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

zagfles

kinger101 said:

zagfles said:

kinger101 said:

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

I'm not sure it is a mistake, although the example I've given assumes a normal distribution which might well be.  The historic year-on-year data suggests fat tails.

But I disagree with the point you make later than random is not the same as unpredictable.  I think your assumption is that randomness means following a certain distribution. 

I'd say for all practical purposes we can treat stock market returns as being random as while they might be influenced by other events, be it geopolitical (war) or biological (pandemic), these events are also largely unpredictable.  None of us know whether Putin will invade Ukraine, or for that matter could have predicted when a virus might cross species boundaries from bats to humans as mutation itself is a random process.  I'd say the recovery from the Covid dip was pretty random, as most people did not expect it to happen so soon.  

A stong indicator of them not being random (i.e. predictable) is that fund managers would be capable of beating index trackers.  On average, they don't.  
 

You're missing the point. See my later post. The stockmarket not being random doesn't mean it's predictable. Whether fund managers can beat the market depends on whether the market is "efficient", ie whether all known data and probabilty of future events is correctly priced in. If so, nobody can reliably beat the market, they can guess or gamble but are just as likely to lose as win. Or rather, more likely lose once charges are taken into account.

But that's not the point.

Genuine randomness gives predictable results within small margins over the long term. Toss a coin 10,000 times. I can practically guarantee you'll get within 3% of 5,000 heads. Try it with a simple program, or a spreadsheet. Invest £50k in premium bonds. The returns over 5 years for 99% of people will be in a narrow predictable range.

Random individual events give highly predictable outcomes in large numbers. The stock markets moves every second it's open. That's a lot of individual movements, millions per year. If the moves were random, that would make stock market moves over a year or even a month completely predictable within a very small margin of error.

But stockmarket moves are driven by cause and effect, and also arguably by its history. So not random. That doesn't mean it's possible to predict. Quite the opposite, it makes it harder to predict.

I think we're disagreeing only on the definition of random.

Your definition seems to mean the outcome of a single event is unpredictable but can be described in probability terms.  You're saying the stock market isn't like this.  Some argue it is given historic year-on-year data closely resembles a normal distribution.  And people have been using the historic data to predict SWR.

But the word random is used to simply mean unpredictable or haphazard, and if people use that word that way, the meaning does become valid.

Either way, I think most people do tend to make some assumption that the markets are following the statistical definition of random over the long term (i.e. if a data point = 1 year, not 1 trade or one month).  Otherwise why model anything based on historic data?  Or use the term "reversion to the mean".

Yes agreed it's about the definition. I think the real practical difference is whether you believe using a "monte carlo" style simulation is valid or not. Random walk theory would suggest it is valid, ie history plays no part, whereas analyses based on actual historic sequences of returns would suggest history does play a part.

I think there's a contraction in assuming random walk is correct ie what happened in the past doesn't matter, while as the same time assuming, as you must for any analysis, an "expected return" and a standard deviation, where the expected return and standard deviations are based on what happened in the past!

If you think history plays no part, then you can't have an expected return nor a standard deviation unless you have something to base those on. For instance with the coin or a roulette table, the physical characteristics will define the probability of getting heads or the number 19, so you have something solid to base expected returns on. History is irrelavent, it can't be relavent. But with the stock market, what is there to base expected return and standard deviation on apart from history?

pip895

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.

Sorry I'm cutting across current discussion and going back to the original points in the original thread.

My plan is to simply use rebalancing.  My drawdown comes out of cash held in my Drawdown account anyway, which starts the year at a level sufficient for about 18m of cash drawdown.  The rest of the 40% non equity portion is in a mix of bond funds, gold and "wealth preservation type funds" some at least of which, I would hope to remain intact, or even rise in the event of an equity meltdown.  After a year I would rebalance to replenish the cash and rebalance the equity.  This would mean selling things that had done best and purchasing some of what had done worst.

In a very simplified example, a portfolio consisting of 60k equity 40k non equity (including cash) with a 5k drawdown would after one year and a 50% drop in equity, be down to 30k Equity and 35k Non equity so 65k in total (assuming the unlikely scenario that the only drop in that side of the portfolio was due to drawdown).

Rebalancing in March/April would sell (Bonds/Gold etc.) both to replenish the 18months of cash reserves and to top up the equity to 60% of the portfolio. So I would start the new year with 39k of equity and 26k of non equity.  If there was no further drop in subsequent years, then the cash reserves would be topped up by selling both equity and non equity funds in proportion.  

There are two caveats to this basic strategy. 1. would I really wait a year before rebalancing - I suspect in practice I would move sooner perhaps after a 25-30% drop??  2. After a drop of 50% I think I might reasonably expect better returns in future and might move my portfolio into a more aggressive position perhaps moving from 60:40 to 75:25 or even 80:20, which in the example above would be 52k equity and only 13k non equity. 

Currently I do treat my SIPP in isolation keeping a cash float in the SIPP/Drawdown account.  I guess if inflation remained high and interest rates picked up I might have to reappraise that, as cash doesn't earn in my SIPP, but missing out on 0.5% or so on my cash balance is neither here or there.  In a prolonged downturn I would probably reduce my withdrawal rate - and I certainly would try and avoid inflation increases, but it would be mainly because the spectre of the LTA  would be receding into the distance and funds would then be better taken from elsewhere. 

Thrugelmir

pip895 said:

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.

In a very simplified example, a portfolio consisting of 60k equity 40k non equity (including cash) with a 5k drawdown would after one year and a 50% drop in equity, be down to 30k Equity and 35k Non equity so 65k in total (assuming the unlikely scenario that the only drop in that side of the portfolio was due to drawdown).

You are overlooking the current correlation between equities and bonds. Both will be impacted by rising interest rates. There's few refuge shelters to be found now. Those that are available have already been repriced. 

pip895

Thrugelmir said:

pip895 said:

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.

In a very simplified example, a portfolio consisting of 60k equity 40k non equity (including cash) with a 5k drawdown would after one year and a 50% drop in equity, be down to 30k Equity and 35k Non equity so 65k in total (assuming the unlikely scenario that the only drop in that side of the portfolio was due to drawdown).

You are overlooking the current correlation between equities and bonds. Both will be impacted by rising interest rates. There's few refuge shelters to be found now. Those that are available have already been repriced. 

I have perhaps over simplified things to make a point but in a well balanced portfolio you will have things that are more resilient particularly but not exclusively in the non equity part of your portfolio.  If we take the last three months while a global tracker is down 6%, gold has hardly moved, my property fund is actualy up 10% and PNL my largest wealth preservation play is down only 2%.  In any correction there is usually something that goes up or stays unchanged.  If you think about it (globally) the money has to go somewhere.  Rebalancing together with a good cash float gives you the tools needed to navigate drawdown in most situations.

michaels

pip895 said:

Thrugelmir said:

pip895 said:

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.

In a very simplified example, a portfolio consisting of 60k equity 40k non equity (including cash) with a 5k drawdown would after one year and a 50% drop in equity, be down to 30k Equity and 35k Non equity so 65k in total (assuming the unlikely scenario that the only drop in that side of the portfolio was due to drawdown).

You are overlooking the current correlation between equities and bonds. Both will be impacted by rising interest rates. There's few refuge shelters to be found now. Those that are available have already been repriced. 

I have perhaps over simplified things to make a point but in a well balanced portfolio you will have things that are more resilient particularly but not exclusively in the non equity part of your portfolio.  If we take the last three months while a global tracker is down 6%, gold has hardly moved, my property fund is actualy up 10% and PNL my largest wealth preservation play is down only 2%.  In any correction there is usually something that goes up or stays unchanged.  If you think about it (globally) the money has to go somewhere.  Rebalancing together with a good cash float gives you the tools needed to navigate drawdown in most situations.

Is this really true?  As an example, if we all suddenly decide that Facebook (or Meta) shares are now worth 30% less than they were a week ago, all shareholders could become poorer in asset terms without a single share changing hands (well perhaps one share to set the new price) or money being diverted to a different asset.

Thrugelmir

pip895 said:

Thrugelmir said:

pip895 said:

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.

In a very simplified example, a portfolio consisting of 60k equity 40k non equity (including cash) with a 5k drawdown would after one year and a 50% drop in equity, be down to 30k Equity and 35k Non equity so 65k in total (assuming the unlikely scenario that the only drop in that side of the portfolio was due to drawdown).

You are overlooking the current correlation between equities and bonds. Both will be impacted by rising interest rates. There's few refuge shelters to be found now. Those that are available have already been repriced. 

I have perhaps over simplified things to make a point but in a well balanced portfolio you will have things that are more resilient particularly but not exclusively in the non equity part of your portfolio.  If we take the last three months while a global tracker is down 6%, gold has hardly moved, my property fund is actualy up 10% and PNL my largest wealth preservation play is down only 2%.  In any correction there is usually something that goes up or stays unchanged.  If you think about it (globally) the money has to go somewhere.  Rebalancing together with a good cash float gives you the tools needed to navigate drawdown in most situations.

"Money has to go somewhere". Perhaps to repay debt (i.e. leverage). More debt now than at the time of the GFC. Investment returns may again fall lower than the cost of borrowing. Lots of people favour investing over paying down their mortgages in the UK (over the past few years).  Every trade eventually ends and a new cycle begins. 

Sea_Shell

So folks, have recent developments changed anyone's mind as to how they are drawing down from their portfolio?

DairyQueen

Sea_Shell said:

So folks, have recent developments changed anyone's mind as to how they are drawing down from their portfolio?

Not really.
We are due to begin drawdown in April. I finished positioning the portfolios just before Covid raised its ugly head. We are front loading drawdown and, since beginning of 2020,  have been holding sufficient wrapped cash to meet our income needs until 2025. Being able to sleep soundly now has been worth the inflation hit on the cash.

Higher than expected inflation and the freeze on tax allowance thresholds has squeezed our income. We intend drawing to max BRT threshold (OH), and tax free threshold (me) so the freeze has halted inflationary increases on the drawdown element of our income until 2026. 

I hope that the markets settle a bit before April as recent volatility makes rebalancing difficult. Sticking with the plan isn't always easy.

The biggest impact on our finances has been the extortionate increase in construction costs. A building project that we initiated a year ago is costing double the original estimate. What with that, the pandemic and the squeeze on our income, retirement isn't exactly going to plan. The big bucket-list holiday that Mr DQ planned to kick-off his retirement is definitely off for the foreseeable.

Having said that, what do I have to worry about? I didn't wake up in the Ukraine yesterday morning. Poor guys.

Time4T_Accounts

Agree with DQ about not being in Ukraine.  On the back of strong growth, I topped up my cash reserves last summer, so I currently have 3.5 years’ worth of living costs. I get to SP age in 2 years.  Happy to take an inflation hit to avoid selling at a volatile time.

NedS

I'm a currently rare breed of income investor in my SIPP, so I will be drawing the income it generates in retirement (current predicted income of £13,100 this year). As long as I have sufficient income to fully utilise my personal tax allowance, I'm happy. For now, all income reinvested as I'm still a couple years away from pulling the trigger. As such, short term market volatility mean little to me unless dividend payments are affected.