha. I hope that you don't ever need the funds quickly. The funds are very safe but, if you read other posts on the subject, you will see that it is quite possible that your phone isn't compatible with the NS&I verification system and you may not be able to get the funds as quickly as you want.