Money market funds

Sunnylifeover50plan

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

BoxerfanUK

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Same here Sunnylife although atm apart from this current years FAD which is cash, all the rest is in Royal London STMMF

Bostonerimus1

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets. So if it is to be done it needs to be done because the money is to be spent soon ie the proceeds of a home sale, or as part of a plan to generate the income you require with a high probability of success. Most people will need growth greater than that provided by a MMF. If you have a pot that is far larger than needed to generate your retirement income then letting it languish in cash and MMF accounts is ok, but for many people it might not be a good strategy.

Sunnylifeover50plan

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets. So if it is to be done it needs to be done because the money is to be spent soon ie the proceeds of a home sale, or as part of a plan to generate the income you require with a high probability of success. Most people will need growth greater than that provided by a MMF. If you have a pot that is far larger than needed to generate your retirement income then letting it languish in cash and MMF accounts is ok, but for many people it might not be a good strategy.

well its my objective that has led to my strategy - "too high to buy" is not the same as reducing volatility risk, at least in my eyes, given the short term timeline of what I'm looking to achieve.

Bostonerimus1

Sunnylifeover50plan said:

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets. So if it is to be done it needs to be done because the money is to be spent soon ie the proceeds of a home sale, or as part of a plan to generate the income you require with a high probability of success. Most people will need growth greater than that provided by a MMF. If you have a pot that is far larger than needed to generate your retirement income then letting it languish in cash and MMF accounts is ok, but for many people it might not be a good strategy.

well its my objective that has led to my strategy - "too high to buy" is not the same as reducing volatility risk, at least in my eyes, given the short term timeline of what I'm looking to achieve.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing. As you say this is a short term tactic I hope you have firm criteria for implementing a more long term strategy. There is ample justification for reducing the volatility of funds that will be required in the short term, but it can hinder growth of long term funds.

Justso65

My current DC pots are just short of my new £600k target.  My latest plan is to pull £16760 from that which would be tax free (so long as I have no other income) and top up from an ISA to meet my requirements for 5 years. So if I could realise around a potential 5% from a STMMF I would be more than happy with the fact that return would more than cover £16760 taken from my pot and it would still be increasing. Even if the STMMF fell to 4% I still cover my needs without eroding it.  I could live with some erosion if the STMMF rates fell further.  5 years down the line I would get a DC pension which would reduce my need to draw from my DC pots and a further 4 years later SP would kick in again reducing my need to draw from my DC pots. So by 67 I would expect to have a significant amount of my £600k, if not more, to use to top up my DC/SP as required.  

Is this a naive plan or does it sound feasible?

Bostonerimus1

Justso65 said:

My current DC pots are just short of my new £600k target.  My latest plan is to pull £16760 from that which would be tax free (so long as I have no other income) and top up from an ISA to meet my requirements for 5 years. So if I could realise around a potential 5% from a STMMF I would be more than happy with the fact that return would more than cover £16760 taken from my pot and it would still be increasing. Even if the STMMF fell to 4% I still cover my needs without eroding it.  I could live with some erosion if the STMMF rates fell further.  5 years down the line I would get a DC pension which would reduce my need to draw from my DC pots and a further 4 years later SP would kick in again reducing my need to draw from my DC pots. So by 67 I would expect to have a significant amount of my £600k, if not more, to use to top up my DC/SP as required.  

Is this a naive plan or does it sound feasible?

You are in an enviable position and seem to have income streams sufficient to meet your needs without overly stressing your DC pension pots. This is once scenario I mentioned where using a MMF for the majority of your DC money will work. However, you could also look at it from another perspective; as you don't really need the DC funds you can take a lot more risk and invest in equities. When you have a large pension pot you have the luxury of choice. Someone with fewer income sources and a lower pension pot won't be able settle for MMF returns over the long term and will need to take a bit more risk to get the growth they need to keep up with inflation.

If you've run the numbers and are happy with your plan then that is the right plan for you...just make sure you include inflation and the possibility of interest rates falling and maybe even the cost of a nursing home.

MK62

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing

The flip side to that though is just blindly throwing money at the stock market.....many have come to regret doing that too. If STMM funds are roughly matching (or bettering) inflation, then personally I don't see a problem, certainly in the short term, especially if capital preservation, rather than potentially maximising returns, is the main aim.

OldScientist

MK62 said:

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing

The flip side to that though is just blindly throwing money at the stock market.....many have come to regret doing that too. If STMM funds are roughly matching (or bettering) inflation, then personally I don't see a problem, certainly in the short term, especially if capital preservation, rather than potentially maximising returns, is the main aim.

In terms of reducing 'potential volatility', there is never an occasion when the stock market is not potentially volatile. While volatility can be measured (e.g., VIX) is cannot be predicted except in very general terms (e.g., the standard deviation of the real annual historical returns of the US stock market is about 18%. Given a mean of about 8.5%, this means that there is about a 30-40% chance of there being a negative real return in the next year (and conversely, about 60-70% chance of a positive return).

Bostonerimus1

MK62 said:

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing

The flip side to that though is just blindly throwing money at the stock market.....many have come to regret doing that too. If STMM funds are roughly matching (or bettering) inflation, then personally I don't see a problem, certainly in the short term, especially if capital preservation, rather than potentially maximising returns, is the main aim.

Agreed, there are many sad examples of poor stock portfolios and poor management. If someone's drawdown is small relative to their pension pot (say < 3%) and the MMF is beating inflation then it's a potential solution. However, any drop in returns or over spending can lead to troubles, just as with a stock portfolio. MMF is not guaranteed to preserve your capital and for many has the risk that inflation will eat away at their pot faster than with a stock portfolio. These are all future possibilities and so you have to be aware of the failure scenarios and make sure those have a low enough probability to let you sleep. For many people the steady return of a MMF will be more likely to fail than a more diverse portfolio with greater volatility. The MMF as a short term place to park money is great, but if it's to avoid volatility it can be dangerous as it invites all the market timing errors people make.

MMF would not have been a large part of the retirement income discussion a couple of years ago because of their poor returns in a similar way to annuities. But both of those are now worthy of consideration as part of a holistic financial plan.