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

michaels

Can you forecast future share values based on the past?

If so presumably it is possible to design a strategy to 'beat the markets' because you can forecast where they are going next base on looking at historic data.

If not then you can never sell a share when it is 'undervalued' because the market is always at the correct level and future market moves and random following a slightly rising trend.

If shares are never undervalued then there is no reason to slightly re-balance your holdings by drawing down from different asset classes so all you need to do is think about whether your current asset mix is appropriate or not and whether - if you decide to re-balance, the marginal impact of different draw-down strategies will be a material tool o do so.

Sorry OP if this logic does not help but if you think about it as a re-balancing question rather than a draw down question then the penny may drop...

Prism

Audaxer said:

QrizB said:

dunstonh said:

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.  

Let's give this a spin.

Imagine you've got a £100k portfolio split 60:40 equities:cash and you're planning to withdraw £4k pa.

You find your £60k of equities have grown 10% and are now worth £66k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £106k split 66:40 or 62.26:37.74. You want to reduce your portfolio to £102k (withdrawing £4k) and return to a 60:40 split, which would be £61.2k:£40.8k.

So you need to sell £4.8k of equities and put £0.8k of that into cash, keeping the £4k as your spending money.

Does that work for everyone?

Edit: Or, if the market is down.

You find your £60k of equities have shrunk 10% and are now worth £56k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £96k split 56:40 or 58.33:41.67. You want to reduce your portfolio to £92k (withdrawing £4k) and return to a 60:40 split, which would be £55.2k:£36.8k.

In this case you need to sell £0.8k of equities and take £3.2k out of your cash in order to generate £4k spending money.

The calculations work, but I think of that more as having £60k invested in a 100% equity portfolio and a cash buffer of £40k. If I wanted to be able to draw £4k per year rising with inflation, I think I would need £120k in total - £100k invested with say 60% equities and 40% bonds, with the addition of a £20k (equivalent to 4 years) as a separate cash buffer. I think providing you can afford to keep that much of a cash buffer, you should not need to sell investments at the year end if markets have fallen.

There have been several times historically when 4 years of cash wouldn't have been anywhere near enough, however that 40% allocation to bonds would really have helped reduce the downside of the pot so that when the cash was gone at least the downside wasn't that bad. Hopefully bonds will still perform that role going forwards but I am not convinced. Possibly a larger pot of cash is needed. I'm not sure.

Or of course, just cash in equities when they are down anyway and hope for a quick recovery.

Chickereeeee

I guess the key question is, are markets 'down' or just not 'up' as much as they were? They did seem to go up rather quickly in the last Q of 2021. 

Thrugelmir

michaels said:

Can you forecast future share values based on the past?

If so presumably it is possible to design a strategy to 'beat the markets' because you can forecast where they are going next base on looking at historic data.

If not then you can never sell a share when it is 'undervalued' because the market is always at the correct level and future market moves and random following a slightly rising trend.

If shares are never undervalued then there is no reason to slightly re-balance your holdings by drawing down from different asset classes so all you need to do is think about whether your current asset mix is appropriate or not and whether - if you decide to re-balance, the marginal impact of different draw-down strategies will be a material tool o do so.

Sorry OP if this logic does not help but if you think about it as a re-balancing question rather than a draw down question then the penny may drop...

Passive investing buys the tracked market. The INRG ETF inflated the price of some 30 stocks into super bubble territory. Investors who bought into the hype would now be nursing a 43% loss. Money invested drives momemtum. Markets aren't always efficient. As some retail investors appear to forget that they are themselves market participants. Not observers sitting on the sidelines. Every action has a consequence. 

Audaxer

Prism said:

Audaxer said:

QrizB said:

dunstonh said:

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.  

Let's give this a spin.

Imagine you've got a £100k portfolio split 60:40 equities:cash and you're planning to withdraw £4k pa.

You find your £60k of equities have grown 10% and are now worth £66k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £106k split 66:40 or 62.26:37.74. You want to reduce your portfolio to £102k (withdrawing £4k) and return to a 60:40 split, which would be £61.2k:£40.8k.

So you need to sell £4.8k of equities and put £0.8k of that into cash, keeping the £4k as your spending money.

Does that work for everyone?

Edit: Or, if the market is down.

You find your £60k of equities have shrunk 10% and are now worth £56k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £96k split 56:40 or 58.33:41.67. You want to reduce your portfolio to £92k (withdrawing £4k) and return to a 60:40 split, which would be £55.2k:£36.8k.

In this case you need to sell £0.8k of equities and take £3.2k out of your cash in order to generate £4k spending money.

The calculations work, but I think of that more as having £60k invested in a 100% equity portfolio and a cash buffer of £40k. If I wanted to be able to draw £4k per year rising with inflation, I think I would need £120k in total - £100k invested with say 60% equities and 40% bonds, with the addition of a £20k (equivalent to 4 years) as a separate cash buffer. I think providing you can afford to keep that much of a cash buffer, you should not need to sell investments at the year end if markets have fallen.

There have been several times historically when 4 years of cash wouldn't have been anywhere near enough, however that 40% allocation to bonds would really have helped reduce the downside of the pot so that when the cash was gone at least the downside wasn't that bad. Hopefully bonds will still perform that role going forwards but I am not convinced. Possibly a larger pot of cash is needed. I'm not sure.

Or of course, just cash in equities when they are down anyway and hope for a quick recovery.

If you look as the portfolio value as the whole £120k including the £20k cash, a £4k annual withdrawal represents just 3.33%, which I think has historically always been a safe withdrawal rate. 

Thrugelmir

Audaxer said:

Prism said:

Audaxer said:

QrizB said:

dunstonh said:

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.  

Let's give this a spin.

Imagine you've got a £100k portfolio split 60:40 equities:cash and you're planning to withdraw £4k pa.

You find your £60k of equities have grown 10% and are now worth £66k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £106k split 66:40 or 62.26:37.74. You want to reduce your portfolio to £102k (withdrawing £4k) and return to a 60:40 split, which would be £61.2k:£40.8k.

So you need to sell £4.8k of equities and put £0.8k of that into cash, keeping the £4k as your spending money.

Does that work for everyone?

Edit: Or, if the market is down.

You find your £60k of equities have shrunk 10% and are now worth £56k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £96k split 56:40 or 58.33:41.67. You want to reduce your portfolio to £92k (withdrawing £4k) and return to a 60:40 split, which would be £55.2k:£36.8k.

In this case you need to sell £0.8k of equities and take £3.2k out of your cash in order to generate £4k spending money.

The calculations work, but I think of that more as having £60k invested in a 100% equity portfolio and a cash buffer of £40k. If I wanted to be able to draw £4k per year rising with inflation, I think I would need £120k in total - £100k invested with say 60% equities and 40% bonds, with the addition of a £20k (equivalent to 4 years) as a separate cash buffer. I think providing you can afford to keep that much of a cash buffer, you should not need to sell investments at the year end if markets have fallen.

There have been several times historically when 4 years of cash wouldn't have been anywhere near enough, however that 40% allocation to bonds would really have helped reduce the downside of the pot so that when the cash was gone at least the downside wasn't that bad. Hopefully bonds will still perform that role going forwards but I am not convinced. Possibly a larger pot of cash is needed. I'm not sure.

Or of course, just cash in equities when they are down anyway and hope for a quick recovery.

If you look as the portfolio value as the whole £120k including the £20k cash, a £4k annual withdrawal represents just 3.33%, which I think has historically always been a safe withdrawal rate. 

History continually gets rewritten. There's a first time for everything. 

Tassie_Devil

QrizB said:

dunstonh said:

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.  

Edit: Or, if the market is down.

You find your £60k of equities have shrunk 10% and are now worth £56k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £96k split 56:40 or 58.33:41.67. You want to reduce your portfolio to £92k (withdrawing £4k) and return to a 60:40 split, which would be £55.2k:£36.8k.

In this case you need to sell £0.8k of equities and take £3.2k out of your cash in order to generate £4k spending money.

In this case I'd use £4k from the cash and rebalance by selling equities when the market recovers. Isn't that the whole point of the cash buffer?

billy2shots

I've been thinking about something for a while and hears as good a place to put it..

You will have to excuse my explanation as I'm not sure how to word it do will just write my thoughts down and I hope you can interpret my point.


I will feel happy with a cash out in retirement, happier than binds to be honest and I have been looking at lots of different technical blogs modeling different scenarios.
I've thought of holding 3-5 years cash in the cash pot but over a 40 year retirement the modeling suggests 6-10 is far more realistic to navigate bear markets and come out the other side. 

Unfortunately 10 years cash is probably too much for most of us, yes it maybe optimal in a bear market scenario but it's probably unlikely to be followed unless someone is mega rich. 
3-5 years appears more of a psychological comfort blanket to aid sleeping at night rather than truly a safe port in a storm.

Anyway, I digress.

Realistically I only want to hold 3-5 years so how can I make that work. 

My main point is that I often read things like 'take from the equities pot in scenario A and cash pot in scenario B'.

Why not do both?

For argument sake let's say a 4% withdraw figure is needed.

Review how your portfolio has performed over the year. If it has returned 4% or more than crack on and take your 4% from the equities.
However if has underperformed then instead of taking your initial 4% from the cash buffer only take the difference.

Example

Portfolio of £1m
£40k per annum drawdown needed.
Equities £880k
Cash £120k

10% drop in portfolio leaves £900k 
You still need to withdraw £40k

Instead of taking that from the cash pot you would only take the difference so you needed a 4% return but this year saw you get a -10% return so a 14% shortfall. 

In my scenario you would take that difference our of the cash pot not so £34,400 from equities and £5.6k from cash 

This allows your cash buffer to go a lot further and you are only selling the same amount of equities that you would if the market had returned you +4% so win win?

Interested in opinions in this. 

Sea_Shell

I see where you're coming from Billy.     

So thinking of it in terms of "units" sold, rather than £££.    Interesting.

So if you would have sold 100 units to provide you with £X, then if the price of those units is down 10%, you only sell 90 units which provides you with less in ££ terms, of which the difference is the amount you draw from cash.


However, if those remaining 90 units then recover their value by the same %, they are still going to be worth less than what 100 units would have been, if they'd been left untouched.

If we said 1 unit = £1, then 100-10% = £90, but then 90+10% = £99.  100+10% = £110


ETA - Sorry, that maths is wrong...I think!!?

If your 100 units had dropped 10% in value to 90p, and so you only sell 90 of them, you'd only realise £81.   So you'd need to pull £19 from cash, if you still needed £100.

So you'd be left with 10 units @ 90p = £9

This is making my brain hurt...but I think this is the heart of what "pound cost ravaging" actually IS.   Your remaining units have to work very hard, to regain the losses from sold units, and a realised loss.

Maybe? 

billy2shots

Sea_Shell said:

I see where you're coming from Billy.     

So thinking of it in terms of "units" sold, rather than £££.    Interesting.

So if you would have sold 100 units to provide you with £X, then if the price of those units is down 10%, you only sell 90 units which provides you with less in ££ terms, of which the difference is the amount you draw from cash.


However, if those remaining 90 units then recover their value by the same %, they are still going to be worth less than what 100 units would have been, if they'd been left untouched.

If we said 1 unit = £1, then 100-10% = £90, but then 90+10% = £99.  100+10% = £110

That's it. So you are not selling any more equities in a dip) correction than you would have normally done meaning you benefit when they start to rise. 

It also stretched the cash buffer out do that intial cash out doesn't have to be so big.