Market downturn - pause drawdown?

[Deleted User]

In practice, whatever the strategy, most people who depend on the stock market reduce expenditure during bear markets. Its basic human psychology.   

Whether they sell stocks or not is another question and it does depend on the chosen strategy.  Personally I would sell stocks if I needed to bring asset allocation into alignment with my targets. This allows me to keep risk consistent. Right now I don’t need to sell stocks. 

Linton

Deleted_User said:

In practice, whatever the strategy, most people who depend on the stock market reduce expenditure during bear markets. Its basic human psychology.   

Whether they sell stocks or not is another question and it does depend on the chosen strategy.  Personally I would sell stocks if I needed to bring asset allocation into alignment with my targets. This allows me to keep risk consistent. Right now I don’t need to sell stocks. 

Is there any data that says most people reduce expenditure during market crashes.? And if they do is it by design or because of panic?

I have never done so in the past and have no intention of doing so now. This is achieved by ensuring direct dependence on share prices is confined to the long term. All day to day expenditure is covered by guaranteed pensions or by dividends/interest with sufficient cash reserves for large one-off expenses.

Boom and bust on living expenses does not seem a sensible strategy for a low stress retirement. If the variation is much more limited than that does it actually make much difference?

LV_426

dunstonh said:

Billxx said:

dunstonh said:

Billxx said:

Hi,

I take a small monthly drawdown from my private pension.  In the light of the market downturn, is anyone in a similar position considering pausing thier drawdown and relying on their cash reserves?

You haven't mentioned your drawdown strategy.  What is it?

For example, are you yield based, cash float covering x number of years or what?

Without knowing how drawdown strategy it is difficult for anyone to answer.   However, my gut feeling is that there probably isn't a strategy as if there was, you wouldn't need to ask the question as your strategy would have it covered.

If you read my original post I was not looking for specific advice, merely asking what other people are considering.

You have missed the point.   You haven't told us what your strategy is.  So, you are asking what other people are considering, but they will likely be following their chosen strategy.  Which means they don't need to do anything in many cases.

Someone on a yield strategy will do something different to someone that operate a cash float within the pension compared ot someone that operates a cash float outside of the pension, compared to someone that segments their portfolio into timescale segments etc etc.       So, what strategy are you following to meet your requirements?

So let's turn this into a useful discussion about drawdown strategies. What's possible, and how do we design such a strategy? What are the issues and questions I need to be asking? Can I do it myself, or do I need to consult with an IFA?

Prism

There have been many posts on different drawdown strategies that have been tested over various historic and synthetic scenarios. It would have helped focus the discussion somewhat if the OP had mentioned which one they were using, or not. The problem with a generic discussion is that some of these strategies are pretty complex can can't be explained easily in a forum. 

Some examples, just to cover the rebalancing part, are bucket (several of these), Guyton PMR, Prime Harvesting and the standard yearly rebalance. Then you have asset allocation strategies, withdrawal rate calculation strategies.

The simple answer for those that don't want a bunch of maths is to pick an asset allocation and then rebalance it back to the starting point either on a fixed schedule, like once a year, or if it drifts too far.

I have seen nothing this year that should cause a UK investor in drawdown to do anything other than normal withdrawals.

bostonerimus

If we are going to talk about drawdown strategies let's include annuities now that BoE is increasing interest rates as fast as it can. I predict we'll see a massive increase in annuity sales soon.

I looked at several methods early on my path to retirement, but in the end I decided I didn't like 5% or even 1% failure rates coming out of the models and I also hated having to think about things like rebalancing. That's why I use rental income and a DB pension for retirement income and if the rental income ever dries up I'll just replace it by taking dividends.

Kim1965

One of my sipps has a dividend income bias(as im told). Its value is around 135k and it produces reliable average monthly dividends of £600, whats wrong with taking this as income when i retire? That way I dont have to sell the actual asset. 

dunstonh

Kim1965 said:

One of my sipps has a dividend income bias(as im told). Its value is around 135k and it produces reliable average monthly dividends of £600, whats wrong with taking this as income when i retire? That way I dont have to sell the actual asset. 

Yield is a viable strategy (if you are taking less than or equal to the yield).  It has its pros and cons like all strategies but it doesn't require you to switch it off during negative periods.

[Deleted User]

Linton said:

Deleted_User said:

In practice, whatever the strategy, most people who depend on the stock market reduce expenditure during bear markets. Its basic human psychology.   

Whether they sell stocks or not is another question and it does depend on the chosen strategy.  Personally I would sell stocks if I needed to bring asset allocation into alignment with my targets. This allows me to keep risk consistent. Right now I don’t need to sell stocks. 

Is there any data that says most people reduce expenditure during market crashes.? And if they do is it by design or because of panic?

I have never done so in the past and have no intention of doing so now. This is achieved by ensuring direct dependence on share prices is confined to the long term. All day to day expenditure is covered by guaranteed pensions or by dividends/interest with sufficient cash reserves for large one-off expenses.

Boom and bust on living expenses does not seem a sensible strategy for a low stress retirement. If the variation is much more limited than that does it actually make much difference?

I remember reading it but don’t remember where.  

Intuitively this seems logical to me.  Say, a 65 year old has 1M in a balanced portfolio.  Say, it dropped to 300K as a result of a major bear (in real terms).  And stayed there for a year.  I would imagine most people would instinctively reduce expenditure. I certainly would. I have anecdotal evidence from year 2000 retirees in the US.  They felt under pressure for a decade or so and certainly reduced spending. Discretionary expenditure in general would get hammered. You see it in the stock prices by various sectors. There is invariably a feedback cycle during bear markets as people cut down on spending in general.  Which makes recessions deeper. 

Now, if one goes from 20M down to 15 at the age of 85 it might be a different story.