Would this strategy of 100% equities work?

Euro_Skank · 12 November at 12:11PM

What if I had 100% equities (in index funds) and a cash buffer to pull from for the average bear market of approx. 22 months of living expenses. Plus, say, 22 x £1,000 to buy the dip?

I think I'm getting close to retirement and I am mostly I equities with hardly any bonds which I'm told is ill-advised.

tacpot12 · 12 November at 12:23PM

It could work. In theory, with 100% in equities, your absolute return will be greater than a portfolio with some bonds or other assets in it.

In my experience though, the alternative of having a mixture of assets (that are counter-cyclical can also work, so that when equities are down, bonds are/might be up).

Having a large cash buffer means that you are missing out on some returns, but with the 100% equities strategy, you absolutely have to have a large cash buffer. There is also the risk that the buffer isn't big enough - but again, in my experience, stock markets have generally recovered within 22 months.

Another strategy to consider is having some income producing equities/funds for your monthly expenditure, and having the rest of the portfolio in growth equities. That was my strategy at the start of my retirement, but I've moved my portfolio more towards income now, and will move some of it back towards growth when I reach my state retirement age (the state pension means I need less income from my retirement portfolio).

eskbanker · 12 November at 12:26PM

Euro_Skank said:

What if I had 100% equities (in index funds) and a cash buffer to pull from for the average bear market of approx. 22 months of living expenses. Plus, say, 22 x £1,000 to buy the dip?
I think I'm getting close to retirement and I am mostly I equities with hardly any bonds which I'm told is ill-advised.

Relying solely on average durations of (recovery from) bear markets would be 'courageous', as Sir Humphrey would have said, but difficult to advise without more detail of your financial circumstances.....

InvesterJones · 12 November at 12:43PM

Without a crystal ball we can only judge if it would work after the event sadly

But rather than going all out for maximum return, have you tried modelling how much return you actually need, and then trying to meet that at the minimum risk? You can run monte carlo simulations for different asset mixes, inflation rates and drawdown to see what the chances are of running out in a given timeframe. Pensioncraft members have access to some tools for this, and there's a free version at portfoliovisualizer.com

masonic · 12 November at 5:36PM

What percentage of your pot does your annual living expenses make up?

TheTelltaleChart · 12 November at 5:40PM

The strategy needs to be a bit more precise. What precisely are your rules for when you take spending from the cash buffer vs when you take them from equities, and when you buy the dip vs when you replenish the cash buffer?

A cliff-edge approach doesn't make sense. IOW, your rules shouldn't say that, under certain conditions, you keep reducing cash (to fund spending + "buy the dip") indefinitely, so if you run out of cash, oopsie!

You can have a target amount of cash to hold based on either how many months' spending it covers, or as a percentage of the whole portfolio. (And, to be pedantic, you're not really 100% equities if you have any target amount of cash.) E.g. I have a target of 5% of my portfolio in cash, but I chose that partly because it's approximately 2 years' spending.

Your rules should also be explicit about what happens to investment income by default, i.e. is it reinvested (e.g. by holding accumulation units) or is it added to cash — that is, until such time as your rules say you should buy/sell investments.

dunstonh · 12 November at 6:03PM

Euro_Skank said:

What if I had 100% equities (in index funds) and a cash buffer to pull from for the average bear market of approx. 22 months of living expenses. Plus, say, 22 x £1,000 to buy the dip?
I think I'm getting close to retirement and I am mostly I equities with hardly any bonds which I'm told is ill-advised.

It could do. It may not.

Income strategies may well work if you go by the average. Or even if you go to 95% of normal market activity. It's the 5% unusual activity that does the damage.

For example, the decade between March 1999 and February 2009, where 100% equities (market cap) lost on average 1% a year.

You don't state what other savings etc you would have to fall back on. But let's assume little or nothing, seeing as you didn't include it and are talking 100% equities. Over that 10-year period, you could have run out of money by being 100% equities.

Why take the risk?
The median cumulative 10-year return is 163% for 100% equities. It is 123% for 60% equities.
However, the worst is -9% vs 26% respectively.

If you have a larger cash buffer then you don't have 100% equities. And without knowing the size of the pot, its harder to say.
£100,000 in 100% equities drawing £1k a month is a recepie for disaster. £1 million drawing £1k month is not as you are drawing less than the yield.

DRS1 · 12 November at 8:37PM

May I ask what you are going to live on once you retire?
Will you immediately start to draw on the 22 month living expense pot? Or are you keeping that in reserve for when the market crashes?
If you keep it in reserve can you live off the income from the equities? Or are you going to be selling some of them as you go?
What you describe feels like it is partly a plan for accumulating rather than a plan for drawdown.
I think some people in drawdown divide their assets into three pots: short medium and long term. They put the equities into the long term pot and they put cash into the short term pot. I could be wrong about this but I think short term may be as long as 5 years. The medium term bit might go into things like bonds or gilts which can be used to replenish the short term pot. It is not something I do myself but it seems like a good idea..