Rebalance and reduce equities?

aroominyork

I am planning an end of tax year rebalance and thinking about the equities/bond mix. Situation is that OH is about to retire with pensions c.£15k pa and I reach state pension in 2028 without plans to stop working before then. We have about £1.5m invested 70%/30%. About 11% of the total is a BBBish corporate bond fund so I should probably consider the portfolio 75/25. Should I reduce the equity allocation by 5-10%?

On top of my salary and OH’s pensions we will draw down max £30k pa, ie capital value stays the same if the fund grows at 2%. (That's probably more than is sensible since our total income at that level would not be sustainable when both retired, but it's a high end figure for scenario planning.)

In theory I am comfortable with this equity/bond allocation. There is about £280k in short/mid term quality bonds; then £190k in the corporate bond fund and the rest in equities. There is enough of a low risk cushion to see us through a few years if there was a double whammy of unexpectedly stopping working during an equity downturn. But I have been DIYing during 5-6 years of a bull (with blips) market and, like many on this forum, have not experienced the psychological hit of a serious bear market.

Could someone please talk some sense to me?

Alistair31

Not really answering your question, and I really hope you don’t take this the wrong way but…working until state pension age, then limiting your spending to £30k/yr to preserve capital, why? 

aroominyork

That is how much we might take from capital while I am still working. When both retired would be closer to 4%.

hallmark

I think the reason you haven't had many replies is it sounds like you have things pretty sorted already and any advice is just as likely to be wrong as correct.

A few random thoughts

I'm not sure how much (if anything) you have in cash or MMF but if you're nervous of a crash having some in an MMF ready to buy in a downturn isn't the worst idea currently IMO, esp at currentl levels.

BBB Corporate debt sounds a bit scary currently, how does the yield compare to slightly safer debt i.e. Govt debt?  I'm basing this on the fact that IIUC a trillion of such debt is due to be rolled over in 2024 at much higher rates.

If you're not sure how you'd cope mentally with a large downturn, you could consider focussing on yield not capital value. Sometimes yield maintains pretty well during big market falls.

As you are firmly in the wealth preservation arena have you considered holding any gold.  I like the description of gold as "the investment you buy as insurance and hope it'll do badly".

TBH though it sounds like you know what you are doing.

Linton

Reducing equity by 5-10% is in my view tweaking rather than making a serious well considered change.  Better I think to decide on your financial management strategy for retirement and allocate assets as required to implement it. If you did not choose your current allocation on this basis how did you end up with it?  Do the factors that led you to do so still apply?

If you have more wealth than you need you have the option to invest the extra in whatever way suits your risk acceptance.  All in equities because short/medium term losses dont matter, all in bonds because you dont need the extra returns that equity may provide so there is no benefit in taking the risk or somewhere in the middle.

aroominyork

hallmark said:

I think the reason you haven't had many replies is it sounds like you have things pretty sorted already and any advice is just as likely to be wrong as correct.

That's a good reason. I thought it might have been my rash...

A few random thoughts

I'm not sure how much (if anything) you have in cash or MMF but if you're nervous of a crash having some in an MMF ready to buy in a downturn isn't the worst idea currently IMO, esp at currentl levels.

Part of the plan is to sell Capital Gearing Trust with much of the proceeds going into MMF and the balance into a global bond index fund. It was less to buy equities in a downturn and more because MMF yields are currently higher than global bonds, but that reeks of timing the bond market and we all know how trying to time the market usually ends up...

BBB Corporate debt sounds a bit scary currently, how does the yield compare to slightly safer debt i.e. Govt debt?  I'm basing this on the fact that IIUC a trillion of such debt is due to be rolled over in 2024 at much higher rates.

Morningstar reports its coupon as 7.35% against a category average of 5.06%. It's Man GLG Sterling Corporate Bond which has topped the tables since it was launched (not only before I bought it!) and I think the manager is excellent (no-one has ever said that before and regretted it...)

If you're not sure how you'd cope mentally with a large downturn, you could consider focussing on yield not capital value. Sometimes yield maintains pretty well during big market falls.

Interesting. I've always focused on capital values but tried to ensure I am not too growth-tilted. Outside of emerging markets my only actively managed funds are a UK smaller companies and Fundsmith, so I own some PSRW (smart beta value) for balance.

As you are firmly in the wealth preservation arena have you considered holding any gold.  I like the description of gold as "the investment you buy as insurance and hope it'll do badly".

It's been in the back of my mind for a few years but I've not acted on it as I don't understand it well enough. The test is "if it crashed would I have known that was a risk I understood and would accept" and I can't say Yes to that.  

TBH though it sounds like you know what you are doing.

Famous last words, but thank you.

Embedded replies.

aroominyork

Linton said:

Reducing equity by 5-10% is in my view tweaking rather than making a serious well considered change.  Better I think to decide on your financial management strategy for retirement and allocate assets as required to implement it. If you did not choose your current allocation on this basis how did you end up with it?  Do the factors that led you to do so still apply?

I have calculated drawdown options for different return rates in some detail, including options for how much far we are comfortable eating into capital. Maybe the tail is wagging the dog in seeking a 'sensible' allocation rather than one that meets specific financial objectives. But I'm not sure what that would look like; what kind of well considered change are you thinking about?

The current allocation was to be equity-heavy (previously 80%+) during acculumation, which I reduced to 70% a few years ago. It was not scientific.

JamesRobinson48 said:

IMHO you are justified in feeling comfortable with the equity/bond allocation. Making the following guessed assumptions: you own your home outright; you also have some occupational pension provision (not included in the £1.5mm); and your equities portfolio is reasonably defensive and diverse.

Yes, we own our home. Occupational pension is only a few £k; I started this job last year and previous pensions have transferred into my SIPP. Yes, reasonably defensive and diverse (though underweight US with other regions a notch or two above global cap weighting - not sure if that makes it more or less diverse!).

Frequentlyhere

"If you have more wealth than you need you have the option to invest the extra in whatever way suits your risk acceptance.  All in equities because short/medium term losses dont matter, all in bonds because you dont need the extra returns that equity may provide so there is no benefit in taking the risk or somewhere in the middle."

@Linton 's eloquent take, is I realise the intelligent and considered way of putting how I feel about this scenario, which is rather more like:

 

Tongue in cheek of course, and meant as a compliment! I think tbh, tweaking or not tweaking will probably make absolutely no difference whatsoever in reality beyond possibly some minor psychological discomfort either way.

If it were me, I'd probably stick with the current allocation. Quite possibly in a year or two you think you'll have made the wrong decision if/when the market dips, and then in 5-7 years you'll think the opposite. 

Side point - may not have felt too bad, but we actually just have had a bear market. After inflation, a global tracker dipped about 25% at one point, and again adjusted for inflation we're only just about now coming back to where we were at all time highs.

Albermarle

Yes, we own our home. Occupational pension is only a few £k; I started this job last year and previous pensions have transferred into my SIPP. Yes, reasonably defensive and diverse (though underweight US with other regions a notch or two above global cap weighting - not sure if that makes it more or less diverse!).

Like all things related to investing, diverse can mean different things to different people.

I think what the comment meant was just that your equity is not in say just a handful of shares , or all in one country/sector.

aroominyork

I realise we have more money than most people on this forum and have had a more comfortable life. In many places I would feel uncomfortable doing what some would see as parading wealth, but I do not feel that when posting on an investment forum. 'Need' is a complex word and I define our need as being to maintain our lifestyle after retirement.

If the bottom line is that this is just tweaking which will make little difference, that in itself will be useful to realise. Just as psychlogy drives the markets, it drives many of our decisions.

Frequentlyhere

aroominyork said:

I realise we have more money than most people on this forum and have had a more comfortable life. In many places I would feel uncomfortable doing what some would see as parading wealth, but I do not feel that when posting on an investment forum. 'Need' is a complex word and I define our need as being to maintain our lifestyle after retirement.

If the bottom line is that this is just tweaking which will make little difference, that in itself will be useful to realise. Just as psychlogy drives the markets, it drives many of our decisions.

Absolutely fair enough. I hope you don't interpret my comment as "you're so loaded, whatever" -  not how it was intended.  It's simply that the percentages/ratios of your scenario mean we're picking over very fine lines of how much you'll be leaving behind in all likelihood.

What I like to do personally is to actually write down the number of the worst case scenario given an investment proposition and see how comfortable i'd feel if that was the reality. That kind of gives me a gut feel of how to go with it.

Just one other thought - if there's 2 of you and you're early 60's, then unless you have reason to suspect otherwise then this portfolio could quite possibly need to last 30+ years to cover both of you. That's a lot of time to ride out bad markets. So i would ask whether it's really the time to tweak, or are you perhaps just reacting to the market feeling high at present?