Merry Correction Day

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  • Thrugelmir
    Thrugelmir Posts: 89,546
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    Prism wrote: »
    Nothing is perfect but hopefully the chances of a better retirement will be higher than using a fixed withdrawal rate or just doing by guesswork. Until a better idea comes out its the one I am aiming for

    The original studies use US Treasuries as the bond proxy. Given UK Gilts yield considerably less at the current time, not even covering inflation. What bonds are you proposing to hold that provide 100% guarantee of no default. The equity portion of your portfolio is going to have to do some heavy lifting to compensate.
  • jamesd
    jamesd Posts: 26,103
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    Thrugelmir wrote: »
    The original studies use US Treasuries as the bond proxy. Given UK Gilts yield considerably less at the current time, not even covering inflation. What bonds are you proposing to hold that provide 100% guarantee of no default. The equity portion of your portfolio is going to have to do some heavy lifting to compensate.
    The original studies include times of low bond yields and times of high inflation.
  • jamesd
    jamesd Posts: 26,103
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    Audaxer wrote: »
    it says later in the page that even compounded real returns (taking inflation into account) of below about 3% over a decade are still in the 4% to 5% SWR range. That seems a really high SWR for a low growth, so I don't understand how that is calculated?
    SWR is the highest rate for the rules used that doesn't run out of capital. So there is income draining capital built in, not drawing only investment returns and leaving capital intact.
    Audaxer wrote: »
    I would have thought safer not to draw anything in a loss year, especially a crash year?
    You have to live on something. Selling equities would be a bad move but you have bonds, cash and investment income or could work. So you might:

    1. have a year in cash savings
    2. use income versions of funds instead of accumulation and top up savings from dividends and interest
    3. sell bonds
    4. use Guyton's sequence of return risk reduction to cut equity percentage when prospects are worst
    5. Use the Guyton-Klinger rules that do 2 and 3, sell equities when values are high, skip inflation increases and maybe cut income if needed
    6. remember that it's already allowed for in the safe withdrawal rate
    Audaxer wrote: »
    It goes on to say that bad decades are the real problem rather than a couple of bad years
    And that's moderately predictable based on the cyclically adjusted price/earnings ratio. So we know that US safe withdrawal rates are still near to the bottom end of the range. But someone who uses Guyton's approach to reduce equity holdings and later switch back into equities can expect to do better.
  • Audaxer
    Audaxer Posts: 3,506
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    jamesd wrote: »
    You have to live on something. Selling equities would be a bad move but you have bonds, cash and investment income or could work. So you might:

    1. have a year in cash savings
    Thanks jamesd, I know I am probably too cautious but I'd always want at least a few years cash savings as a buffer.
    2. use income versions of funds instead of accumulation and top up savings from dividends and interest
    I have a portfolio of good income equity funds and strategic bond funds from which I will draw dividends. Hopefully dividends on these funds will be less volatile than capital values in markets crashes?
    3. sell bonds
    I also hold Vanguard LifeStrategy funds. I like the simplicity of the funds, the fact that they are low cost, globally diversified and have automatic rebalancing, but for the purpose of selling bonds alone in an equity crash, I wonder if it would be better to hold separate global equity and bond funds?
  • Alexland
    Alexland Posts: 9,653
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    Audaxer wrote: »
    I also hold Vanguard LifeStrategy funds. I like the simplicity of the funds, the fact that they are low cost, globally diversified and have automatic rebalancing, but for the purpose of selling bonds alone in an equity crash, I wonder if it would be better to hold separate global equity and bond funds?

    In an equity crash the fixed allocation fund manager would be selling the increasingly valuable bonds in order to buy more lower cost equities. However yes if you were selling down fund units you would be selling both bonds and some of the newly purchased equities.

    For those that might want to take further advantage of the more attractive equity prices to increase their exposure then mixed asset funds are inflexible to changes in asset allocation. I run my workplace pension as a 2 fund portfolio of equities and bonds to enable me to make changes without many units having time out the market.

    Given the partial recovery I am increasing bonds 5% to rebalance to an overall 80/20 allocation next week.

    Alex
  • Thrugelmir
    Thrugelmir Posts: 89,546
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    Alexland wrote: »
    In an equity crash the fixed allocation fund manager would be selling the increasingly valuable bonds in order to buy more lower cost equities.

    With equities and bonds highly correlated at the current time. Why are only equities going to be impacted by whatever news causes a major market down pricing movement. Many bonds are trading at over nominal par value. Might not as be as valuable as you are suggesting. QE has changed the playing field somewhat. In the chase for higher yields by investors.
  • Alexland
    Alexland Posts: 9,653
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    Thrugelmir wrote: »
    With equities and bonds highly correlated at the current time.

    Maybe when investing globally because of exchange rate movements but a quick check of a couple of UK domestic investments suggests the inverse correlation and protection is still just about working.

    The VMID ftse250 ETF is down 9.07% over the past 6 months but VGOV UK gilts ETF is only down 0.04%. Yet over the past month VMID is up 4.9% and VGOV is down 1.13%.

    Alex
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