What is your trigger point to start spending from cash buffer?? + QE, Does it change the game?

BritishInvestor

zagfles said:

pensionpawn said:

SouthCoastBoy said:

If I was now in retirement I would be using my cash buffer, as currently inflation is eroding its real value and markets are down. Having said that I currently hold a 40% buffer so quite a sizeable chunk. If my cash buffer is smaller I may have a different strategy. Each to his own, its not one size fits all.

I agree, use your cash (we have a similar %age) buffer now. Yes, your pot (funds element) could shrink further however you're not selling funds and your cash is also losing buying power (varies on your personal exposure to a general inflation figure). The £2880 (£3k6) that's (hopefully) going into your SIPP can remain in cash. That's our plan. Also, nobody's really made a loss until you drawdown from the fund portion of your pot after it has fallen more than 20% 

Even ignoring tax relief very few people will be making a loss even if selling equities now, unless they've only bought them in the last year or so. I find it a bit worrying how people take so much notice of short term performance, equities are meant to be long term investments, if you look at the long term picture, even after the recent drops global equities are up about 25% over the last 3 years, 45% over 5 years, and well over 100% over 10 years. Is that bad? Are equities really" low" or "down" now just because they're lower than they were in November?

I think a common mistake to make is to check portfolio values every week (some might even do it every day!) because then all you'll remember is "down again this week" rather than "up 25% since 3 years ago".

Have a look at some of the best buy fund lists and you will see how far underwater many are.

https://www.ii.co.uk/analysis-commentary/top-10-most-popular-investment-funds-february-2021-ii515290

Eg Baillie Gifford American -55% over the last year

zagfles

BritishInvestor said:

zagfles said:

pensionpawn said:

SouthCoastBoy said:

If I was now in retirement I would be using my cash buffer, as currently inflation is eroding its real value and markets are down. Having said that I currently hold a 40% buffer so quite a sizeable chunk. If my cash buffer is smaller I may have a different strategy. Each to his own, its not one size fits all.

I agree, use your cash (we have a similar %age) buffer now. Yes, your pot (funds element) could shrink further however you're not selling funds and your cash is also losing buying power (varies on your personal exposure to a general inflation figure). The £2880 (£3k6) that's (hopefully) going into your SIPP can remain in cash. That's our plan. Also, nobody's really made a loss until you drawdown from the fund portion of your pot after it has fallen more than 20% 

Even ignoring tax relief very few people will be making a loss even if selling equities now, unless they've only bought them in the last year or so. I find it a bit worrying how people take so much notice of short term performance, equities are meant to be long term investments, if you look at the long term picture, even after the recent drops global equities are up about 25% over the last 3 years, 45% over 5 years, and well over 100% over 10 years. Is that bad? Are equities really" low" or "down" now just because they're lower than they were in November?

I think a common mistake to make is to check portfolio values every week (some might even do it every day!) because then all you'll remember is "down again this week" rather than "up 25% since 3 years ago".

Have a look at some of the best buy fund lists and you will see how far underwater many are.

https://www.ii.co.uk/analysis-commentary/top-10-most-popular-investment-funds-february-2021-ii515290

Eg Baillie Gifford American -55% over the last year

Oh dear, the top buy at II after it returned 100%+ over a year! Do that many people make the mistake of buying yesterday's winner? But it's still up about 50% over 5 years so those who've held it long term will be OK.

michaels

Amazing how many market timers we see even on this board.

And it you are making different decisions based on whether markets are 'high' or 'low' then you are a market timer.

Separate observation, even though my portfolio is down by15% ish from the highs my safe withdrawal monthly amount (if you filter price history for the market position vs peak) is only down by about 3%

Sea_Shell

Well, we have decided to "do nothing" and carry on as we were.   For this month at least 😉


However, separately, we have decided to start a £1000 per month, 1 yr rolling fix, to at least guarantee a return (2.5%+) as rates are on the rise.  We can play this by ear, month by month.

NedS

I am amazed how many people have a cash buffer as part of their investment strategy but with no predefined plan in place as to how it will be used other than 'when markets are down'.

I see two options - either used as part of a rule based system such as Guyton-Klinger's to reduce drawdown from the pot and use the cash buffer to make up the difference, or a simple percentage-based rule that the cash buffer will be drawn upon once markets are down a set percentage from previous highs until a certain recovery point is reached. A sliding percentage rule could also be used - e.g, draw 50% from cash buffer when markets are down 20% up to 100% from cash buffer when markets drop 50% or more.

It should be relatively easy to perform some simplistic spreadsheet modelling of how such strategies would have performed during recent downturns versus a do nothing strategy to find optimum percentages and see if there is any benefit in holding a cash buffer at all.

For now, I'm sticking with my income portfolio so do not have to worry about such things as it just keeps paying out the dividend income, but I'm genuinely interested in seeing any modelling as to how best to deploy a cash buffer in a downturn.

Linton

NedS said:

I am amazed how many people have a cash buffer as part of their investment strategy but with no predefined plan in place as to how it will be used other than 'when markets are down'.

I see two options - either used as part of a rule based system such as Guyton-Klinger's to reduce drawdown from the pot and use the cash buffer to make up the difference, or a simple percentage-based rule that the cash buffer will be drawn upon once markets are down a set percentage from previous highs until a certain recovery point is reached. A sliding percentage rule could also be used - e.g, draw 50% from cash buffer when markets are down 20% up to 100% from cash buffer when markets drop 50% or more.

It should be relatively easy to perform some simplistic spreadsheet modelling of how such strategies would have performed during recent downturns versus a do nothing strategy to find optimum percentages and see if there is any benefit in holding a cash buffer at all.

For now, I'm sticking with my income portfolio so do not have to worry about such things as it just keeps paying out the dividend income, but I'm genuinely interested in seeing any modelling as to how best to deploy a cash buffer in a downturn.

Or my option of always taking money from the cash buffer and treating the equity/cash/income investments/Wealth preservation and pension/ISA/unwrapped allocations as a longer term strategic issue with the actual values rebalanced no more frequently than annually.  In particular pension drawdown is managed so as to clear pensions by death without paying higher rate tax and is not directly liked to expenditure.

I agree that it is sensible to limit the cash allocations by the use of income funds.  However in my view income is only a partial alternative to cash.

Sea_Shell

We're still 60% equities and 10% cash overall, so we'll try and keep roughly to that.  

BritishInvestor

NedS said:

I am amazed how many people have a cash buffer as part of their investment strategy 

Yep, Agreed

Sea_Shell

BritishInvestor said:

NedS said:

I am amazed how many people have a cash buffer as part of their investment strategy 

Yep, Agreed

You both say that as if its a bad or stupid thing to have?    

coyrls

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.