Managing Sequence of Risk

Audaxer

tacpot12 said:

I think I have manage to avoid SORR during the dip caused by the pandemic duing 2020 by having my retirement portfolio mainly invested in income-producing Investment Trusts (ITs) and Funds. Because I am withdrawing the income and not reinvesting it, if the income is lower, it doesn't affect my future income, just my current income and I have a cash buffer in my SIPP that allowed me to continue to withdraw cash at the same rate for a couple of years. 

My dividend income is significantly up over the last 18 months, so there was a strong rebound in dividend payments, and I am on track to have two full years with above average levels of dividend income. (normally I expect about 4% pa, but in late 2020 & early 2021 I had 4.5% and late 2021 and early 2022 looks like it might be closer to 5%.   

These are quite good percentages for dividend income, but is that 4.5% and 5% of your initial investment value, or the percentages income of your current value? If the value of your funds and ITs have increased quite a bit, the yields will probably be down, but not a concern if your actual dividend income is increasing. 

bostonerimus

Aegis said:

bostonerimus said:

Then the Covid crash came and I halved my tenants rent for a few months while she couldn't work.

We don't always see eye to eye, but that was a really decent thing to do, so you have my respect for this action, for what it's worth.

Thanks. My tenant was very worried and I wanted to ease her mind. She's been a good tenant and anyway what was I going to do? evictions were out lawed during the pandemic and who would I have got to move in if she had missed rent? She couldn't work so I thought it right to share the burden with her. 

Aegis

bostonerimus said:

Aegis said:

bostonerimus said:

Then the Covid crash came and I halved my tenants rent for a few months while she couldn't work.

We don't always see eye to eye, but that was a really decent thing to do, so you have my respect for this action, for what it's worth.

Thanks. My tenant was very worried and I wanted to ease her mind. She's been a good tenant and anyway what was I going to do? evictions were out lawed during the pandemic and who would I have got to move in if she had missed rent? She couldn't work so I thought it right to share the burden with her. 

If I was wearing a hat, I'd tip it.  Genuinely sounds like you wanted to be - and were - part of the solution.

original1

Interesting reading the link posted by JohnWinder. Thanks for that, getting through it slowly.

MarkCarnage

Albermarle said:

Realistically need to find someone that averaged in from 1998 through to 2001 or so, who won't have seen any positive returns (dividends excluded) for near 12 years.

1998 to 2001 , is only three years , not 12 ?

I think it was meant to illustrate that they would not have recouped the losses made in these 3 years until 12 years on.....all depends on what the initial portfolio was invested in of course (the comment about dividends suggests all equities) but there are equity portfolios which would have recovered. Also very unlikely that someone would only have spent 3 years accumulating, and also unlikely that with dividends reinvested they wouldn't have been ahead at some point, though back to square one in 2008/9 probably......

The main problem is likely to be those who take fright and crystallise paper losses at the wrong time; buy high and sell low.....which is potentially quite a big sub set of DC pension investors or indeed ISA investors judging by some of the comments on these boards....

MaxiRobriguez

MarkCarnage said:

Albermarle said:

Realistically need to find someone that averaged in from 1998 through to 2001 or so, who won't have seen any positive returns (dividends excluded) for near 12 years.

1998 to 2001 , is only three years , not 12 ?

I think it was meant to illustrate that they would not have recouped the losses made in these 3 years until 12 years on....

Exactly.

Many drawdown-in-retirement portfolios (mine included) is forecasted with continued growth into retirement. Perhaps less than whilst in work, what with the need to carry cash or cash-like assets as a minority proportion of the portfolio, but growth nonetheless.

If that doesn't happen in the early stages of retirement, that can have huge impact on pot being dwindled down much, much faster.

london21

bostonerimus said:

Aegis said:

bostonerimus said:

Then the Covid crash came and I halved my tenants rent for a few months while she couldn't work.

We don't always see eye to eye, but that was a really decent thing to do, so you have my respect for this action, for what it's worth.

Thanks. My tenant was very worried and I wanted to ease her mind. She's been a good tenant and anyway what was I going to do? evictions were out lawed during the pandemic and who would I have got to move in if she had missed rent? She couldn't work so I thought it right to share the burden with her. 

That is a good tactic. Better than getting nothing.
Often wondered what would happen to landlords when the eviction was paused. 

bostonerimus

london21 said:

bostonerimus said:

Aegis said:

bostonerimus said:

Then the Covid crash came and I halved my tenants rent for a few months while she couldn't work.

We don't always see eye to eye, but that was a really decent thing to do, so you have my respect for this action, for what it's worth.

Thanks. My tenant was very worried and I wanted to ease her mind. She's been a good tenant and anyway what was I going to do? evictions were out lawed during the pandemic and who would I have got to move in if she had missed rent? She couldn't work so I thought it right to share the burden with her. 

That is a good tactic. Better than getting nothing.
Often wondered what would happen to landlords when the eviction was paused. 

In my case I can live without the rental income and I was far better placed to weather Covid than my tenant who is in her early 30s and self employed as a dog trainer. Part of my strategy for avoiding SORR is to have several non stock market linked income sources and a healthy cash buffer. I did not expect to have the rental income cut in half for a few months, but I just fell back on my DB pension and cash and I could have taken some DC dividends if needed. Landlords with large numbers of rentals and no other income were probably in a really tough spot, but hopefully furlough money helped. But I think they are shortsighted if they put "all their eggs in one basket". Also I don't have a mortgage so I don't need the rental cash flow each month.

tacpot12

Audaxer said:

tacpot12 said:

I think I have manage to avoid SORR during the dip caused by the pandemic duing 2020 by having my retirement portfolio mainly invested in income-producing Investment Trusts (ITs) and Funds. Because I am withdrawing the income and not reinvesting it, if the income is lower, it doesn't affect my future income, just my current income and I have a cash buffer in my SIPP that allowed me to continue to withdraw cash at the same rate for a couple of years. 

My dividend income is significantly up over the last 18 months, so there was a strong rebound in dividend payments, and I am on track to have two full years with above average levels of dividend income. (normally I expect about 4% pa, but in late 2020 & early 2021 I had 4.5% and late 2021 and early 2022 looks like it might be closer to 5%.   

These are quite good percentages for dividend income, but is that 4.5% and 5% of your initial investment value, or the percentages income of your current value? If the value of your funds and ITs have increased quite a bit, the yields will probably be down, but not a concern if your actual dividend income is increasing. 

These are the percentages of the income vs. the current value of the portfolio at the end of May each year. The dividend income has increased (in percentage terms) more than the value of the funds, so the yeild and actual dividend income have both increased.

My portfolio includes three "High Income" funds (3 out of 20 holdings). These have paid 5%, 6% and 7% dividends on average of the last three years, so they skew the income percentages a bit. Most of the rest of the portfolio normally pays around 4%. The big surprise is the iShares UK Dividend EFT (IUKD) which I was expecting to pay about 4% but which paid 6.2% in May 18-19, 7.8% in May 19-20, 3.6% in May 20-21 (Pandemic year) and has already paid 5.0% between May 21 and now, so is likely to pay nearly 6% for the full year. 

tacpot12

To the people who pointed out that there had not really been a poor sequence of returns during the pandemic, would agree with this, but I would also point out that the nature of the risk is that we don't know whether one poor return is the start of a sequence or not.

My contention is that by taking my income from the natural yeild of the portfolio, I am less exposed to any sequence of return risk. I might have a poor return, or I might have a sequence of poor returns, but it only affects my income during  the period of the poor return, when the returns return to normal, all my assets return to normal. Someone whose plan is to sell assts for their retirement income will not have their assets return to normal as they have sold some of them (and done so at low prices, so had to sell more. I only sell when the markets have not just crashed. 

I know that this smacks of trying to time the markets, but I'm willing to risk that a recovery follows a crash.