De-investing, when to call it quits?

Sea_Shell

General hypothetical question alert.


We know that the "rule" of investing is to only invest for the longer term, which is usually for a minimum of at least 3-5 yrs.

What about on the way back out?    Does the same rule usually apply?

e.g. you have (had) an investment pot from which you NEEDED, say, £12k pa.    As it gets whittled away (as it's been drawn at an unsustainable rate), at what point do you "cash out" as a rule of thumb?

Once you have only 3-5 yrs cash equivalent worth left? (£36-£60k), or would you just keep going until the bitter end and a zero balance, once you're resigned to the fact that you know it will inevitably run out.   Maybe not today, maybe not tomorrow, but soon!

Would there come a point where an FA would make contact and tell you that you really should cash-out now, or stop making withdrawals?   Or would this be customer lead?


(Please take this at face value, ignore other income, spending, other assets etc, as this is just an example.)

Albermarle

First point is that 3 years is too short for investing. Normally 5 years is stated as the minimum. 7 or 8 years is better, and over 10 years best.

So on to your question. In the absence of, or just ignoring, any cash savings outside the pension, then AIUI the norm would be to always have at least a couple of years in cash (maybe three) within the pot. Then your income can be still be paid, if markets are down, without having to sell investments. The cash is then replenished when the investments pick up again.
If this is done, then you would automatically be in cash only for the last two or three years.

Linton

I cannot see how why you should get to the point when you NEED £12k and are within sight of running out of money but don’t know what to do.

If the need for the £12k is planned to end soon because perhaps some other income stream is coming on line, in which case whatever is left from the money generating the £12k forms part of the pot for the next phase of retirement.

If the need for the £12k is ongoing but you have insufficient funds to provide it the risk of this happening should have been detected say 10 years previously and you should have done something about it then.  For example learn to live within your means.  What you don’t do is to see disaster ahead and carry on regardless.

If you are using an IFA, whether you have sufficient money to finance your life style surely should be a topic for discussion at annual reviews. If the advisor does not mention it the customer should. I don’t think having an IFA means you should take no responsibility for monitoring your finances.

on the topic of the cash reserves I agree with Albermarle, you should always have several years worth of non-guaranteed income held as cash.

Sea_Shell

So basically, in this scenario, the investments should have really been cashed out when the pot reached, say, £60k, not held until the bitter end, hoping for some miraculous recovery? 


Don't worry, this isn't about me!!   I've got my head screwed on a bit better than that. 

Albermarle

Sea_Shell said:

So basically, in this scenario, the investments should have really been cashed out when the pot reached, say, £60k, not held until the bitter end, hoping for some miraculous recovery? 


Don't worry, this isn't about me!!   I've got my head screwed on a bit better than that. 

Or something in between the two extremes. With 5 years to go, there could be an argument for keeping some of it still invested for a while. 

Linton

Sea_Shell said:

So basically, in this scenario, the investments should have really been cashed out when the pot reached, say, £60k, not held until the bitter end, hoping for some miraculous recovery? 


Don't worry, this isn't about me!!   I've got my head screwed on a bit better than that. 

Yes, If not getting the full £12k for the next 5 years is a major problem then having the money in cash now would be sensible.  Especially now that savings interest rates have increased.

EthicsGradient

I think the "at least 5 years" rule is for the total time you've had investments in a particular fund or company, not just the time left - it's to stop you thinking that you can dart in, make a good quick profit (because some people may see "stock market up 20% this year!" and think they are likely to get that in 1 year too), and pull out quickly.

In this scenario, you've been in for some time, and this has already smoothed out the risk of a sudden loss. You are still, on balance, likely to do better in the stock market than in savings accounts, so just carry on withdrawing what you need until it's all gone.

This is "time in the market matters more than timing the market", again; but rather than "put what you can in now, and keep it there for the long haul", it's "you've done the long haul; keep what you can in the market".

(This assumes that your expenses don't become too big a percentage when you've got comparatively little in there - if an IFA was taking a fixed amount each year, I think there should come a time when they say "my fees are too much for you to justify paying me", but I'd hope they'd at least give you the option of the remainder in a global tracker or similar with low charges.)

sevenhills

Linton said:

Yes, If not getting the full £12k for the next 5 years is a major problem then having the money in cash now would be sensible.  Especially now that savings interest rates have increased.

In cash, it would decrease in value by 5% per year.

eskbanker

sevenhills said:

Linton said:

Yes, If not getting the full £12k for the next 5 years is a major problem then having the money in cash now would be sensible.  Especially now that savings interest rates have increased.

In cash, it would decrease in value by 5% per year.

Only if the current differential between savings interest and inflation continues....

dunstonh

We know that the "rule" of investing is to only invest for the longer term, which is usually for a minimum of at least 3-5 yrs.

I know it has been picked up higher up but just to emphasise this, timescale is important.   An economic cycle is around 15 years nowadays.   If you are not prepared to invest for an economic cycle you won't know if you are going to get the good part of it, the average part of it or the horrible part of it.   

Time is not perfect.  For example, 2000-2009 would have seen equities result zero return over that 10 year period.   Whereas investing from 2002 to 2007 would have seen you double your money.   But investing for 2000-2003 would have seen you nearly halve your money.    However, when you start looking at 15+ years, you really are averaging out virtually all ups and downs.  

e.g. you have (had) an investment pot from which you NEEDED, say, £12k pa.    As it gets whittled away (as it's been drawn at an unsustainable rate), at what point do you "cash out" as a rule of thumb?

You are playing an odds game here in.   Most market crashes see loss to recovery take place within 12 months.  The deeper ones see the vast majority less than 3 years.   The extreme ones may take 5 years.

So, on that basis, 3 years cash should be the minimum.   And then segment the remainder to reflect the timescale to when that money would be needed.
e..g. (made up names)
3 years of cash
2 years of risk 1 portfolio
3 years of risk 2 portfolio
7 years of risk 3 portfolio
an excess at risk 4 portfolio

Risk 1 portfolio may have a high ratio of cash and a small ratio of equities.   Risk 2 portfolio may have less cash and more gilts, risk 3 more equities etc.

That is just one method.  It is not the only one but it is an effective one.

Another option may be that you just don't risk it.  And this is something you see on the advice side a lot but not so much on this forum (or other investment forums).   If you have sufficient money to achieve your objectives then stop worrying about trying to get as much as possible and play it safe.

Would there come a point where an FA would make contact and tell you that you really should cash-out now, or stop making withdrawals?   Or would this be customer lead?

An adviser will frequently make the recommendation. An FA probably won't but an IFA would.    I did one yesterday.  78 years old, and I persuaded her to increase her cash savings and start spending the excess she will never need on her family so she can see the enjoyment and enhancements to their lives which she couldn't do if they inherited it after her death.        

Everyone is different and some will invest until death. Others have no need to.

Linton

sevenhills said:

Linton said:

Yes, If not getting the full £12k for the next 5 years is a major problem then having the money in cash now would be sensible.  Especially now that savings interest rates have increased.

In cash, it would decrease in value by 5% per year.

That may be the case. Whether this matters or not depends on the OPs requirements. This has not been stated.  If the requirement is that the money must be inflation linked then there is no way of guaranteeing the payments.  So it’s a judgement call, is the unhappiness of only receiving £12k fixed worth the risk of not even getting that.