Full Details of Fund holding and charges

JohnWinder

Great question. You wouldn’t because: it can be cheaper to buy a stock fund and a bond fund; you can be more picky about which bonds you hold, eg inflation linked; you can’t sell just some bonds or just some stocks; such funds commonly have a home country bias; you can’t pick and choose your currency hedging approach; you’re stuck with one fund provider whose computers might go down for a week; they change their investing approach without your permission or desire (going ESG is fashionable now).  But none of those need be compelling reasons.
You would do what you asked because: it reduces the chances you fiddle with the mix, trade unnecessarily (see a current thread on VLS60) to your detriment (read ‘mind the gap’ research); you won’t be so startled when equities drop 50% and bonds don’t move, because your 50/50 fund is only down 25% unlike an equity fund would be down 50%; the grey beards and wise heads observe that as investors become more sophisticated (maybe just older) they move towards simplification (Ferri calls it the last stage of the education of an index investor - embracing simplicity); the fund does all the rebalancing for you. But none of those are necessary for some people.
You’ll put your own weights of importance on those and other considerations as you read more. Take your time, get it right; not that it will ever be right, but at least not open to repeated changing if little bits of new information come along.

Linton

Pat38493 said:

JohnWinder said:

Yes, it can be hard to write clearly, succinctly, and so say all of us.

‘Rather than just buy a global tracker and see what happens a better approach in my view is to estimate how much money you will need at what point in the future to pay for this.’

I know that’s not a suggestion that folk buying global trackers are buying global trackers and just seeing what happens, rather than estimating future spending needs, monitoring progress towards that, saving more if necessary or planning to work longer if needed or planning an economy class future instead of the business class one. So we can leave that alone I think.

This seems to be partly the gist of what I read so far in the Tim Hale book - what I am now wondering is, why wouldn't I just put all my money in a single global highly diversified tracker with the mix of equities and bonds that matches my investment strategy?  He seems to be suggesting that this has just as good a chance, if not better, to deliver my objectives than spending weeks and months trying to identify a bunch of different funds to invest in.

Of course it almost goes without saying that I should invest enough into the fund to meet my long term (in this case retirement) objectives, and check this against some reasonable best and worst case assumptiuons.

The main problem I think is that index investing with a bit of bonds to reduce the risk of panicking in a crash is fine for very long term, say 20 years. investing.  It requires minimal effort and relatively short term movements like a 5 year down turn dont really matter.

Under other circumstances such as approaching retirement without a good DB pension the situation is very different.  Now you are really dependent on your investments.  The short/medium term does matter and the long term becomes steadily less important.  You have various options such as keeping to your VLS60 and adjusting your spending in the short to medium term or changing your strategy to provide a more stable financial environment. That is your choice.

If you would prefer to keep a more stable environment  and do not want to cancel your long planned world cruise or to check the stock market before ordering your regular box of fine wines the simple VLS60 approach does not work well, particularly as JohnWinder points out on the bond side.  You need other ways of reducing expenditure volatility, if necessary at the cost of reducing long term total return.

Audaxer

Linton said:

Pat38493 said:

JohnWinder said:

Yes, it can be hard to write clearly, succinctly, and so say all of us.

‘Rather than just buy a global tracker and see what happens a better approach in my view is to estimate how much money you will need at what point in the future to pay for this.’

I know that’s not a suggestion that folk buying global trackers are buying global trackers and just seeing what happens, rather than estimating future spending needs, monitoring progress towards that, saving more if necessary or planning to work longer if needed or planning an economy class future instead of the business class one. So we can leave that alone I think.

This seems to be partly the gist of what I read so far in the Tim Hale book - what I am now wondering is, why wouldn't I just put all my money in a single global highly diversified tracker with the mix of equities and bonds that matches my investment strategy?  He seems to be suggesting that this has just as good a chance, if not better, to deliver my objectives than spending weeks and months trying to identify a bunch of different funds to invest in.

Of course it almost goes without saying that I should invest enough into the fund to meet my long term (in this case retirement) objectives, and check this against some reasonable best and worst case assumptiuons.

Under other circumstances such as approaching retirement without a good DB pension the situation is very different.  Now you are really dependent on your investments.  The short/medium term does matter and the long term becomes steadily less important.  You have various options such as keeping to your VLS60 and adjusting your spending in the short to medium term or changing your strategy to provide a more stable financial environment. That is your choice.

If you would prefer to keep a more stable environment  and do not want to cancel your long planned world cruise or to check the stock market before ordering your regular box of fine wines the simple VLS60 approach does not work well, particularly as JohnWinder points out on the bond side.  You need other ways of reducing expenditure volatility, if necessary at the cost of reducing long term total return.

I agree with all the points above. However I do think a simple VLS60 multi-asset fund could still work to provide a stable increasing income providing you have built up a big enough pot, so that your required withdrawal rate is relatively low. With a low starting withdrawal rate of say 3% or less, I think you could probably safely maintain a steady increasing income, even in loss years without decimating the pot, although I would still want a bit of a cash buffer.

Interested in your views on whether you think the VLS60 solution would work in that scenario.

Linton

Audaxer said:

Linton said:

Pat38493 said:

JohnWinder said:

Yes, it can be hard to write clearly, succinctly, and so say all of us.

‘Rather than just buy a global tracker and see what happens a better approach in my view is to estimate how much money you will need at what point in the future to pay for this.’

I know that’s not a suggestion that folk buying global trackers are buying global trackers and just seeing what happens, rather than estimating future spending needs, monitoring progress towards that, saving more if necessary or planning to work longer if needed or planning an economy class future instead of the business class one. So we can leave that alone I think.

This seems to be partly the gist of what I read so far in the Tim Hale book - what I am now wondering is, why wouldn't I just put all my money in a single global highly diversified tracker with the mix of equities and bonds that matches my investment strategy?  He seems to be suggesting that this has just as good a chance, if not better, to deliver my objectives than spending weeks and months trying to identify a bunch of different funds to invest in.

Of course it almost goes without saying that I should invest enough into the fund to meet my long term (in this case retirement) objectives, and check this against some reasonable best and worst case assumptiuons.

Under other circumstances such as approaching retirement without a good DB pension the situation is very different.  Now you are really dependent on your investments.  The short/medium term does matter and the long term becomes steadily less important.  You have various options such as keeping to your VLS60 and adjusting your spending in the short to medium term or changing your strategy to provide a more stable financial environment. That is your choice.

If you would prefer to keep a more stable environment  and do not want to cancel your long planned world cruise or to check the stock market before ordering your regular box of fine wines the simple VLS60 approach does not work well, particularly as JohnWinder points out on the bond side.  You need other ways of reducing expenditure volatility, if necessary at the cost of reducing long term total return.

I agree with all the points above. However I do think a simple VLS60 multi-asset fund could still work to provide a stable increasing income providing you have built up a big enough pot, so that your required withdrawal rate is relatively low. With a low starting withdrawal rate of say 3% or less, I think you could probably safely maintain a steady increasing income, even in loss years without decimating the pot, although I would still want a bit of a cash buffer.

Interested in your views on whether you think the VLS60 solution would work in that scenario.

Thanks for the question, I think it is more complex than it seems and raises some important issues.  Hence the delay in replying.

Given a sufficiently low drawdown rate cash could provide a steady income increasing with inflation.  A major problem is that we cant definitively bound the drawdown rate because we dont know what the inflation rate will be.  

There are 2 main ways of matching inflation, an inflation linked annuity or long term equities.  If the drawdown rate is too low you would be better off buying the annuity.  I guess 3% could be around that figure.  However there are drawbacks from an annuity in that it is very inflexible.  For instance you would need a separate pot for major one-off expenses, you cannot modify the income if your circumstances change and you would need to make separate provision for extra cash which may be needed near the end of your life either for extra care or for inheritance.

Until recently long term equity was the only practical solution. A major problem with a straight VLS60 solution is flexibility.  The only factor you can change is the drawdown rate.  It really necessitates the use a Guyton-Klinger or similar policy of variable drawdown to deal with major volatility of equity values as there is nothing else you can do. I would rule out this on the basic principle that one should manage ones portfolio to support ones life style, not vice versa.  By the use of a more sophisticated portfolio I believe it should be possible to manage fluctuating asset values reducing their effect with incorporation of lower risk buffers and a strong focus on diversification into the strategy and secondly by adjustment of asset allocations should that really be necessary.

So to answer your question my view on how a low drawdownVLS60 solution would work is that it could work on a loose definition of "work" but would not meet my income objectives and for reasons I have mentioned and others I wont go into here would be rather inefficient.  

Pat38493

By the way if you read the historical analysis on the ERN blogs, it seemed to indicate that an 80% equities fund would provide a higher sustainable withdrawal rate over periods greater than 30 years.

JohnWinder

There are 2 main ways of matching inflation, an inflation linked annuity or long term equities.

I don’t think it’s right to overlook inflation linked government bonds when we’re considering the main ways of matching inflation, particularly as they match it every six months whereas we’ve gone more than a decade in the past when equities failed to match inflation.

‘If the drawdown rate is too low you would be better off buying the annuity.  I guess 3% could be around that figure.’

It might be worth elaborating on that, for clarity. ‘Too low’ for what? If the drawdown rate is around 3%, quite low I’d say, or let’s say 2% which is even lower and therefore bordering on the ‘too low’, then you don’t need an annuity. It is the case that if the drawdown rate is very low you don’t need an annuity, and if the drawdown rate has to be quite high because you don’t have a big fund, then you can’t afford an annuity. An annuity becomes a reasonable option when the drawdown rate is between those two levels.

VLS lacks flexibility as you say. But the 4% rule is based on a VLS-type portfolio that is rebalanced (as VLS is), and we’re read plenty to suggest that if you make it the 3% rule as specified above, then it will see you through 30 years with very little chance of failing (and none if you can do a bit of light touch flexibility in your drawdowns - G-K guard rails aren’t necessary).

‘I would rule out this on the basic principle that one should manage ones portfolio to support ones life style, not vice versa.’ 

Whether you have buckets, some arcane mix of funds, VLS or gold in the freezer section, if a sensibly managed portfolio is not big enough to meet your needs for 30 years you have to change your needs. To suggest you don’t change your needs, but you tweak the portfolio and all will be well can only mean you have enough in the funds, which could well be the case with a VLS only retirement fund. 

By the use of a more sophisticated portfolio I believe it should be possible to manage fluctuating asset values reducing their effect with incorporation of lower risk buffers and a strong focus on diversification into the strategy and secondly by adjustment of asset allocations should that really be necessary.’ 

 No doubt, but why should it inherently give a bigger drawdown or last longer than an equal sized VLS? Let’s see the evidence.

And what are those ‘income objectives’ referred to?

Linton

JohnWinder said:

There are 2 main ways of matching inflation, an inflation linked annuity or long term equities.

1) I don’t think it’s right to overlook inflation linked government bonds when we’re considering the main ways of matching inflation, particularly as they match it every six months whereas we’ve gone more than a decade in the past when equities failed to match inflation.

‘If the drawdown rate is too low you would be better off buying the annuity.  I guess 3% could be around that figure.’

2) It might be worth elaborating on that, for clarity. ‘Too low’ for what? If the drawdown rate is around 3%, quite low I’d say, or let’s say 2% which is even lower and therefore bordering on the ‘too low’, then you don’t need an annuity. It is the case that if the drawdown rate is very low you don’t need an annuity, and if the drawdown rate has to be quite high because you don’t have a big fund, then you can’t afford an annuity. An annuity becomes a reasonable option when the drawdown rate is between those two levels.

VLS lacks flexibility as you say. But the 4% rule is based on a VLS-type portfolio that is rebalanced (as VLS is), and we’re read plenty to suggest that if you make it the 3% rule as specified above, then it will see you through 30 years with very little chance of failing (and none if you can do a bit of light touch flexibility in your drawdowns - G-K guard rails aren’t necessary).

‘I would rule out this on the basic principle that one should manage ones portfolio to support ones life style, not vice versa.’ 

3) Whether you have buckets, some arcane mix of funds, VLS or gold in the freezer section, if a sensibly managed portfolio is not big enough to meet your needs for 30 years you have to change your needs. To suggest you don’t change your needs, but you tweak the portfolio and all will be well can only mean you have enough in the funds, which could well be the case with a VLS only retirement fund. 

By the use of a more sophisticated portfolio I believe it should be possible to manage fluctuating asset values reducing their effect with incorporation of lower risk buffers and a strong focus on diversification into the strategy and secondly by adjustment of asset allocations should that really be necessary.’ 

4) No doubt, but why should it inherently give a bigger drawdown or last longer than an equal sized VLS? Let’s see the evidence.

5) And what are those ‘income objectives’ referred to?

I) IL bonds typically have a low yield. Say expected inflation is 3% and the coupon was 2% giving a total of 5%. lf the market fixed bond rate was 3.5%  the IL bond price would immediate rise to bring the long term expected return much closer to the fixed bond rate.  The main value in an IL bond is the capital value at maturity not the interest which happens to be paid in the meantime.  Hence the interest from IL bonds is likely to be far too low to provide useful ongoing income.

Between launch and maturity the price of an IL bond can be very volatile so taking capital would not safely provide an inflation linked income.

You could in theory set up an IL bond ladder so you always get the capital benefits at maturity.  However the number of available UK IL bonds is limited so there are years in which no IL bonds mature.  Creating a ladder of maturing bonds would be difficult and the management effort significant.  Far easier to buy an annuity. Plus with an annuity once you reach say 80+  you get the significant benefits of other annuitants dying.

2) If your drawdown rate is set to 3% and index linked annuity rates were 3.5% why not buy an annuity?  The inflexibility could be a reason but at some point paying extra for that flexibility would be difficult to justify.

3) Yes your pension pot must be large enough to pay for the income.  You do have the problem that you dont know future inflation  nor how long you will live  so you cant reliably calculate the right size.  Which implies  it would be prudent to make pretty pessimistic assumptions.  Furthermore even if you could calculate the right size you would need to add on an unknown extra to cope with volatility.

4) At least in the UK we have no evidence from actual long term pension drawdown.  Comparatively few people will be in the decumulation phase with a significant but limited pot size and most of those wont have been retired for more than say 10 years.   In any case that evidence would be historical and so subject to the problems of SWR calculation (subject of another posting sometime).

So we are in the very early days and real life experimentation is essential if we are to develop recommendations for future retirees.  I do note that the gurus who provide the simple answers are as far as I know not retired and living off a pension pot themsleves.

5) If your real life objective is what you consider to be a comfortable retirement your income objectives are what income you need from your pension pot at what time.

Perhaps it would be easier to ask one question at a time!

JohnWinder

Most quotations on the internet are wrong. Mark Twain.

Audaxer

Linton said:

JohnWinder said:

There are 2 main ways of matching inflation, an inflation linked annuity or long term equities.

1) I don’t think it’s right to overlook inflation linked government bonds when we’re considering the main ways of matching inflation, particularly as they match it every six months whereas we’ve gone more than a decade in the past when equities failed to match inflation.

‘If the drawdown rate is too low you would be better off buying the annuity.  I guess 3% could be around that figure.’

2) It might be worth elaborating on that, for clarity. ‘Too low’ for what? If the drawdown rate is around 3%, quite low I’d say, or let’s say 2% which is even lower and therefore bordering on the ‘too low’, then you don’t need an annuity. It is the case that if the drawdown rate is very low you don’t need an annuity, and if the drawdown rate has to be quite high because you don’t have a big fund, then you can’t afford an annuity. An annuity becomes a reasonable option when the drawdown rate is between those two levels.

VLS lacks flexibility as you say. But the 4% rule is based on a VLS-type portfolio that is rebalanced (as VLS is), and we’re read plenty to suggest that if you make it the 3% rule as specified above, then it will see you through 30 years with very little chance of failing (and none if you can do a bit of light touch flexibility in your drawdowns - G-K guard rails aren’t necessary).

‘I would rule out this on the basic principle that one should manage ones portfolio to support ones life style, not vice versa.’ 

3) Whether you have buckets, some arcane mix of funds, VLS or gold in the freezer section, if a sensibly managed portfolio is not big enough to meet your needs for 30 years you have to change your needs. To suggest you don’t change your needs, but you tweak the portfolio and all will be well can only mean you have enough in the funds, which could well be the case with a VLS only retirement fund. 

By the use of a more sophisticated portfolio I believe it should be possible to manage fluctuating asset values reducing their effect with incorporation of lower risk buffers and a strong focus on diversification into the strategy and secondly by adjustment of asset allocations should that really be necessary.’ 

4) No doubt, but why should it inherently give a bigger drawdown or last longer than an equal sized VLS? Let’s see the evidence.

5) And what are those ‘income objectives’ referred to?

Yes your pension pot must be large enough to pay for the income.  You do have the problem that you dont know future inflation  nor how long you will live  so you cant reliably calculate the right size.  Which implies  it would be prudent to make pretty pessimistic assumptions.  Furthermore even if you could calculate the right size you would need to add on an unknown extra to cope with volatility.

Thanks for your responses. 

If your pot is large enough and your drawdown rate low enough, then it should cope with inflation-adjusted withdrawals even from a VLS60. Nothing can be guaranteed but even if you increased your withdrawal amount by 10% for inflation this year on a very small initial withdrawal rate of say 2.5%, in my view you would need an extremely bad sequence of returns to run out of money.

Linton

Audaxer said:

Linton said:

JohnWinder said:

There are 2 main ways of matching inflation, an inflation linked annuity or long term equities.

1) I don’t think it’s right to overlook inflation linked government bonds when we’re considering the main ways of matching inflation, particularly as they match it every six months whereas we’ve gone more than a decade in the past when equities failed to match inflation.

‘If the drawdown rate is too low you would be better off buying the annuity.  I guess 3% could be around that figure.’

2) It might be worth elaborating on that, for clarity. ‘Too low’ for what? If the drawdown rate is around 3%, quite low I’d say, or let’s say 2% which is even lower and therefore bordering on the ‘too low’, then you don’t need an annuity. It is the case that if the drawdown rate is very low you don’t need an annuity, and if the drawdown rate has to be quite high because you don’t have a big fund, then you can’t afford an annuity. An annuity becomes a reasonable option when the drawdown rate is between those two levels.

VLS lacks flexibility as you say. But the 4% rule is based on a VLS-type portfolio that is rebalanced (as VLS is), and we’re read plenty to suggest that if you make it the 3% rule as specified above, then it will see you through 30 years with very little chance of failing (and none if you can do a bit of light touch flexibility in your drawdowns - G-K guard rails aren’t necessary).

‘I would rule out this on the basic principle that one should manage ones portfolio to support ones life style, not vice versa.’ 

3) Whether you have buckets, some arcane mix of funds, VLS or gold in the freezer section, if a sensibly managed portfolio is not big enough to meet your needs for 30 years you have to change your needs. To suggest you don’t change your needs, but you tweak the portfolio and all will be well can only mean you have enough in the funds, which could well be the case with a VLS only retirement fund. 

By the use of a more sophisticated portfolio I believe it should be possible to manage fluctuating asset values reducing their effect with incorporation of lower risk buffers and a strong focus on diversification into the strategy and secondly by adjustment of asset allocations should that really be necessary.’ 

4) No doubt, but why should it inherently give a bigger drawdown or last longer than an equal sized VLS? Let’s see the evidence.

5) And what are those ‘income objectives’ referred to?

Yes your pension pot must be large enough to pay for the income.  You do have the problem that you dont know future inflation  nor how long you will live  so you cant reliably calculate the right size.  Which implies  it would be prudent to make pretty pessimistic assumptions.  Furthermore even if you could calculate the right size you would need to add on an unknown extra to cope with volatility.

Thanks for your responses. 

If your pot is large enough and your drawdown rate low enough, then it should cope with inflation-adjusted withdrawals even from a VLS60. Nothing can be guaranteed but even if you increased your withdrawal amount by 10% for inflation this year on a very small initial withdrawal rate of say 2.5%, in my view you would need an extremely bad sequence of returns to run out of money.

Yes, but at that level of drawdwn would you be better off with an index linked annuity?  A single life RPI annuity at 65 is 4.15% according to HL.  So for a £400K pot 2.5% SWR would give you £10K/year.  Or spend £240K on a £10K annuity with zero risk or effort and retain £160K for one-off extravagences, the kids etc etc.