Selling drawdown funds

mrichard69

I have an AJBell  balanced funds portfolio. Seven funds each with a different percentage of my SIPP. I want to start taking a monthly drawdown but have no idea of the best strategy to sell across these funds.  is better to sell from high performers or low? Is it better to just divide the drawdown amount by 7 and take an equal amount from each fund?  I've had the portfolio for about a year so it needs rebalancing by now.  Any ideas welcome for consideration.  

Notepad_Phil

Unfortunately there is no one answer that is guaranteed to be better as no one knows what the future performance of the funds will be.

Personally I'd rather have just the one fund (such as something like VLS60) than the 7 funds that AJ Bell seems to have created for you that you then have to manage, but if you want to keep the 7 then as a first step I'd look to see what needed to be done to make the funds equivalent to the percentages if you bought a new AJ Bell portfolio now.

If you're handy with spreadsheets then you could probably knock something up in not too long a time that would take into account the current and desired percentages along with the drawdown amount.
 

Do whatever buying and selling of funds you need to do to get back to the 'ideal' portfolio and then If you're selling monthly (as opposed to selling to raise the full years amount) I'd take out the amount proportionally to the percentage of funds in the portfolio. E.g. if one fund is 50% of the portfolio then 50% of the drawdown comes from that fund.

Prism

The simple option is probably to withdraw what you need for the next year, or at least put it into cash, and then rebalance back to your target allocations. I wouldn't want to be making those decisions every month, although its possible.

dunstonh

I want to start taking a monthly drawdown but have no idea of the best strategy to sell across these funds.

How much cash float are you carrying in the pension?    opinions vary on what is best but 24-36 months worth is a popular range.

is better to sell from high performers or low?

When you do need to sell units, you would use the sale to rebalance your holdings to your current target weightings suitable for your investment strategy.      

 Is it better to just divide the drawdown amount by 7 and take an equal amount from each fund?

No as that would unbalance your portfolio.

I've had the portfolio for about a year so it needs rebalancing by now.  

The methods you are proposing are not going to rebalance your portfolio.    

Linton

I agree with Prism.  Rather than have these decisions to make every month just draw down once a year, perhaps at the end of the year of the tax year.  Leave enough cash in the pension account to pay fees and you can then ignore your investments for 11 months.

gm0

Novice DIY drawdown perspective here.  Worked example. 

The way I look at it is this.  You choose a long term asset allocation suitable for deaccumulation which may or may not be the same as the one you saved up in. 

This allocation was likely chosen to reflect your 30-40 year retirement plan - pot size - risk - desired WR, risk tolerance of volatility.  And that portfolio design *can* change - but if it does so not quickly if it changes  at all.  Perhaps in the very long term with age - some people lower risk later on, others raise it further to the benefit of heirs - so to circumstances or taste - or just a mainstream set and forget middle of the road choice.  If we are swapping allocations every month we are now trading investments in the short term.  So let's ignore reviewing asset allocation design for *annual* check/rebalancing of funds which "implement that plan".  Major changes can impact funds you hold (regulation change can make a choice unavailable for new purchase say as happened with some US denominated and listed options in UK. So you may need to change one fund for another if something like that happens, or there is news on major events and risk - as with the Woodford private equity saga it can prompt a swap out of a fund on an active managed choice. This last element is probably the hardest to DIY and may influence what you choose to hold and avoid in the first place. Screening investment trusts and reading annual reports etc is a hobby to some but not everybody.

Basic rebalancing annually involves mechanically getting back to the "target" asset allocation by selling higher performers and buying lower performers until back to target %.  It *may* also include setting up next year's wrapped cash in a money market cash fund for the income to draw against to be made available - in this case so that trading is limited to rebalancing and the income for year ahead is buffered inside the wrapper.  That obviously depends on whether you plan to hold cash at all. 
And the amount may be n months (n=12/18/24 whatever you choose) based on the inflated amount (% you chose CPI ?) of the initial year 1 WR amount you set and the buffering you have in your overall thinking.  How your platform "does" monthly income also impacts this - some take cash fund first, others largest holding, others smear across all funds.  Some offer all, some a subset.

The performance of a rebalanced vs a not-rebalanced portfolio depends upon what the market does.  Oscillate while flat, big bear, big bull etc. And you will encounter some of each over 30-40 years but can't know the average balance of that market trend line over 40 years in advance.  Rebalancing is therefore a speculative received wisdom with some backtesting behind it and the (small) possible difference between once a year and slightly more often can be investigated (ERN has a piece on this very thing).  Once a year when resetting income seems convenient to many. 

I have chosen drawdown approaches where rebalancing was done annually as part of the backtesting of their probable efficacy so it's arbitrary and likely perilous to "change one thing" and not do it. Only in the sense that it invalidates the testing done and the confidence that gave. I can't know if rebalancing my selection or not doing so will in fact be better over this particular sequence.  It's still a probabilistic punt.  But not quite a 50:50 one.

One nuance to this is that different access methods to harvest income from a DC pot make different assumptions on what asset class - equities, bonds, performers etc. is sold for income and what rules about the state of markets (if any) apply. So that part of calculating the rebalancing trades can vary also. 

Thrugelmir

mrichard69 said:

I have an AJBell  balanced funds portfolio. Seven funds each with a different percentage of my SIPP.

Did you set this up yourself? 

bostonerimus

I would take dividends and interest payments from your investments. Then sell enough to fulfill your income requirement once, or at most twice a year, to rebalance your portfolio.

mrichard69

@Thrugelmir - No I didn't.  It's a ready made portfolio that AJ Bell sell as 'balanced'

Audaxer

mrichard69 said:

@Thrugelmir - No I didn't.  It's a ready made portfolio that AJ Bell sell as 'balanced'

I see the portfolio on the AJ Bell site. It is all ACC funds so if it was me I would sell once a year to top up a cash fund with a year's income, and at the same time rebalance back to the original percentages. It costs £1.50 for each trade so a maximum of 7 trades, one for each fund, would only cost £10.50 once a year if you did it that way. 

Thrugelmir

mrichard69 said:

@Thrugelmir - No I didn't.  It's a ready made portfolio that AJ Bell sell as 'balanced'

Has AJ Bell revised their % allocation to the individual funds since you invested?