Like the February Correction ?
Comments
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In simple terms: replenish when you're able to by top-slicing the better performing investments (NB all withdrawals from the investment bucket follow this approach).
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I'll describe my partner's plan - won't be retiring for several years yet - but this is roughly how it will operate:
- in the latter stages of work, build up a cash buffer comprising anticipated living expenses to cover a sufficiently long period that it provides some peace of mind. She'll have around 2+yrs worth of cash by the retirement day.
- in "normal" markets, top-up this cash buffer periodically, perhaps quarterly, via asset sales so the buffer balance is roughly maintained. The frequency of sales may be guided by what costs, if any, are involved. Pound-cost averaging in reverse.
- What to sell? This depends on the portfolio construction. If you've everything in a single multi-asset fund, there's no decisions, just sell a small slither of that. My partner's portfolio has a number of components: eg. equity funds/trusts, multi-asset funds/trusts, each component having a % target allocation. Sales will be made to roughly bring these components back to their % target levels. This means that holdings that have performed more strongly will generally be top-sliced a little, leaving those holdings that have performed less well alone. NB this is not a hard rebalancing of everything back to % targets, just a way of focusing the sales on the better performing holdings. The targets are guidelines to help ensure the portfolio retains a balance, but they're not set in stone: during a prolonged bull market in equities, for example, the approach described will allow the best performing (equity) holdings to form a slowly growing % of the portfolio, despite the regular top-slicing, as part of an intentional "let your winners run (up to a point)" plan.
- In times of market stress, the cash buffer provides a (limited) window where spending requirements can be met without requiring any asset sales, providing peace of mind by keeping the market's noise at a distance.
- If components of the portfolio (eg gov bonds) happen to have performed strongly while equities have fallen sharply, then these can be top-sliced, in the same manner as strongly performing equities would have been top-sliced in the normal or good times described above.
- If/once the cash buffer is depleted to ~6 months spending power, asset sales will occur regardless. Again, the holdings that are top-sliced are the better (least worst) performing ones, so as to bring these holdings back towards their % target allocations.
- There is no rush to replenish the cash buffer if doing so would entail selling assets whose price is judged to be low. Just continue with periodic modest sales by top-slicing holdings that are most overweight their % targets. If you have a sensible withdrawal rate (and perhaps the ability to reign in spending 'somewhat' if necessary), a suitable asset allocation at the outset and a reasonable cash buffer at the beginning, I see few reasons why this approach won't see someone through a prolonged period of low asset prices, without derailing the plan. But there are no certainties! The more robust you want your plan to be, the longer you'll have to work before retiring, or the lower the income you'll be able to 'safely' withdraw. Personal choices.
- As markets recover, asset sales can made (following the same MO of top-slicing the better performing components) at a higher rate than the normal spending rate in order to slowly replenish the cash buffer over years. Again, no point in forcing this, as there's no advantage to rebuilding the buffer from forced sales of assets at depressed prices.
Thanks for all that, just a couple of points.
I was planning for a regular 3 month review/sell off. Should this not be a bit aggressive to take care of the CGT allowance for the year?
The selling off of winners has always troubled me. I generally like my winners that’s why I picked them. Some of my portfolio is there to fill in perceived gaps, why should they benefit at the expense of the good guys?
With ref to the original thread I’m not selling a thing, new cash unfortunately will probably form my cash bucket. This feels very strange as it’s a buying opportunity after totally investing for the last 28yrs.0 -
bostonerimus wrote: »If you can afford to have a large cash allocation then I think you've done well and basically "won the war". Many people simply can't do that as they need to keep as much invested as possible to have a good chance of funding retirement.....sleeping well at night on a mattress of cash is nice.
But it is what we should aspire to.0 -
The selling off of winners has always troubled me. I generally like my winners that’s why I picked them. Some of my portfolio is there to fill in perceived gaps, why should they benefit at the expense of the good guys?
You don't have to sell all your winners, but sometimes it's sensible to sell some of them just to bring your portfolio back into the balance you originally intended. You picked your winners because you liked them but you also planned your portfolio because you saw a benefit to the original ratio (I assume).Almost everything will work again if you unplug it for a few minutes, including you. Anne Lamott
It's amazing how those with a can-do attitude and willingness to 'pitch in and work' get all the luck, isn't it?
Please consider buying some pet food and giving it to your local food bank collection or animal charity. Animals aren't to blame for the cost of living crisis.0 -
I was planning for a regular 3 month review/sell off. Should this not be a bit aggressive to take care of the CGT allowance for the year?
The selling off of winners has always troubled me. I generally like my winners that’s why I picked them. Some of my portfolio is there to fill in perceived gaps, why should they benefit at the expense of the good guys?
Not sure I follow CGT question.
Regarding winners, I partly agree (up to a point).
My partner's portfolio will be run more conservatively than mine because it'll be smaller and so have less margin of safety (initially, at least). Strongly performing equities wouldn't be rebalanced back to target %, just sold sufficiently to replenish the cash buffer. If they performed very strongly, they'd still grow as a % of the portfolio, steadily moving beyond their supposed % targets. So, a limited version of "letting your winners run".
Also, the more conservative multi-assets components of the portfolio only need to be so big - they're present to do a job, which is largely to provide some insurance against a poor sequence of returns in the earlier years and also to dampen volatility when the safety margin is narrow. Over time, and if the portfolio performed well, these more conservative components could be transitioned from having "% of portfolio" targets to absolute monetary amount targets. So, the quarterly top-slicing sales for replenishing the cash buffer could come from these sources even if the other equity components were performing strongly.
That's a bit more akin to how I do things.
A further point: I don't see the purpose of my/our investment strategies to be to make as much money as possible. We only need to make enough money to support our chosen lifestyles. So, there's not huge incentive to take on more risk in the hope of making much better returns, if I/we think that extra money wouldn't make us any happier (and if the additional risk-taking might jeopardize our plans).
Having said that, for me, running an investment portfolio isn't just a tool to get a job done; it's also a vocation that I've pursued for years and that I'm interested in doing well at, purely for the personal satisfaction of it. So I'll continue to do things at the margins (including taking more risk in order to seek greater returns) that I'd consider out-of-bounds for my partner's more utilitarian pot.0 -
In simple terms: replenish when you're able to by top-slicing the better performing investments (NB all withdrawals from the investment bucket follow this approach).
--
I'll describe my partner's plan - won't be retiring for several years yet - but this is roughly how it will operate:
- in the latter stages of work, build up a cash buffer comprising anticipated living expenses to cover a sufficiently long period that it provides some peace of mind. She'll have around 2+yrs worth of cash by the retirement day.
- in "normal" markets, top-up this cash buffer periodically, perhaps quarterly, via asset sales so the buffer balance is roughly maintained. The frequency of sales may be guided by what costs, if any, are involved. Pound-cost averaging in reverse.
- What to sell? This depends on the portfolio construction. If you've everything in a single multi-asset fund, there's no decisions, just sell a small slither of that. My partner's portfolio has a number of components: eg. equity funds/trusts, multi-asset funds/trusts, each component having a % target allocation. Sales will be made to roughly bring these components back to their % target levels. This means that holdings that have performed more strongly will generally be top-sliced a little, leaving those holdings that have performed less well alone. NB this is not a hard rebalancing of everything back to % targets, just a way of focusing the sales on the better performing holdings. The targets are guidelines to help ensure the portfolio retains a balance, but they're not set in stone: during a prolonged bull market in equities, for example, the approach described will allow the best performing (equity) holdings to form a slowly growing % of the portfolio, despite the regular top-slicing, as part of an intentional "let your winners run (up to a point)" plan.
- In times of market stress, the cash buffer provides a (limited) window where spending requirements can be met without requiring any asset sales, providing peace of mind by keeping the market's noise at a distance.
- If components of the portfolio (eg gov bonds) happen to have performed strongly while equities have fallen sharply, then these can be top-sliced, in the same manner as strongly performing equities would have been top-sliced in the normal or good times described above.
- If/once the cash buffer is depleted to ~6 months spending power, asset sales will occur regardless. Again, the holdings that are top-sliced are the better (least worst) performing ones, so as to bring these holdings back towards their % target allocations.
- There is no rush to replenish the cash buffer if doing so would entail selling assets whose price is judged to be low. Just continue with periodic modest sales by top-slicing holdings that are most overweight their % targets. If you have a sensible withdrawal rate (and perhaps the ability to reign in spending 'somewhat' if necessary), a suitable asset allocation at the outset and a reasonable cash buffer at the beginning, I see few reasons why this approach won't see someone through a prolonged period of low asset prices, without derailing the plan. But there are no certainties! The more robust you want your plan to be, the longer you'll have to work before retiring, or the lower the income you'll be able to 'safely' withdraw. Personal choices.
- As markets recover, asset sales can made (following the same MO of top-slicing the better performing components) at a higher rate than the normal spending rate in order to slowly replenish the cash buffer over years. Again, no point in forcing this, as there's no advantage to rebuilding the buffer from forced sales of assets at depressed prices.
The mechanics of drawdown, particularly if you start to implement some of the variable withdrawal rate strategies, can get complicated.......what, when and how much to sell becomes a large decision space if you think about it too much.
I think the UK's recent flirtation with drawdown will cool a bit as interest rates rise and annuities become attractive once again. People always go on about diversity in a portfolio and I think that should extend to having cash/equites/bonds and annuities or DB pensions in the mix. A foundation of SP and using some of the DC pension pot to buy an annuity is something to consider if you can afford it. Then any remaining DC pot can be aggressively invested to either pay for luxuries or to build up an inheritance.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
Not sure I follow CGT question.
Regarding winners, I partly agree (up to a point).
My partner's portfolio will be run more conservatively than mine because it'll be smaller and so have less margin of safety (initially, at least). Strongly performing equities wouldn't be rebalanced back to target %, just sold sufficiently to replenish the cash buffer. If they performed very strongly, they'd still grow as a % of the portfolio, steadily moving beyond their supposed % targets. So, a limited version of "letting your winners run".
Also, the more conservative multi-assets components of the portfolio only need to be so big - they're present to do a job, which is largely to provide some insurance against a poor sequence of returns in the earlier years and also to dampen volatility when the safety margin is narrow. Over time, and if the portfolio performed well, these more conservative components could be transitioned from having "% of portfolio" targets to absolute monetary amount targets. So, the quarterly top-slicing sales for replenishing the cash buffer could come from these sources even if the other equity components were performing strongly.
That's a bit more akin to how I do things.
A further point: I don't see the purpose of my/our investment strategies to be to make as much money as possible. We only need to make enough money to support our chosen lifestyles. So, there's not huge incentive to take on more risk in the hope of making much better returns, if I/we think that extra money wouldn't make us any happier (and if the additional risk-taking might jeopardize our plans).
Having said that, for me, running an investment portfolio isn't just a tool to get a job done; it's also a vocation that I've pursued for years and that I'm interested in doing well at, purely for the personal satisfaction of it. So I'll continue to do things at the margins (including taking more risk in order to seek greater returns) that I'd consider out-of-bounds for my partner's more utilitarian pot.
Once again thanks for the insights.
With ref to CGT if your portfolio doubles every 5 or so years you will reach a point where CGT is payable on your gains once you have harvested the gains. So my intention is to cash in over the years at ¼ yr intervals to make use of the CGT allowance and rebase.
Over the many years I’ve chased returns, not to the point of investing in obviously mental funds/strategies.
Burnt my bridges on the pension DB front, now all in SIPP with Fundsmith no regrets.
I can’t help think I would miss the thrill of the chase if I went passive/mainstream.
With ref to the OP keep calm and carry on.0 -
bostonerimus wrote: »I think the UK's recent flirtation with drawdown will cool a bit as interest rates rise and annuities become attractive once again.
Likewise an extended period of poor stock market returns. Reversal of QE globally has yet to be determined consequences. Making money may not be as easy as it seemed.0 -
bostonerimus wrote: »The mechanics of drawdown, particularly if you start to implement some of the variable withdrawal rate strategies, can get complicated.......what, when and how much to sell becomes a large decision space if you think about it too much.
I think the UK's recent flirtation with drawdown will cool a bit as interest rates rise and annuities become attractive once again. People always go on about diversity in a portfolio and I think that should extend to having cash/equites/bonds and annuities or DB pensions in the mix. A foundation of SP and using some of the DC pension pot to buy an annuity is something to consider if you can afford it. Then any remaining DC pot can be aggressively invested to either pay for luxuries or to build up an inheritance.
I agree with all of that.
Re diversifying income streams, I have a small DC pot in my investments bucket, which I'd certainly consider eventually annuitising, to add some base-load income, to be joined later by state pension.0 -
Thrugelmir wrote: »Likewise an extended period of poor stock market returns. Reversal of QE globally has yet to be determined consequences. Making money may not be as easy as it seemed.
Amen to that. When volatility returns to the markets I always think of Bette Davis in "All About Eve"
https://www.youtube.com/watch?v=yKHUGvde7KU“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
I agree with all of that.
Re diversifying income streams, I have a small DC pot in my investments bucket, which I'd certainly consider eventually annuitising, to add some base-load income, to be joined later by state pension.
My base retirement income comes from rent and a DB pension which means I can be a bit blaze when my DC pots and regular equity investments lose money - and I'm grateful for that, but my plan was always to arrange things so that I don't have to rely on drawdown. SP will be a nice income bump when it starts.“So we beat on, boats against the current, borne back ceaselessly into the past.”0
This discussion has been closed.
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