Annual Review - Rebalancing and Changes to Investments Concerns

[Deleted User]

I think income versions of funds help UK retirees to automatically manage their drawdown. 

I think the drawdown should be a number based on ones drawdown strategy rather than a completely random figure based on distributions.  We should try to focus on total return. Focusing on “income” often pushes people into high yielding funds which reduces diversification for no benefit.  

[Deleted User]

Well for me I'm down 17% because I bought in dollars and I'll sell in dollars. 

Sure but you are providing the info to someone thinking in pounds and comparing against his losses in pounds. 

Linton

Deleted_User said:

8I think income versions of funds help UK retirees to automatically manage their drawdown. 

I think the drawdown should be a number based on ones drawdown strategy rather than a completely random figure based on distributions.  We should try to focus on total return. Focusing on “income” often pushes people into high yielding funds which reduces diversification for no benefit.  

Is there any point in repeatedly raising your views on taking of income vs selling of funds?

Focussing on total return may also lead to poor investing. It encourages the use of high return /high risk funds with inadequate diversification from over reliance on the tech sector or whatever is in fashion at the time. Even index funds are capable of this error, consider the 2001 crash or recent events.  For more evidence see many of the recent posts on these forums or returning to topic, consider the OPs portfolio.

One does not use a random figure for income distributions any more than taking a random figure based on excess total return. The rational way to provide income from dividends and interest is to first specify the income one needs.  Then set up a diversified portfolio of appropriate size and overall % yield. I find income in £ terms is relatively stable in the medium term with the % income moving inversely with the more volatile capital value. 

Returning to the OPs problems…..

Linton

Another factor in the OPs portfolio’s poor performance seems to be the use of “sustainable” funds. They tend to make greater use of tech and have not been able to benefit from the bonanza for the energy companies.

[Deleted User]

Linton said:

Deleted_User said:

8I think income versions of funds help UK retirees to automatically manage their drawdown. 

I think the drawdown should be a number based on ones drawdown strategy rather than a completely random figure based on distributions.  We should try to focus on total return. Focusing on “income” often pushes people into high yielding funds which reduces diversification for no benefit.  

Is there any point in repeatedly raising your views on taking of income vs selling of funds?

Focussing on total return may also lead to poor investing. It encourages the use of high return /high risk funds with inadequate diversification from over reliance on the tech sector or whatever is in fashion at the time. Even index funds are capable of this error, consider the 2001 crash or recent events.  For more evidence see many of the recent posts on these forums or returning to topic, consider the OPs portfolio.

One does not use a random figure for income distributions any more than taking a random figure based on excess total return. The rational way to provide income from dividends and interest is to first specify the income one needs.  Then set up a diversified portfolio of appropriate size and overall % yield. I find income in £ terms is relatively stable in the medium term with the % income moving inversely with the more volatile capital value. 

Returning to the OPs problems…..

1. Boston raised the “income investing strategy” suggesting that lack of one is a deficiency in the OP’s portfolio. That’s why I “raised my view” that its not.  It pertains to OP. 

2. No, focusing on total return does not lead to picking high growth funds.  A couple of reasons::
- dividends are a random and very poor indicator of value, so low distributions are not a good indication of growth.  In fact, my own portfolio does have a value tilt.   But high dividends can be the opposite of value. Companies often use high dividends to placate frustration in investors when things are going wrong. And they can do it at the cost of maintenance, staff retention or by borrowing. 

- saying “total return” does not exclude distributions. They are a contributor to “total”.  Its just that using them as a criterion in the selection process is counterproductive.  If I said “low dividend funds are the appropriate criterion” then you would have had a point. 

It might be psychologically helpful for some people to select income they need and then pick funds with that kind of distribution but its not rational.  Why? Because unlike the total return strategy it excludes certain industries  and even regions and so reduces diversification.  Some sectors of the market have a standard for high payout. Some corporate structures or tax laws lead to high payouts.  So, one is foregoing “the free lunch” for psychological reasons.

 Now, Boston himself isn’t doing that as far as I know.  He likely has a very low withdrawal rate because he has other income sources so he does not need to use distributions as a “screen”.  But most people, including the OP, need portfolio to generate income higher than average distributions which then forces them to reduce diversification. 

[Deleted User]

Linton said:

Another factor in the OPs portfolio’s poor performance seems to be the use of “sustainable” funds. They tend to make greater use of tech and have not been able to benefit from the bonanza for the energy companies.

Or, as already noted earlier

Deleted_User said:

Its a very active portfolio full of bets. There is also an “ESG”/sustainability tilt.  Did you specifically ask for it?  This is something that reduces diversification and increases your risks.  For example this year oil companies have done great, for obvious reasons, and offset some of the losses in other industries. Weapons companies have done alright too.  ESG avoids both, so hurts your portfolio.  Some falsely believe that they are hurting themselves but are doing good by not buying shares in these companies.  In practice production isn’t impacted by you buying shares in company A. If a lot of people follow ESG, it artificially cheapens shares in certain stocks and increases future returns for people who do buy their shares. 

bostonerimus

The core of my concern is that there hasn't been any thought about income generation whether it's a total return approach or one that is more geared towards dividends and interest. The portfolio is just a risky growth one with a tilt towards Asia. The OP says that the drawdown advice from the advisor so far is "don't take out any money right now". Other than being a conduit to some dubious portfolio generator I don't see the value they add.

GSP

Thank you for all your responses.

I’ll be looking for a new advisor as a fresh start in the coming months as mine will be retiring in a year or so, and I don’t wish to go where he recommends.

It’ll be ‘interesting’ what the new advisor will recommend in the way of investments. I’ll show him the history of the last five years and see what he thinks!

Going forward, that’s all I have pension funds and drawing down on them.
Would I still need an Independent Financial Advisor (which seem to be very thin on the ground in my area), or would a Financial Advisor or other suffice.
Once again, thanks.

bostonerimus

GSP said:

Thank you for all your responses.

I’ll be looking for a new advisor as a fresh start in the coming months as mine will be retiring in a year or so, and I don’t wish to go where he recommends.

It’ll be ‘interesting’ what the new advisor will recommend in the way of investments. I’ll show him the history of the last five years and see what he thinks!

Going forward, that’s all I have pension funds and drawing down on them.
Would I still need an Independent Financial Advisor (which seem to be very thin on the ground in my area), or would a Financial Advisor or other suffice.
Once again, thanks.

I would lean towards an IFA. When you hire someone make sure you understand the services you'll be getting and all the fees involved. You should be getting a portfolio that is appropriate for your drawdown needs and personal circumstances and a clear drawdown strategy that translates into practical advice about how and when to withdraw money. There should be a discussion of all the tools available to meet your income needs and that should involve doing a budget, considering annuities, maybe downsizing when SP will start etc. This is a holistic process, not just printing out 16 funds with various allocations next to them and telling you to get on with it. If someone is taking say 1% of your portfolio every year they need to be actually doing some work.

GSP

bostonerimus said:

GSP said:

Thank you for all your responses.

I’ll be looking for a new advisor as a fresh start in the coming months as mine will be retiring in a year or so, and I don’t wish to go where he recommends.

It’ll be ‘interesting’ what the new advisor will recommend in the way of investments. I’ll show him the history of the last five years and see what he thinks!

Going forward, that’s all I have pension funds and drawing down on them.
Would I still need an Independent Financial Advisor (which seem to be very thin on the ground in my area), or would a Financial Advisor or other suffice.
Once again, thanks.

I would lean towards an IFA. When you hire someone make sure you understand the services you'll be getting and all the fees involved. You should be getting a portfolio that is appropriate for your drawdown needs and personal circumstances and a clear drawdown strategy that translates into practical advice about how and when to withdraw money. There should be a discussion of all the tools available to meet your income needs and that should involve doing a budget, considering annuities, maybe downsizing when SP will start etc. This is a holistic process, not just printing out 16 funds with various allocations next to them and telling you to get on with it. If someone is taking say 1% of your portfolio every year they need to be actually doing some work.

Thanks bostonerimus.
Just have to find a new one now and searches don’t reveal any coming up that live fairly close to me.

From memory five years ago when I started drawing down there wasn’t much discussion about strategies etc. I’ve just gone along with drawing money when I need it, and the advisor rebalancing the portfolio.
I was made aware about drawing down too much and the fund running out, but at my previous review my drawdown’s were sustainable, this review they are not.
One year should not be taken in isolation, but that drop over the last year I am sure has blown a number of planners up in the air currently.

Next time with a new advisor I will certainly question the investments chosen more. How many will this new one choose?