Tim Hale based plan- comments please?

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  • Audaxer
    Audaxer Posts: 3,505
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    Linton wrote: »
    I disagree that 40% is a good allocation for someone retired. If you are retired at say 60 you need to plan for half your money not being used for perhaps 15 years or more. For that timeframe it would be sensible to have a a high equity allocation. For the rest perhaps 40% equity may work out about right. You need the high equity allocation for protection against inflation as well as to maximise your long term income.

    Specifying a particular overall % is difficult as you need to balance a range of objectives. What % you drawdown depends on the importance you place on the different objectives. 4 possible objectives for a retirement portfolio...
    1 - a steady income
    2 - growth to cover future inflation and to supplement your income portfolio if necessary
    3 - a base level of safety for the bad times and protection against the wilder fluctuations
    4 - inheritance for the grieving relatives on your demise

    It would be surprising if a VLS fund just happened to provide the most appropriate portfolio to meet all these objectives to the extent your circumstances required. I couldnt construct a single portfolio to do all these jobs adequately. Having no need for objective 4, I have set up 3 totally separate portfolios each attempting to meet a specific objective.

    The steady income is provided by a globally diversified high yield portfolio, 60% equity 40% bonds and other relatively fixed income, providing around 6% annually. There is a 100% equity growth portfolio that is providing a higher annual return than VLS100. And finally security is provided by a wealth preservation portfolio based on strategic bonds and the specialist wealth preservation funds. High level control can then be exercised by allocation of appropriate %s to each portfolio.

    If you follow this route, the overall % drawdown figure is defined by the allocation which in turn is dependent on the importance you place on each objective. It's not something you can meangfully specify before any analysis.

    Obviously you need a figure for planning purposes. A reasonably safe steady default value would appear to be about 3.5% though that's based on history. Jamesd has advocated up to about 6% adopting a strategy that cuts back on the drawdown during the bad times. What will be safe for the next 30 years, who knows? But the actual implementation of retirement finance is very different to a high level plan.
    Thanks Linton, that sounds a really well thought out strategy. I like the idea of leaving a portfolio to grow untouched, but I personally wouldn't be brave enough to put 100% of it into equities in case there was a big equity crash in the future just at the time I needed to draw from that portfolio. How do you guard against that?

    I'd love to know how you get 6% income from a 60/40 portfolio without high risk to capital?

    I hadn't really heard of wealth preservation funds, but it is something I will look into. If you don’t mind me asking, how many wealth preservation funds and strategic bonds funds do you have in that portfolio?


    One of my reasons for only going for 40% equities is that I was concerned about large market fall just after I transfer in lump sums. As I will have a large cash buffer, I was thinking of investing some more into equities (maybe through a VLS80 or even a VLS100) if/when there is a big fall. That would up my equity allocation and would do even more so when the funds start to rise again, but I would eventually rebalance to my desired level. I know I shouldn't try to time the market, but I'm just a bit wary of investing it all at once. Please let me know if this is a bad strategy.
  • bostonerimus
    bostonerimus Posts: 5,617
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    Audaxer wrote: »
    Thanks Linton, that sounds a really well thought out strategy. I like the idea of leaving a portfolio to grow untouched, but I personally wouldn't be brave enough to put 100% of it into equities in case there was a big equity crash in the future just at the time I needed to draw from that portfolio. How do you guard against that?

    I'd love to know how you get 6% income from a 60/40 portfolio without high risk to capital?

    I hadn't really heard of wealth preservation funds, but it is something I will look into. If you don’t mind me asking, how many wealth preservation funds and strategic bonds funds do you have in that portfolio?


    It's sometimes comforting to use either chronological or asset class buckets, but it's just another way to look at a portfolio. Many people find it simpler to think of the portfolio as a whole, set an appropriate asset allocation and use total return to produce income.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • baj25
    baj25 Posts: 48
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    Thanks again for ongoing comments.
    I've started to feed into the funds I'm more confident about.
    A steer on alternatives to L&G Global 100 for value would be interesting, I wasn't sure about that one from the outset and it seems I'm not alone. And still interested in ideas to look into for bonds or similar.
    Learning all the time which is good.
  • bowlhead99
    bowlhead99 Posts: 12,295
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    The L&G global 100 is not a value fund- it does not in any way attempt to select stocks by value criteria. It is just an 'easy to replicate as a cheap index fund' version of the global 1200, which is itself a cap weighted index of blue chip companies targeted to mirror the regional weights and industry sector allocations of listed companies across developed countries.

    So, not a value play, just extra money going into companies selected on the basis of them being big. If you are using regional equity index trackers anyway, you already have investments in Apple and Alphabet and Exxon and P&G etc which were selected on size criteria regardless of the perceived income, growth or value proposition that they might represent.

    Doubling up on the very biggest simply because they are big enough to be in a "global 100" rather than merely being the major components of a 'global 5000' or whatever you already have across your portfolio, does not make a whole lot of sense. It would arguably make more sense to buy companies that do not get into the global 5000 at all.

    What is it that makes you want "value," and what do you mean by value? Do you mean a company that paid a large amount of dividend income last year relative to its current market price, and which some people believe should be priced higher based on the "value for money" it represents but many people don't because they prefer to instead buy businesses they perceive to have better growth prospects? Or some other criteria? Or just, it's a buzzword you heard so figure you should get some?

    To recommend funds you really need to understand what it is going to do for a person, how is it supposed to meet their needs and goals, by doing what, and why couldn't another fund do it better. Difficult to do that with what you've given us to go on.

    In the so-called "value" space there are mechanical index funds which purport to select appropriate companies based on indexes composed of companies displaying certain suitable metrics and indicators and statistics (eg iShares do an ETF series following the MSCI Value Factor index), or there are fund managers doing their own manual filtering, assessment and acquisition of shares that meet their own criteria.
  • Linton
    Linton Posts: 17,045
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    Audaxer wrote: »
    Thanks Linton, that sounds a really well thought out strategy. I like the idea of leaving a portfolio to grow untouched, but I personally wouldn't be brave enough to put 100% of it into equities in case there was a big equity crash in the future just at the time I needed to draw from that portfolio. How do you guard against that?

    The first line of defence is a significant cash holding, say 10% of my total wealth. Were that to be seriously depleted the Wealth Preservation portfolio is about 25% of the total. So the chances of having to sell equity during a crash is zero, barring a 10 year global economic disaster.

    This means that crashes wouldnt worry me, at least for the first 5 years say.
    I'd love to know how you get 6% income from a 60/40 portfolio without high risk to capital?

    12% Euopean Assets Trust - 5.8%
    11% Schroder Asian Income Maximiser - 6.9%
    11% L&G High Income - 6.3%
    9% Schroder Global real Estate - 3.9% (needs fixing. It was around 6%)
    8% Princess Private Equity - 5%
    7% L&G EM Gov Bond - 5.2%
    6% Legg Mason Income optimiser - 5%
    4% Threadneedle EM bond - 6.2%
    +20 directly held UK shares, pehaps 55% FTSE 100, 45% FTSE250.

    Only natural income (dividends/interest) is taken so capital isnt touched. Some of the funds do pay out most of their gains so they could lose capital. A couple of the share holdings have fallen by the wayside. On the other hand other investments have produced a nice capital return as well as a high dividend/interest. It is expected that overall the income portfolio will need topping up from the growth one very occasionally.

    The overall % yield is a bit under 6% now, perhaps 5.8, thanks to a major rise in capital values over the past year.
    I hadn't really heard of wealth preservation funds, but it is something I will look into. If you don’t mind me asking, how many wealth preservation funds and strategic bonds funds do you have in that portfolio?

    The Wealth Preservation Portfolio has only recently been set up with a substantial transfer from the Growth Portfolio:
    28% Troy Trojan "O"
    28% RIT Capital Partners IT
    22% Jupiter Strategic Bond
    22% Ruffer Investment Company. IT

    There isnt a wide choice of funds suitable for this portfolio.

    One of my reasons for only going for 40% equities is that I was concerned about large market fall just after I transfer in lump sums. As I will have a large cash buffer, I was thinking of investing some more into equities (maybe through a VLS80 or even a VLS100) if/when there is a big fall. That would up my equity allocation and would do even more so when the funds start to rise again, but I would eventually rebalance to my desired level. I know I shouldn't try to time the market, but I'm just a bit wary of investing it all at once. Please let me know if this is a bad strategy.

    If you put all your investments in one portfolio naturally a major fall would be worrying. As my portfolios are split I know that a major fall in the portfolio which holds most of the equity wouldn't have any short or medium term effect so it can be ignored. A large drop in share capital values wouldnt directly have a major immediate effect on dividends, even less on corporate or government bonds and none on cash so the money necessary for daily living wouldnt be at much risk.
  • Audaxer
    Audaxer Posts: 3,505
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    Linton wrote: »
    The first line of defence is a significant cash holding, say 10% of my total wealth. Were that to be seriously depleted the Wealth Preservation portfolio is about 25% of the total. So the chances of having to sell equity during a crash is zero, barring a 10 year global economic disaster.

    This means that crashes wouldnt worry me, at least for the first 5 years say.



    12% Euopean Assets Trust - 5.8%
    11% Schroder Asian Income Maximiser - 6.9%
    11% L&G High Income - 6.3%
    9% Schroder Global real Estate - 3.9% (needs fixing. It was around 6%)
    8% Princess Private Equity - 5%
    7% L&G EM Gov Bond - 5.2%
    6% Legg Mason Income optimiser - 5%
    4% Threadneedle EM bond - 6.2%
    +20 directly held UK shares, pehaps 55% FTSE 100, 45% FTSE250.

    Only natural income (dividends/interest) is taken so capital isnt touched. Some of the funds do pay out most of their gains so they could lose capital. A couple of the share holdings have fallen by the wayside. On the other hand other investments have produced a nice capital return as well as a high dividend/interest. It is expected that overall the income portfolio will need topping up from the growth one very occasionally.

    The overall % yield is a bit under 6% now, perhaps 5.8, thanks to a major rise in capital values over the past year.


    The Wealth Preservation Portfolio has only recently been set up with a substantial transfer from the Growth Portfolio:
    28% Troy Trojan "O"
    28% RIT Capital Partners IT
    22% Jupiter Strategic Bond
    22% Ruffer Investment Company. IT

    There isnt a wide choice of funds suitable for this portfolio.



    If you put all your investments in one portfolio naturally a major fall would be worrying. As my portfolios are split I know that a major fall in the portfolio which holds most of the equity wouldn't have any short or medium term effect so it can be ignored. A large drop in share capital values wouldnt directly have a major immediate effect on dividends, even less on corporate or government bonds and none on cash so the money necessary for daily living wouldnt be at much risk.
    Thanks for your response Linton which is very interesting. I think I'm probably being too cautious.
  • bostonerimus
    bostonerimus Posts: 5,617
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    Linton wrote: »
    If you put all your investments in one portfolio naturally a major fall would be worrying. As my portfolios are split I know that a major fall in the portfolio which holds most of the equity wouldn't have any short or medium term effect so it can be ignored. A large drop in share capital values wouldnt directly have a major immediate effect on dividends, even less on corporate or government bonds and none on cash so the money necessary for daily living wouldnt be at much risk.

    I don't really see the utility of partitioning a portfolio like this.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • bowlhead99
    bowlhead99 Posts: 12,295
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    There can be merit in having a multi-stage waterfall /cascade of portfolios, feeding into the money you are actually spending or drawing out of the overall pot. Both from a practical level and a psychological one.

    Imagine someone has investment assets of £250k and are hoping their portfolio can deliver inflation plus 4% a year; because they need to draw £10k a year (about 4%) to supplement their state pension and get through the year without depleting capital as they look to navigate the next 20 to 45 years from age 65 and still have money left at the end for a few years in a care home. The £250k they accumulated as their retirement fund, in context, represents the accumulation of about 10 years' gross salary from when they were working a £25-30k a year job.

    Perhaps they have their portfolio split 60/40 equities/bonds in index funds, so £150k of the £250k is equities (intended to be the growth engine and provide some natural income towards the 4% target of what they want to draw).

    Then there is a bad year or two on 'the markets' and equities drop 50-55%. So the equities in the portfolio tank by £75-80k-ish. Depending on the underlying drivers of the crash and the state of the markets pre-crash, their bond indexes may not grow significantly to offset those heavy losses in a meaningful way.

    The paper loss they have experienced over that year or two, which might only be a couple of years into retirement, is equal to about three times the annual gross amount they had ever earned as full time salaried employee. For a non-professional investor, they may feel, "ouch". Now they are looking at the next forty years ahead of them with only seven years of their old salary in the bank and not ten. A £10k draw for living costs is now 10/160ths or 10/170ths of the pot instead of 10/250ths. It's not a pleasant place to be, even if the nice people on the internet told them they should just DIY with simple index funds because paying an IFA to properly assess their risk tolerance and educate them about such situations would be a waste of money.

    The person knowing that they might be faced with such a situation and feel that, "aaargh, my £250k mixed asset retirement portfolio has been painfully ravaged by unfriendly markets causing it to drop by over a third" might instead look for something more complex:

    - a bit of the portfolio set up to deliver long term growth (accepting serious short term swings because you'll never be drawing from it to directly pay for anything);

    - a bit of the portfolio delivering income into a cash buffer

    - cash buffer to cover a few years drawdown

    The theory would go, do your spending from the cash buffer (unlikely to run out as it is being fed with new income albeit income that would fluctuate). Periodically top up the income generators or cash buffer when your long-term-growth pot is high, with some sort of a rebalance process. You can then just let it run, without worrying too much about it running out.

    Obviously that's just one way to do it, there are plenty of ways to skin a cat.
    I don't really see the utility of partitioning a portfolio like this.
    It may depend how much money you have to play with.

    For example, in other posts you have mentioned that you're in the fortunate position where your assets are 100x your spending needs (or you said something like you only need to draw 1% for spending each year so the assets overall are rising with the markets).

    So, even if you were 100% equities and the equities crashed by 50%, you still have 50 years spending money and you know that they will recover anyway given enough time because you are not at any risk of depleting the capital with a few years' drawdown while markets are low, and then struggling to recover.

    In any given year it doesn't really matter whether the portfolio generates income, gains or losses as you are only going to pull 1% from it, which will typically be more than covered by growth as the long term average with no risk of ruin. So, in that situation, which bit of the portfolio shall I draw from in a given year? Who cares.

    So, you can just focus on total returns and drawing cash from whatever portfolio component you like from time to time, on a whim, because the draw is relatively inconsequential. However, others who are trying to 'get away with' a higher draw relative to their overall assets may need to think carefully about from where they should take the overall draw. To keep everything clear in their mind, they might decide it is cleaner to have separate pots for separate purposes, rather than everything all just being one big pile of assets that's unlikely to ever expire.
  • TheTracker
    TheTracker Posts: 1,223
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    I don't really see the utility of partitioning a portfolio like this.

    Purely psychological.

    I'd have expended the intellectual effort on bolstering my psychological defences. But if one is unable or unwilling to do this then it seems a fair, even clever, response to structure ones portfolios to soften psychological impact. Of course, one must be careful to not make material changes or you may be introducing a "psychological ongoing charge factor".
  • bowlhead99
    bowlhead99 Posts: 12,295
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    Yes, that 'psychological ongoing charge factor' means you might do something sub optimal (like invest in something more costly, administratively burdensome or with a lower risk/return than you could practically handle) for peace of mind. Some would be happy to pay it.

    Others (and particularly those whose levels of assets provide completely adequate peace of mind) would not. For example Warren Buffet is quite happy to advise his wife not to try to bother doing anything clever with the money he leaves her once he's gone, as he doesn't want her being fleeced by predatory advisors that see her as a cash cow and she does not need to worry about having enough money to get by.
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