Would this strategy of 100% equities work?

Euro_Skank

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

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

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

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

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

dunstonh

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

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..

Eyeful

1. I suggest that before you retire you look into "sequence of risk".
Watch this it might help.

https://www.youtube.com/watch?v=oyzR7tMmj9o


2. You might find " Income guard rails" of interest as well.

https://www.youtube.com/watch?v=ix0sHlcYtpg

OldScientist

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.

There are the results are a number of numerical tests at https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/ that might form a useful starting point for reading (usefully, the analysis is UK based).

A pithy quote from the article

Clients are less likely to panic-sell in a bear market if they have two years worth of income in cash. So, while cash might not help mitigate sequence risk, it does help with mitigating stupidity risk!

There are other things that might be considered before deciding on asset allocation
1) How reliant is your retirement on portfolio income? For example, if other sources of income (e.g., SP, DB pension, annuity, etc.) cover essential (or 'core') expenditure, then taking more risk with portfolio income might be appropriate.
2) Somewhat linked to the first point, can you be flexible with the withdrawals from the portfolio (in other words, if the portfolio falls by 50%, can you afford to take 50% less in income)?

As for the length of bear markets, https://monevator.com/bear-market-recovery/ is an interesting read - particularly note that real (i.e., inflation linked) recovery times in the UK were as long as 11 years!

Linton

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.

What would you do if your equity fell by 50% in a small number of months? Sell the lot in a panic, cut all income or carry on withdrawing £1K regardless and calmly wait for a recovery, which could take a lot more than 22 months? Those conditions have happened this century.

If your 100% equities are just play money, then fine but if they are essential for your well being for the rest of your life, perhaps another 30-40 years, the strategy is highly risky.

Euro_Skank

​​T​hank you, all, very much. Some very valid points which will give me plenty to think about. I regularly watch James Shack and sometimes Pension Craft, but don't recall seeing those ones - so thanks! 

My portfolio is currently sitting around £675,00 (£200K in ISAs, £170K in a SIPP, the remainder (£305K) is in general investment accounts). My annual living expenses will be around £29K after tax so it's about 4.3%. So my index funds are definitely not play money although I can really live frugally if need be  - not sure my flexibility would be 50% though. I have no debt, no dependents (unless a neighbour's cat counts) and a couple of paid-off flats. 

My strategy would be to take approximately 3.5% during bull markets and then in the event of a market downturn (ie 20% market drop) to start pulling from my cash reserves...topping up the cash pot when the market recovers. Currently I have little desire to save more than about two years' cash for living expenses (that article by The Accumulator nearly made me consider living out of a van).

The first year I plan to cash in an ISA. I may also get a tax refund large enough to enjoy the second year before having to sell off maybe another ISA. 

Therefore, I will certainly research or glady take advice on how to (rapidly) glide path as quickly and as tax efficiently as possible into more bonds. Although when I used Pickafund (thanks to a Pete Matthews' vid) to try and research the best bond fund, its performance looked dismal; from what I could see it had actually lost money every year for the last five years! Feel free to recommend one though. 

Thanks! Sir Humphrey was my favourite character of that show. Fond memories watching it with my dad when I was a kid. 

Happy Friday!