Close to retirement. Investing a modest pot.

DairyQueen

Audaxer said:

DairyQueen said:

Audaxer said:

It is a very difficult one to answer.

Although I agree 3.5% should be a fairly SWR, I think of that withdrawal rate being safe with a medium risk portfolio containing approximately 60% equities, so maybe something like VLS20 could be a bit too cautious. It's good that you are helping him organize his retirement finances, however if it was me I'd be reluctant to go as far as actually choosing the investments for a relative or friend's portfolio.    

Believe me, I am very reluctant to become involved.

This is the lesser of the evils as his pensions are in a complete mess.

Imagine every piece of correspondence on several pension policies cast aside unread for almost five decades. No addresses updated. No idea of policy terms/benefits/costs/investments. No knowledge of current administrator - policies have exchanged hands several times.

The good news is that he has kept most correspondence received in the last decade, and some companies have traced him. Did he reply to the tracing letters? Nope. I doubt he is exceptional.

I mention this to illustrate why someone needs to take control of this situation and, in the absence of anyone else, that's me. If I don't help then he will simply take the line of least resistance. Along with 90% of the UK population, he doesn't understand investments or pensions.

It is better that I choose the investments than to leave things 'as is'. Anything is better than leaving 'as is'. If he could afford an IFA then that's the solution, but he can't. So, I am stuck between a rock and a hard place.

One option is to split the pot between 3 buckets cash/high bond fund/high equity fund) to match investment periods <5/5-10/10+ years. Relative will not take any notice of market conditions. Nor will he rebalance. It would require an occasional rebalance from me but not much intervention.

Not ideal but better than all in cash, or taking the risk of selling a high equity fund after a drop. 

For simplicity I also like the look of Fidelity Investment Pathways option linked by @Albermarle. I wasn't aware of that solution previously, but it looks a decent solution for someone in your relative's position. Investment Pathway 3 invests in the following fund:
Fidelity Investment Funds IV - Fidelity Multi Asset Balanced Income Fund W Incomeome Dividends | GB00BFPC0725 | Fidelity
It has 40% equities and a dividend yield of 3.29%. I think it would be much simpler solution to manage than a 3 bucket solution, as it provides monthly dividends. 

The only thing that would concern me a bit about that solution is putting the whole amount in the one managed fund, so if you thought the same, you could look for one or two other similar funds to split the portfolio if you wanted to pursue that solution.

Thanks for this.
Yes, this strategy is the frontrunner at the moment but I need to check-out other providers of these pathways. Plus, do more research on other suggestions. 

These pathways have the advantage of being simple to self-manage and easily understandable. As I recall Fidelity has low platform charges but I'll compare it to other options.

I also took a quick look at @Albermarle's link and option 3 seems the best fit.

itsmeagain

DairyQueen said:

itsmeagain said:

I personally think that alleged 'Low risk' LS20 schemes are actually highest risk when it comes to keeping up with inflation.
With LS20, you may lose less in a crash short term, but almost guaranteed to be worse off than an LS60-100 mid-long term.

Agreed.... except a reasonable %age of the pot can't be invested for the long term. He will need to begin drawdown in 3 years. I would go 100% equities for a 100% 10+ year investment but this isn't a 10+ year investment.

He needs a simple drawdown strategy that doesn't involve him managing/rebalancing. He needs to preserve his pot. Matching inflation without taking too much risk is probably the best that can be achieved.

I could split the pot across different buckets but that would require DIY rebalancing and see above.

It's a real dilemma.

For the position of the person you are describing, the Vanguard 2025 target retirement fund is circa 60/40 - shares/bonds right now.
Arguably, choosing something like the above or extending the 60/40 by using the LS60, will self manage/balance itself because it's already a bucket of buckets that does it all for you.
You could also add 5 years and pick the 2030 fund if you wanted to be slightly more risky (arguably guaranteed to get a better return) over 20 years of drawdown.

I'm retired at 55 with a DB pension, plus £150k in a DC/SIPP. It's mainly in the LS80 and I can't see me dropping to less than the LS60, although I may be less risk adverse because I don't actually need by SIPP - that will probable be handed to my wife/family when I'm gone.

DairyQueen

Thanks for the suggestion.

I have considered target retirement funds but the problem is one mentioned by posters upthread - i.e. no/low equity allocation so exposure to inflation risk. These  de-risk to preserve capital in the lead-up to retirement but then assume an annuity will be purchased. Staying invested in retirement requires a reasonable equity allocation to stand a chance of matching inflation for funds invested in a 10+ year timescale. 

I am less concerned about the inflation risk over the short term.

itsmeagain

DairyQueen said:

Thanks for the suggestion.

I have considered target retirement funds but the problem is one mentioned by posters upthread - i.e. no/low equity allocation so exposure to inflation risk. These  de-risk to preserve capital in the lead-up to retirement but then assume an annuity will be purchased. Staying invested in retirement requires a reasonable equity allocation to stand a chance of matching inflation for funds invested in a 10+ year timescale. 

I am less concerned about the inflation risk over the short term.

That's why I'm suggesting keeping a 60/40 or choosing a target retirement for 5/10 years later than the actual retirement.
The main reason that insurance/annuity works for the provider, is that they expect to pay out far less than you or they will make from the money you give them.
Self insure & self annuity is the way to go.

DairyQueen

It's ironic but I am rapidly discovering that investing a modest pot is more of a challenge than a larger pot.

There is much less room for error, and less comfort around taking higher risks. A bigger %age of essential income is dependent on the outcome.

Also, those less engaged with investments (but who lack the means to pay for portfolio management) are better-suited to actively managed funds of some description (pathway, auto rebalancing). A bog-standard global passive is fine during accumulation but investment throughout decumulation is more complex.

Posts have been very helpful. Plenty of food for thought

Audaxer

I've just looked at the Fidelity Multi Asset Balance Income W Inc fund (which has 38% equities) on TrustNet and compared it on a Total Return basis to VLS40 and VLS20 over the last 5 years and the results are as follows:
Fidelity Multi Asset Balance Income W Inc - 19.2%
VLS40 - 30.2%
VLS20 - 22.1%
I was surprised to see that even the VLS20 had better returns than the Fidelity fund which has 38% equities, but that must be down to the Fidelity fund concentrating on dividend paying equity in the UK in particular, rather than the more diversified VLS funds.

I suppose it depends whether having the likes of a VLS fund, and selling say 3.5% of capital once a year, is a manageable option for someone in your relative's position. The Fidelity fund could obviously do a lot better over the next 5 years, so it could still be a good option.

Albermarle

Yes, this strategy is the frontrunner at the moment but I need to check-out other providers of these pathways. Plus, do more research on other suggestions. These pathways have the advantage of being simple to self-manage and easily understandable. As I recall Fidelity has low platform charges but I'll compare it to other options.

I think you will find all providers will have a very similar investment pathways , as it is all based on guidance from FCA as far as I know .

For sums < £100K , usually a Sipp provider charging a % charge is better, especially if they have no other trading charges or extras. Such as HL , Fidelity or AJ Bell

Although maybe a little more expensive , another alternative could be a traditional provider , like Standard Life . Probably a bit easier to operate as no cash account , or worry about paying fees etc .

DairyQueen

Audaxer said:

I've just looked at the Fidelity Multi Asset Balance Income W Inc fund (which has 38% equities) on TrustNet and compared it on a Total Return basis to VLS40 and VLS20 over the last 5 years and the results are as follows:
Fidelity Multi Asset Balance Income W Inc - 19.2%
VLS40 - 30.2%
VLS20 - 22.1%
I was surprised to see that even the VLS20 had better returns than the Fidelity fund which has 38% equities, but that must be down to the Fidelity fund concentrating on dividend paying equity in the UK in particular, rather than the more diversified VLS funds.

I suppose it depends whether having the likes of a VLS fund, and selling say 3.5% of capital once a year, is a manageable option for someone in your relative's position. The Fidelity fund could obviously do a lot better over the next 5 years, so it could still be a good option.

Just checked the fund on Trustnet. P'raps I am looking at the wrong fund but it gives the breakdown as:

48% Growth Assets
33.5% Yield Assets
16.8% Defensive Assets
3.1% Other
1.7% Cash
-3.1% Hedge

The top ten holdings are all income/high yield/bond funds except for a FTSE 100 tracker. Not sure how they classify 'Growth Asset' but it may take some time to look under the bonnet of all of the funds. 

Superficially (as you say) its overweight UK - as is VLS20. I can't see much US exposure other than (perhaps) global bonds. This could explain the difference in past performance when compared to VLS. Charges may also play a part.

One of the advantages of VLS is its transparency.

I hold our short term drawdown in cash, and our medium term in RIT and VLS20. The former has a chunk of private equity absent from other funds. OCF = 0.66% so not too bad for active management. There is little overlap between the two. 

Perhaps I should just bite the bullet and manage relative's portfolio alongside my own. Just keep things simple so he knows the function of each bucket, and undertake an annual rebalance.

Perhaps:
1-5 years = cash
6-10 years = VLS20 and RIT
10+ years = L&G International Index Trust

Still thinking. 

Audaxer

DairyQueen said:

Audaxer said:

I've just looked at the Fidelity Multi Asset Balance Income W Inc fund (which has 38% equities) on TrustNet and compared it on a Total Return basis to VLS40 and VLS20 over the last 5 years and the results are as follows:
Fidelity Multi Asset Balance Income W Inc - 19.2%
VLS40 - 30.2%
VLS20 - 22.1%
I was surprised to see that even the VLS20 had better returns than the Fidelity fund which has 38% equities, but that must be down to the Fidelity fund concentrating on dividend paying equity in the UK in particular, rather than the more diversified VLS funds.

I suppose it depends whether having the likes of a VLS fund, and selling say 3.5% of capital once a year, is a manageable option for someone in your relative's position. The Fidelity fund could obviously do a lot better over the next 5 years, so it could still be a good option.

Just checked the fund on Trustnet. P'raps I am looking at the wrong fund but it gives the breakdown as:

48% Growth Assets
33.5% Yield Assets
16.8% Defensive Assets
3.1% Other
1.7% Cash
-3.1% Hedge

I can't see the fund on TrustNet now - it's buffering for some reason. I've looked at the fund on AJ Bell and it shows the same 38% equities as on the Fidelity site, so that seems to be the correct percentage of equities.

DairyQueen

Audaxer said:

DairyQueen said:

Audaxer said:

I've just looked at the Fidelity Multi Asset Balance Income W Inc fund (which has 38% equities) on TrustNet and compared it on a Total Return basis to VLS40 and VLS20 over the last 5 years and the results are as follows:
Fidelity Multi Asset Balance Income W Inc - 19.2%
VLS40 - 30.2%
VLS20 - 22.1%
I was surprised to see that even the VLS20 had better returns than the Fidelity fund which has 38% equities, but that must be down to the Fidelity fund concentrating on dividend paying equity in the UK in particular, rather than the more diversified VLS funds.

I suppose it depends whether having the likes of a VLS fund, and selling say 3.5% of capital once a year, is a manageable option for someone in your relative's position. The Fidelity fund could obviously do a lot better over the next 5 years, so it could still be a good option.

Just checked the fund on Trustnet. P'raps I am looking at the wrong fund but it gives the breakdown as:

48% Growth Assets
33.5% Yield Assets
16.8% Defensive Assets
3.1% Other
1.7% Cash
-3.1% Hedge

I can't see the fund on TrustNet now - it's buffering for some reason. I've looked at the fund on AJ Bell and it shows the same 38% equities as on the Fidelity site, so that seems to be the correct percentage of equities.

Is this the one?:
https://www.trustnet.com/factsheets/o/jsqr/fidelity-multi-asset-balanced-income