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  • FIRST POST
    • sixpence.
    • By sixpence. 9th Sep 19, 4:59 PM
    • 203Posts
    • 38Thanks
    sixpence.
    Question re 700K investment
    • #1
    • 9th Sep 19, 4:59 PM
    Question re 700K investment 9th Sep 19 at 4:59 PM
    Hello Ė I need some guidance and would very much appreciate whatever anyone on here has to say. Iíll try to keep things clear and concise! Would love it people read this and gave their two cents.

    1. I am in the (very) fortunate and lucky position where I am about to be gifted 700 K. I am 30 years old. I already have a VLS (in my ISA) which I invest in for retirement. My mortgage is paid off.

    2. My goal is to set up a form of passive income. I know Iím young, but please donít suggest that I go for growth instead; a steady source of passive income is what Iím after. Not trying to sound shirty, just want to save time

    3. I donít think investing in property is a good idea (although it is what my older brother and sister have decided to do) bc of the economic uncertainty of well... everything. I think it is a good idea to invest in a diverse low risk fund income portfolio. My objective is to get 3-4% income (after charges). Basically Iím looking for the income equivalent of VLS, if there is such a thing!

    4. Iím with Hargreaves Lansdown. They are offering free consultations this month so Iím going to take one with them. Will obviously take it with a pinch of salt. I would also like to consult another IFA. Does anyone have any IFA recommendations? I figure if the stamp duty for a property is 3-4% then there is no harm in speaking to a couple of IFAs, who I think normally charge about 1%.

    5. I donít want to rush into anything. Iím basically treating this as its own job/project. Iím doing a level 4 online investing course (mostly because it was very cheap so I thought I might as well!). Iíve read a few books (like the Intelligent Investor, Rich Dad Poor Dad et cetera) but if anyone has anything else to recommend I would really appreciate it: books, websites, online courses, welcome.

    Thank you so much for reading this. Feel free to respond to anything here really.
Page 3
    • mark88man
    • By mark88man 15th Sep 19, 5:17 PM
    • 4,364 Posts
    • 10,680 Thanks
    mark88man
    plus even if you earn nothing you can still put £2880 into a pension and the government will top it up to £3600 whether or not you earn a penny

    BUT IN ADDITION

    Your tax rebate on money you invest in pension is paid on taxable income, not income you have actually paid £££ tax on. That is if you earn income of just under your allowance then you can pay all that income into a pension and get a 25% top up- which is fine in your case where you have the cash in the bank to do that. So don't dismiss pensions - but whether its ISA, LISA pension or otherwise what is as important is your investment strategy, which as you see depends on your needs, but unless you ill health is worse then you are willing to share its not that different from most people entering pension land.
    Things happen for a reason. Often because we are stupid & make bad decisions.
    Weight/Health - Fluctuating - better than I was worse than I should be
    Mid 19: CC:15K@0% - Car Loan:9K@2.8% - Mort:124K@2.1% = £148K - down £8k year to date
    Decrease in Total Debt 2016:£13.4K 2017:£8.3K 2018:£20K

    • sixpence.
    • By sixpence. 15th Sep 19, 11:40 PM
    • 203 Posts
    • 38 Thanks
    sixpence.
    Holy !!!! man. I will reply to other comments tomorrow but I am opening a SIPP now because I had no idea I could do this without a job. This is so great.
    • Sailtheworld
    • By Sailtheworld 16th Sep 19, 12:48 PM
    • 405 Posts
    • 419 Thanks
    Sailtheworld
    Are any more of these gifts likely to appear in the future?

    If there's a reasonable chance and you'd like £24.5k per year why not just start spending that now. If you invested the fund and managed to match inflation it would last nearly 30 years.
    • mark88man
    • By mark88man 16th Sep 19, 9:03 PM
    • 4,364 Posts
    • 10,680 Thanks
    mark88man
    Holy !!!! man. I will reply to other comments tomorrow but I am opening a SIPP now because I had no idea I could do this without a job. This is so great.
    Originally posted by sixpence.
    just to be clear - to get the £2880 you can do that without any income whatsoever, but above that however much money you have, you still you need to earn what HMRC view as taxable income (even if you don't pay any actual tax on it) before you can put that much into your pension
    Things happen for a reason. Often because we are stupid & make bad decisions.
    Weight/Health - Fluctuating - better than I was worse than I should be
    Mid 19: CC:15K@0% - Car Loan:9K@2.8% - Mort:124K@2.1% = £148K - down £8k year to date
    Decrease in Total Debt 2016:£13.4K 2017:£8.3K 2018:£20K

    • londoninvestor
    • By londoninvestor 16th Sep 19, 9:09 PM
    • 1,334 Posts
    • 1,174 Thanks
    londoninvestor
    just to be clear - to get the £2880 you can do that without any income whatsoever, but above that however much money you have, you still you need to earn what HMRC view as taxable income (even if you don't pay any actual tax on it) before you can put that much into your pension
    Originally posted by mark88man
    And that means (just to be really clear about what "taxable income" means) even if you don't earn enough to pay tax, you can still make a gross contribution up to the amount of your total earnings, and get tax relief on it.

    e.g. someone who earns £7,500pa has no income tax liability, but can still make a £6,000 net contribution and receive £1,500 topup, for a total gross contribution of £7,500.

    Previous discussion here, including a reference to the relevant legislation to clarify the confusing language on the gov.uk site:
    https://forums.moneysavingexpert.com/showthread.php?t=5929270
    Last edited by londoninvestor; 16-09-2019 at 9:13 PM.
    • sixpence.
    • By sixpence. 17th Sep 19, 5:10 PM
    • 203 Posts
    • 38 Thanks
    sixpence.
    Very good recommendation here and i too can highly recommend jamesd's work on this forum. I do want to point out a very important aspect to the 4% rule that may or may not have been discussed in the link. It really should be used for those people retiring at traditional retirement ages like 60 or 65. For anyone younger it really should not be used and certainly not as OP's age.

    The 4% rule is based on historical returns on investments and inflation data. It says that at least 95% of the time ( using historical scenarios) that your money will not run out as long as you at most use only need 4% (inflation adjusted every year) to draw-down from investments every year. This works for say a 30 year time horizon (i.e. so those who are aged 60 expecting to live to 90). But at OP's age it certainly will not work given the much longer time horizon (presumably).
    Originally posted by itwasntme001
    I am not maths-inclined. I'm bright but I have an English degree and this stuff sometimes ties me in knots. I think I am maybe best, long term, meeting occasionally with an FA to discuss strategy and having passive investments so that I don't need to pay loads in fees.

    This is completely spot on. Although its very much a personal choice what the OP does depending on his/her confidence (and confidence in MSE posters!) and how he/she wants to be involved (extremes being completely passive to completely active).

    I am in my mid-30s so not that far off from the OP's age and have a similar wealth amount accumulated mainly through work (outside of my own home). I take a mix between passive and active approach because i like to dabble in single shares (i have a finance background). I do not recommend this approach to everyone and if one is unsure then almost always a passive approach (perhaps including some managed funds) would be my best advice. I would also probably favour pure passive funds especially at OP's age as he/she has a very long time horizon (presumably?) so having managed funds on a buy and hold approach would increase manager risk considerably for the OP as opposed to someone closer to retirement say (who are looking to reduce equity exposure perhaps).


    There are so so many ways to do this that the OP should remember the advice from Bostonerimus that it does not need to be complicated - so just keep things simple and clear.
    Originally posted by itwasntme001
    I just want 3% growth (to match inflation) and 3% that I can use for income (whether that is achieved through a growth drawdown or income). I had a peruse of the HL page - these funds look too pricey for me and are obviously managed so not what I am looking for - but they don't seem to even have an option like this?https://www.hl.co.uk/funds/hl-funds/multi-manager-funds

    When this is done, how often do people recommend I meet with the FA to touch base? I was thinking I might chat to them for an hour ever six months to go voer how I am approaching things. Is this niave or simply not how things are done?
    Last edited by sixpence.; 17-09-2019 at 5:16 PM.
    • bostonerimus
    • By bostonerimus 17th Sep 19, 6:38 PM
    • 3,304 Posts
    • 2,626 Thanks
    bostonerimus
    If you set up your portfolio with a sensible allocation to multi-asset funds and/or some individual index funds there's no need for you to do much of anything other than monitor your withdrawals and adjust them according to market conditions. I'm retired and I haven't touched my simple portfolio of index funds and a multi-asset fund for over 5 years.

    I wouldn't touch those H&L funds in your link...what's wrong with VLS60?
    Last edited by bostonerimus; 17-09-2019 at 6:40 PM.
    Misanthrope in search of similar for mutual loathing
    • sixpence.
    • By sixpence. 17th Sep 19, 9:40 PM
    • 203 Posts
    • 38 Thanks
    sixpence.
    If you set up your portfolio with a sensible allocation to multi-asset funds and/or some individual index funds there's no need for you to do much of anything other than monitor your withdrawals and adjust them according to market conditions. I'm retired and I haven't touched my simple portfolio of index funds and a multi-asset fund for over 5 years.

    I wouldn't touch those H&L funds in your link...what's wrong with VLS60?
    Originally posted by bostonerimus
    I am not going to touch them! They look like a lot of pointess faff to me. I might test the HL FA (I have a free consulation with them next week, normal price is £500 but they have an offer this month, so it's free and might as well take it, but will take it with a pinch [bucket] of salt...) by asking him why this is better than a drawdown approach with a VLS, because it costs loads more. I will play dumb(er) though.

    Why not a VLS60? So my entire ISA, which is only 60K right now but I intend to maximise my allowance every year and not withdraw until I am 55 unless something happens, is a VLS. So I figure it's a bit... I don't know... un-diverse to have that much in a VLS. Will be worth seven figures one day hopefully, can you really have that much in a VLS? Are there people out there with 2 milion quid in a VLS because that sounds a bit mental to me.
    • londoninvestor
    • By londoninvestor 17th Sep 19, 10:43 PM
    • 1,334 Posts
    • 1,174 Thanks
    londoninvestor
    And equally obviously, it would take you 35 years to do so, or even longer if investment growth outperforms ISA allowance increases over that time, so it seems unlikely that this process would form a particularly significant or useful part of your plans, especially if you're already dismissing pensions....
    Originally posted by eskbanker
    This didn't get much attention but is a very important point. If you start with a 700k cash pot and only put it into the markets at a rate of 23.6k per year (assuming 20k into an ISA and the 3.6k non-earners' max), it will take 30 years to invest it, you'll have a large uninvested cash balance for the long term, and this will eat into your returns. So you should be planning to have money invested in funds in a taxable account for a good few years.

    Strategising how to do this is a good topic to discuss with an IFA if you're looking for one anyway.
    • bostonerimus
    • By bostonerimus 18th Sep 19, 2:38 AM
    • 3,304 Posts
    • 2,626 Thanks
    bostonerimus
    I am not going to touch them! They look like a lot of pointess faff to me. I might test the HL FA (I have a free consulation with them next week, normal price is £500 but they have an offer this month, so it's free and might as well take it, but will take it with a pinch [bucket] of salt...) by asking him why this is better than a drawdown approach with a VLS, because it costs loads more. I will play dumb(er) though.

    Why not a VLS60? So my entire ISA, which is only 60K right now but I intend to maximise my allowance every year and not withdraw until I am 55 unless something happens, is a VLS. So I figure it's a bit... I don't know... un-diverse to have that much in a VLS. Will be worth seven figures one day hopefully, can you really have that much in a VLS? Are there people out there with 2 milion quid in a VLS because that sounds a bit mental to me.
    Originally posted by sixpence.
    You can spread the money out if you are nervous, but from an asset standpoint VLS60 is very diverse. Some will be in an ISA, some in a SIPP and some in taxable accounts and cash. You can have it in a number of multi-asset funds from different companies along with some sector index funds if you want. The area you need to maybe take advice is taxation if you don't know how to arrange things efficiently.

    FYI I have seven figures in Vanguard US Equity Index fund and I sleep well at night.
    Last edited by bostonerimus; 18-09-2019 at 4:08 AM.
    Misanthrope in search of similar for mutual loathing
    • sixpence.
    • By sixpence. 18th Sep 19, 6:31 PM
    • 203 Posts
    • 38 Thanks
    sixpence.
    This didn't get much attention but is a very important point. If you start with a 700k cash pot and only put it into the markets at a rate of 23.6k per year (assuming 20k into an ISA and the 3.6k non-earners' max), it will take 30 years to invest it, you'll have a large uninvested cash balance for the long term, and this will eat into your returns. So you should be planning to have money invested in funds in a taxable account for a good few years.

    Strategising how to do this is a good topic to discuss with an IFA if you're looking for one anyway.
    Originally posted by londoninvestor
    Don't worry I'm not that silly! I mean I will obviously use my ISA allowance each year so I will either put cash or siphon this into it. An IFA can def advise on tx - esp as people get a dividends allowance each year etc. I think maybe an accountant could help with this? Although I have never used one (yet).

    You can spread the money out if you are nervous, but from an asset standpoint VLS60 is very diverse. Some will be in an ISA, some in a SIPP and some in taxable accounts and cash. You can have it in a number of multi-asset funds from different companies along with some sector index funds if you want. The area you need to maybe take advice is taxation if you don't know how to arrange things efficiently.

    FYI I have seven figures in Vanguard US Equity Index fund and I sleep well at night.
    Originally posted by bostonerimus
    So person might reasonably put 2 million pounds in a VLS60? Do other people think this is sensible?
    I want to do the simplest and most sensible thing possible tbh. I don't feel the need to own funds for the sake it of although I like the idea of a multi-asset fund. Maybe I could do 50% VLS 60 and 50% other funds: multi-asset, REIT, Asia ex Japan income.
    Yes but are you unusual? Would a lot of people put seven figures in a single vanguard?
    • Smoose89
    • By Smoose89 18th Sep 19, 7:18 PM
    • 7 Posts
    • 1 Thanks
    Smoose89
    I'm in the same situation as the op less money though.
    I currently locked away 320k in fix rate bonds at average 2.3% for 2 to 3 years.
    Is it better the vanguard 60 funds at being stable than 80 which I have only put 15k into stocks and shares so far and 15k into a cash isa.
    • bostonerimus
    • By bostonerimus 18th Sep 19, 9:17 PM
    • 3,304 Posts
    • 2,626 Thanks
    bostonerimus


    So person might reasonably put 2 million pounds in a VLS60? Do other people think this is sensible?
    I want to do the simplest and most sensible thing possible tbh. I don't feel the need to own funds for the sake it of although I like the idea of a multi-asset fund. Maybe I could do 50% VLS 60 and 50% other funds: multi-asset, REIT, Asia ex Japan income.
    Yes but are you unusual? Would a lot of people put seven figures in a single vanguard?
    Originally posted by sixpence.
    I'm an advocate of simple cap weighted index investing and as my US equity fund contains around 3600 different stocks I don't worry about diversity...you might criticise the cap weighted basis though. My international stock index, bond index and small amount in a multi-asset fund give me some geographical and fixed income diversity.

    With VLS60 you will own 7 stock funds and 11 bond funds that are globally diverse. There is a UK stock bias so maybe you should own a separate US equity fund.

    You should come up with an asset allocation that meets you needs. If you need advice for that then ask an IFA, but again, this does not need to be complicated.
    Last edited by bostonerimus; 18-09-2019 at 9:22 PM.
    Misanthrope in search of similar for mutual loathing
    • Alexland
    • By Alexland 19th Sep 19, 6:29 AM
    • 5,762 Posts
    • 5,031 Thanks
    Alexland
    With VLS60 you will own 7 stock funds and 11 bond funds that are globally diverse. There is a UK stock bias so maybe you should own a separate US equity fund.
    Originally posted by bostonerimus
    ...and then end up overweight in both UK and US equities. If you don't like the UK bias of VLS you would be better going with the HSBC Global Strategy series.

    However once you get into six-figure account valuations then 2 fund portfolios of a global tracker such as HSBC FTSE All World and a fixed income fund such as Vanguard Global Bond Index Hedged can be cheaper depending on your contribution pattern and platform trade fees.

    Alex
    Last edited by Alexland; 19-09-2019 at 6:31 AM.
    • bostonerimus
    • By bostonerimus 19th Sep 19, 11:57 AM
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    • 2,626 Thanks
    bostonerimus
    ...and then end up overweight in both UK and US equities. If you don't like the UK bias of VLS you would be better going with the HSBC Global Strategy series.

    However once you get into six-figure account valuations then 2 fund portfolios of a global tracker such as HSBC FTSE All World and a fixed income fund such as Vanguard Global Bond Index Hedged can be cheaper depending on your contribution pattern and platform trade fees.

    Alex
    Originally posted by Alexland
    Agreed...a simple portfolio with a few tracker funds would keep fees low, and that's what I do.
    Misanthrope in search of similar for mutual loathing
    • sixpence.
    • By sixpence. 19th Sep 19, 1:49 PM
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    • 38 Thanks
    sixpence.
    Agreed...a simple portfolio with a few tracker funds would keep fees low, and that's what I do.
    Originally posted by bostonerimus
    Okay, I can see how this can be simple. I will go to the IFA with the idea of owning a few passive funds and wanting to get clued up on a drawdone approach.

    If they can contribute to this in terms of tax/making things easy then great. I have x3 possible IFAs to "interview" before I pick which one to work with. If I am not sure I might post a seperate "this is what the IFA said" post on the forum as I don't really have anyone in real life I can bounce ideas off.
    • sixpence.
    • By sixpence. 19th Sep 19, 1:54 PM
    • 203 Posts
    • 38 Thanks
    sixpence.
    Does anyone know how many shares are in a VLS 60? It would probably take a while (for me at least) to work out, but it must be tens of thousands right?

    I can't believe once upon a time my dad just suggested buying 5-6 ulities. What total madness.
    • sixpence.
    • By sixpence. 19th Sep 19, 2:05 PM
    • 203 Posts
    • 38 Thanks
    sixpence.
    One more question (sorry to triple post!). What do people do if there is a recession, as there was in 2008, in this instance? I mean, if you're dependant on the income do you just take your lumps and spend the money. Do you hope that it has gone up enough over the years to mean that you can still take the same amount of income?
    • bowlhead99
    • By bowlhead99 19th Sep 19, 5:43 PM
    • 9,348 Posts
    • 17,006 Thanks
    bowlhead99
    Does anyone know how many shares are in a VLS 60? It would probably take a while (for me at least) to work out, but it must be tens of thousands right?

    I can't believe once upon a time my dad just suggested buying 5-6 ulities. What total madness.
    Originally posted by sixpence.
    The total number of equities will be in the thousands but not tens of thousands. For example their UK all-share index fund has under 600 companies, developed Europe ex-UK 500, Asia and emerging markets will be under 2000, and Vanguard's US index has about 3400.

    And actually, for convenience, more than a third of the 'global ex UK' allocation in VLS60 is just done with a simple developed world tracker of ~2000 large stocks, rather than the region-by-region stuff mentioned, so some of the stocks that aren't global giants don't get much of a look in.

    Yes you are right, it's more than just a few utilities picked at random, and it's very convenient to have the ability to sort your money broadly at low cost.

    Still, while it's true that it's 'diversified', all of the equity allocations within different regions are done based on free float market capitalisation so your money isn't very evenly spread across all those companies.

    If you didn't appreciate that point: a layman might assume his £20000 investment in the fund would get him £12000 into the 60% of the fund that represents 6000 stocks, so would be basically putting £2 into each of them...?

    In reality, Apple and Microsoft between them are 5% of the 'developed world ex UK' fund (£116), and 6.7% of the US tracker (another £116) so instead of having £4 across those two companies, you have £232. Likewise, Google and Facebook and Amazon between them will be another £200 (instead of £6). This doesn't leave much space for smaller companies, so even with the 'overweighting' to the UK index that you've heard about with VLS: as of the last factsheet you only get 30p in Premier Foods, 10p in Topps Tiles or less than 8p in Thomas Cook.

    You might think that Apple is more likely to double in value, or less likely to halve in value, than Thomas Cook. But if nobody knows the future, and the current share price represents a fair price for the risk and growth prospects in each company (because markets are efficient, so no active management or value judgements are used when allocating money in a tracker), do you really think you should put over £100 into Apple or Microsoft for every eight pence you put into Thomas Cook? Who am I to judge you, if you think that's fine. It's a low cost way to allocate the capital.

    One more question (sorry to triple post!). What do people do if there is a recession, as there was in 2008, in this instance? I mean, if you're dependant on the income do you just take your lumps and spend the money. Do you hope that it has gone up enough over the years to mean that you can still take the same amount of income?
    Originally posted by sixpence.
    More sophisticated ways of working out a long term 'safe withdrawal rate' for people in retirement will consider the relative strength of the markets when pulling out money.

    For example, say you wanted to take £24k a year (real terms) from your £700k pot because you think 3.5% on top of inflation is sustainable long term Imagine markets crashed 30%, your £700k becomes £490k, you put your withdrawals on hold and take nothing out, three years later, markets go back up +42.85%, you have your £700k back (ignoring inflation for the moment).

    Whereas if you did three years of taking £24k from the £490k, you would only have £418k, so when the £442k bounces back by 42.85%, you only have £597k, not £700k. So the three years of refusing to moderate your withdrawals downwards at times of low fund value, and just going ahead and taking the £72k anyway ... has 'cost' you £103k from the original investment. Ouch- only three years into a forty year spending phase, with markets no lower than when they started, but you've used up more than a seventh of the capital.

    By contrast if the markets had stormed upwards towards £800k or £900k in real terms, you can easily take out that £24k per year in real terms while they markets are booming and be left with more than you started with after the fund portfolio falls back. Because £24k in a bull market is a much smaller slice of the pie than £24k in a bear market.

    There are different ways to approach this (more than one way to skin a cat) but many people would advocate having at least a couple of year's money in cash rather than investments, so that you can keep drawing from that cash pot even if markets are bad for a while, and then when markets are relatively better, top up the cash with some investment sales.

    Some people with truly large investment balances relative to their spending needs will not bother with a large cash buffer because they know returns on cash are generally lower than investment returns in the long run, and they don't expect to run out because their spending is only a couple of a percent of their wealth each year. But most don't have that luxury, so planning for the downsides is important and a plan to vary the amount drawn from the pot -though more complicated - is sensible.
    • sixpence.
    • By sixpence. 20th Sep 19, 2:05 PM
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    sixpence.
    Thanks for this reply. Itís very informative. Okay so 6000 -10,000 shares is still a pretty extraordinary amount.

    A recesssion honestly sounds so stressful in this situation. I actually got a bit tense reading about it. What do people do in a recession? If itís your income then you canít just live off air for two years.

    I thought you were supposed to keep 1-2 years in cash. Anymore than that feels like quite lot of cash. My savings account is approximately 0.5-.0.75% interest so even by keeping cash one is losing money according to inflation.

    If the markets increased by 8% per year for five years that would leave approximately £850,000 (if I was withdrawing 3.5% per year) - note: my maths isnít very good so this is an approximation - if the value of the fund then dropped 30% in a recession it would be worth £595,000. So it doesnít seem like growth protects one from a recession? Bearing in mind, the market didnít fully recover from the 2008 recession until 2013.

    Also I know from researching my stocks and shares ISA (which contains a VLS 60) that you always want to keep 10% of your investments in cash in case there is a recession so that you can achieve optimum growth during "recovery".

    The total number of equities will be in the thousands but not tens of thousands. For example their UK all-share index fund has under 600 companies, developed Europe ex-UK 500, Asia and emerging markets will be under 2000, and Vanguard's US index has about 3400.

    And actually, for convenience, more than a third of the 'global ex UK' allocation in VLS60 is just done with a simple developed world tracker of ~2000 large stocks, rather than the region-by-region stuff mentioned, so some of the stocks that aren't global giants don't get much of a look in.

    Yes you are right, it's more than just a few utilities picked at random, and it's very convenient to have the ability to sort your money broadly at low cost.

    Still, while it's true that it's 'diversified', all of the equity allocations within different regions are done based on free float market capitalisation so your money isn't very evenly spread across all those companies.

    If you didn't appreciate that point: a layman might assume his £20000 investment in the fund would get him £12000 into the 60% of the fund that represents 6000 stocks, so would be basically putting £2 into each of them...?

    In reality, Apple and Microsoft between them are 5% of the 'developed world ex UK' fund (£116), and 6.7% of the US tracker (another £116) so instead of having £4 across those two companies, you have £232. Likewise, Google and Facebook and Amazon between them will be another £200 (instead of £6). This doesn't leave much space for smaller companies, so even with the 'overweighting' to the UK index that you've heard about with VLS: as of the last factsheet you only get 30p in Premier Foods, 10p in Topps Tiles or less than 8p in Thomas Cook.

    You might think that Apple is more likely to double in value, or less likely to halve in value, than Thomas Cook. But if nobody knows the future, and the current share price represents a fair price for the risk and growth prospects in each company (because markets are efficient, so no active management or value judgements are used when allocating money in a tracker), do you really think you should put over £100 into Apple or Microsoft for every eight pence you put into Thomas Cook? Who am I to judge you, if you think that's fine. It's a low cost way to allocate the capital.


    More sophisticated ways of working out a long term 'safe withdrawal rate' for people in retirement will consider the relative strength of the markets when pulling out money.

    For example, say you wanted to take £24k a year (real terms) from your £700k pot because you think 3.5% on top of inflation is sustainable long term Imagine markets crashed 30%, your £700k becomes £490k, you put your withdrawals on hold and take nothing out, three years later, markets go back up +42.85%, you have your £700k back (ignoring inflation for the moment).

    Whereas if you did three years of taking £24k from the £490k, you would only have £418k, so when the £442k bounces back by 42.85%, you only have £597k, not £700k. So the three years of refusing to moderate your withdrawals downwards at times of low fund value, and just going ahead and taking the £72k anyway ... has 'cost' you £103k from the original investment. Ouch- only three years into a forty year spending phase, with markets no lower than when they started, but you've used up more than a seventh of the capital.

    By contrast if the markets had stormed upwards towards £800k or £900k in real terms, you can easily take out that £24k per year in real terms while they markets are booming and be left with more than you started with after the fund portfolio falls back. Because £24k in a bull market is a much smaller slice of the pie than £24k in a bear market.

    There are different ways to approach this (more than one way to skin a cat) but many people would advocate having at least a couple of year's money in cash rather than investments, so that you can keep drawing from that cash pot even if markets are bad for a while, and then when markets are relatively better, top up the cash with some investment sales.

    Some people with truly large investment balances relative to their spending needs will not bother with a large cash buffer because they know returns on cash are generally lower than investment returns in the long run, and they don't expect to run out because their spending is only a couple of a percent of their wealth each year. But most don't have that luxury, so planning for the downsides is important and a plan to vary the amount drawn from the pot -though more complicated - is sensible.
    Originally posted by bowlhead99
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