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  • FIRST POST
    • green_man
    • By green_man 10th Jan 19, 4:59 PM
    • 240Posts
    • 111Thanks
    green_man
    Any point in a Cash buffer in Pension Drawdown Account?
    • #1
    • 10th Jan 19, 4:59 PM
    Any point in a Cash buffer in Pension Drawdown Account? 10th Jan 19 at 4:59 PM
    So the old school wisdom seems to be that itís sensible to carry a cash sum within your investments so that in the event of a crash you can draw on this sum and allow for the market to recover before you sell anymore investments. Seems sensible but these sums seem to be specified as 2-3 years of typical drawdown withdrawal, so you have this portion of your pot permanently out of the market. Does this stand up to financial scrutiny?

    Iíve got to say I currently do follow the this and although Iím not in drawdown yet I will be in two years. But would you just not be better off in the long run by running 100% equities and just selling what you need each month. Iím talking about selling 0.2% of equities a month here to fulfill living expenses, so even in a crash this will only go up to 0.3-0.4% per month. Doesnít the benefit of extra investment in the market outweigh the savings made in event of crash?
Page 6
    • kidmugsy
    • By kidmugsy 13th Jan 19, 6:38 PM
    • 12,480 Posts
    • 8,845 Thanks
    kidmugsy
    There is still a risk on the revenue side of things of course
    Originally posted by Robert McGeddon
    Do you know a good source for a graph showing the history of dividends? I don't think I've ever seen one. Yet it must exist because I've seen many dozens of people assuring me that dividends are pretty stable.

    but that's true of all investment types.
    Originally posted by Robert McGeddon
    No it isn't: that's why the writers compare equities with Treasuries or Gilts, on which they assume that both revenue risk and principal risk are negligible. (On Gilts, history bears them out. So far.)
    Free the dunston one next time too.
    • kidmugsy
    • By kidmugsy 13th Jan 19, 6:40 PM
    • 12,480 Posts
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    kidmugsy
    Interesting. The bond-based strategy appears to ignore real-world inflation though unless I've missed something?
    Originally posted by Spreadsheetman
    You missed the fact that they are considering Treasury Inflation Protected Securities.
    Free the dunston one next time too.
    • Linton
    • By Linton 13th Jan 19, 10:11 PM
    • 10,398 Posts
    • 10,796 Thanks
    Linton
    No; versus CPI it's about -0.5%.

    Nor does it much matter because in the UK (unlike the US back then) it's easy to buy an index-linked annuity which would probably do a better job than a ladder of I-L gilts.


    Anyway, that's two commenters I've seen who've missed the point. Any more?
    Originally posted by kidmugsy

    SWR may result in excess wealth at the end of life, but you have still to suggest and cost a practicable alternative for todays conditions. A strategy that depends on the use of non existant inflation beating safe bonds is irrelevent.



    An index linked annuity provides a worse return than the SWR alternative and has other disadvantages because of its lack of flexibility. However I agree it may well make sense when one reaches an age close to average life expectancy especially since one may be losing the capability or interest to sensibly manage a large portfolio.



    I do have a simple modification which is to recalculate the SWR every say 5 years. Most of the time this should result in an increased drawdown and a reduction in wealth at end of life since most of the time the highly damaging early crashes wont have happened.
    • kidmugsy
    • By kidmugsy 13th Jan 19, 10:28 PM
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    kidmugsy
    SWR may result in excess wealth at the end of life, but you have still to suggest and cost a practicable alternative for todays conditions. A strategy that depends on the use of non existent inflation beating safe bonds is irrelevent.
    Originally posted by Linton
    Maybe not: locking in an annual loss of 0.5% versus CPI may do triumphantly better than SWR.

    The point is that it's daft to say that a decade of QE and ZIRP have driven down ILG yields and yet ignore completely the fact that they've driven up equity valuations to quite unsustainable levels (if fact it proves to be).

    You can't legitimately point out that QE and ZIRP will have impaired one of the two strategies being compared but then ignore the possibility that they haven't impaired the other (in all likelihood).



    An index linked annuity provides a worse return than the SWR alternative
    Originally posted by Linton
    Come now; you can't possibly know that. We have had a decade of the lowest interest rates in 5,000 years, a decade of central banks buying up sovereign debt, and even corporate debt, promiscuously.

    How the devil can anyone blithely assume that Bergen's 4% SWR - published, was it not, in 1994 - is unchanged? It makes no sense.

    Anyway, look at the publication in its own terms. It demonstrated that Bergen was wrong: a retiree could have done distinctly better than with the 4% rule. So why then worship the 4% rule? Why assume that things have changed so that what wasn't a good idea when it was published is magically a good idea in our much changed circumstances?

    So much for Sharpe and company; but the deep problem with SWR is even more profound. The idea of "proving" it to be a good idea by assuming that the future must bear a great resemblance to a small part of the past is, it seems to me, reckless. When did Bergen's history begin? 1926, was it? Where did it apply? The US.

    What convinces you that that is a representative enough sample to gamble all your retirement capital on?
    Free the dunston one next time too.
    • Triumph13
    • By Triumph13 13th Jan 19, 10:34 PM
    • 1,431 Posts
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    Triumph13
    The simple fact is that a risk free strategy based on bonds must, by definition, come out at a worse deal than just buying an annuity as there is more variability in individual life expectancy than in average life expectancy. If they are coming up with an answer that's higher than annuity rates then they have clearly got it wrong - or else they should set up in business selling annuities!
    • Audaxer
    • By Audaxer 13th Jan 19, 10:59 PM
    • 1,594 Posts
    • 984 Thanks
    Audaxer
    The 'problem' with that approach is that the natural income from a balance equity portfolio is fairly low: about 1.8% from memory, which is lower than the safe withdrawal rate. If the fund focuses on high income equities, you can get up to about 3.5%, BUT the total return of the fund tends to be much lower.
    Originally posted by bearshare
    The yield from a balanced portfolio of equity and bonds if investing at present would be over 4%. There are a number of ITs with a history of many decades of continually growing dividends, so I would hope you would get a sustainable growing natural income of over 4% from these type of ITs and funds over the long term.

    If you went for high yield/maximiser funds the yields could be as much as 6% or 7%, but I have my doubts whether these type of funds are sustainable over the long term.
    • bearshare
    • By bearshare 14th Jan 19, 12:54 PM
    • 38 Posts
    • 23 Thanks
    bearshare
    The yield from a balanced portfolio of equity and bonds if investing at present would be over 4%. There are a number of ITs with a history of many decades of continually growing dividends, so I would hope you would get a sustainable growing natural income of over 4% from these type of ITs and funds over the long term.

    If you went for high yield/maximiser funds the yields could be as much as 6% or 7%, but I have my doubts whether these type of funds are sustainable over the long term.
    Originally posted by Audaxer
    You may get approaching 4% from a balanced portfolio of UK equities and bonds, but if you want a global portfolio, you would struggle. It CAN be done but only by selecting high dividend payers, which usually implies low growth, or ITs paying income from capital (like EAT).

    Anyhow my point is, you sacrifice total returns for income. Compare pretty much any high income fund with their corresponding 'regular' fund and see the difference..
    • Robert McGeddon
    • By Robert McGeddon 15th Jan 19, 8:52 AM
    • 24 Posts
    • 10 Thanks
    Robert McGeddon
    Right then, young man, another one for your reading list: be sure to be suspicious of strategies that rely on so-called safe withdrawal rates from equity portfolios. They are probably a rather extravagant way to fund a retirement. To see why, google "The 4% RuleóAt What Price?"
    by Jason S. Scott , William F. Sharpe , and John G. Watson
    Originally posted by kidmugsy
    Ha ha! You obviously don't know me, but thank you for the (presumed) compliment.

    Thanks also for the link to the article which I've downloaded and partially digested. I hadn't realised retiring was so hard . ..
    • Robert McGeddon
    • By Robert McGeddon 15th Jan 19, 8:55 AM
    • 24 Posts
    • 10 Thanks
    Robert McGeddon
    Do you know a good source for a graph showing the history of dividends? I don't think I've ever seen one. Yet it must exist because I've seen many dozens of people assuring me that dividends are pretty stable.
    Originally posted by kidmugsy
    I think this merits a separate thread to avoid going off topic. When I get a mo . . . .

    No it isn't: that's why the writers compare equities with Treasuries or Gilts, on which they assume that both revenue risk and principal risk are negligible. (On Gilts, history bears them out. So far.)
    Even index linked gilts can lose out in real terms If your real return could be plus or minus 1% then there is uncertainty in the outcome. Low risk? For sure. Negligible risk? Only maybe.
    • coastline
    • By coastline 15th Jan 19, 12:46 PM
    • 987 Posts
    • 1,122 Thanks
    coastline
    A few links..

    A detailed site showing examples of Annuities

    https://www.sharingpensions.co.uk/

    Historic S&P 500 dividends ..

    http://www.multpl.com/s-p-500-dividend-yield/

    Inflation adjusted.

    http://www.multpl.com/s-p-500-dividend/

    Dividend growth showing the effects of recent downturns.

    http://www.multpl.com/s-p-500-dividend-growth

    Same chart in table form showing a 20% cut in 2009 which was reversed by 2011.

    http://www.multpl.com/s-p-500-dividend-growth/table/by-year

    Breakdown of S&P 500 ratios showing various time periods.

    https://www.quandl.com/data/MULTPL-S-P-500-Ratios
    Last edited by coastline; 15-01-2019 at 4:17 PM.
    • Thrugelmir
    • By Thrugelmir 15th Jan 19, 1:42 PM
    • 62,450 Posts
    • 55,553 Thanks
    Thrugelmir
    You may get approaching 4% from a balanced portfolio of UK equities and bonds, but if you want a global portfolio, you would struggle. It CAN be done but only by selecting high dividend payers, which usually implies low growth, or ITs paying income from capital (like EAT).
    Originally posted by bearshare
    EAT is cutting it's dividend by 22%. The chickens are coming home to roost.
    "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
    • Audaxer
    • By Audaxer 15th Jan 19, 1:53 PM
    • 1,594 Posts
    • 984 Thanks
    Audaxer
    You may get approaching 4% from a balanced portfolio of UK equities and bonds, but if you want a global portfolio, you would struggle. It CAN be done but only by selecting high dividend payers, which usually implies low growth, or ITs paying income from capital (like EAT).
    Originally posted by bearshare
    As well as UK equities and bonds, my income portfolio includes global equity funds and an Asian equity fund. The yield is just below 4%, and would be higher if you invested in these funds now as the capital values have fallen a bit with the recent correction.
    Anyhow my point is, you sacrifice total returns for income.
    Possibly, although my income portfolio with less than 60% equities has similar total returns over the last 3 and 5 years with the VLS60 and HSBC Global Strategy Balanced funds which I also hold. I'm not sure which will fare better going forward, but the thing I like about the income funds is that they should continue to produce dividends of up to 4% of my original investment increasing with inflation, even when the capital is volatile. I would be more wary about drawing 4% from the VLS60 in loss years by selling capital, as I think you are more likely to deplete the growth fund balance if you have a bad run of loss years early on, than if you were just taking dividends and not touching the capital. Do you and others agree?
    Compare pretty much any high income fund with their corresponding 'regular' fund and see the difference..
    I agree, and that's why I steer clear of the maximiser/high income funds with yields of 6% and 7%.
    • zagfles
    • By zagfles 15th Jan 19, 6:03 PM
    • 13,905 Posts
    • 11,985 Thanks
    zagfles
    No; versus CPI it's about -0.5%.

    Nor does it much matter because in the UK (unlike the US back then) it's easy to buy an index-linked annuity which would probably do a better job than a ladder of I-L gilts.
    Originally posted by kidmugsy
    Depends on the term I guess, index linked gilts are around 2.5%...about the same.
    Anyway, that's two commenters I've seen who've missed the point. Any more?
    Point is that they used an example where a rock solid safe option beats the oft quoted 4%. Not possible now, in the UK at least.
    • kidmugsy
    • By kidmugsy 15th Jan 19, 6:10 PM
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    kidmugsy
    Depends on the term I guess, index linked gilts are around 2.5%...about the same. Point is that they used an example where a rock solid safe option beats the oft quoted 4%. Not possible now, in the UK at least.
    Originally posted by zagfles
    Except that there's no good reason to suppose that the 4% is going to be achieved in the UK. There's no point changing one side of a comparison and leaving the other side unchanged if you suspect that both sides are/were/will be governed by ZIRP and QE.
    Free the dunston one next time too.
    • zagfles
    • By zagfles 15th Jan 19, 6:29 PM
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    zagfles
    Except that there's no good reason to suppose that the 4% is going to be achieved in the UK. There's no point changing one side of a comparison and leaving the other side unchanged if you suspect that both sides are/were/will be governed by ZIRP and QE.
    Originally posted by kidmugsy
    Bond/gilt yields tend to move with interest rates, dividend yields and share gains don't. So the current very low interest rates lead to low bond yields, they don't necessarily lead to low share yields.

    Although personally I think 4% is over optimistic. And I agree with the implication of the article, that if you want a guaranteed income then a guaranteed investment might be a better idea, but I'm happy to adjust my spending depending on investment performance so am happy with a more volatile portfolio.
    Last edited by zagfles; 15-01-2019 at 6:31 PM.
    • kidmugsy
    • By kidmugsy 15th Jan 19, 10:03 PM
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    • 8,845 Thanks
    kidmugsy
    Historic S&P 500 dividends ..
    http://www.multpl.com/s-p-500-dividend-yield/
    Originally posted by coastline
    Those are not dividends, they are yields.

    Originally posted by coastline
    Just the job! Thank you very much.

    (i) Do you happen to know: are these true dividends or are they adjusted for the modern tendency to buyback shares instead of distributing dividends?

    (ii) Now all the punter has to do is wonder how much they'd be reduced by charges and taxes in his own particular case. For SIPPs and ISAs that would be pretty easy, I'd think.

    Dividend growth showing the effects of recent downturns.
    http://www.multpl.com/s-p-500-dividend-growth
    Originally posted by coastline
    Pretty good. I wonder whether there's an inflation-corrected companion chart. Anyway, only a couple of episodes of negative nominal growth.

    Same chart in table form showing a 20% cut in 2009 which was reversed by 2011.
    http://www.multpl.com/s-p-500-dividend-growth/table/by-year
    Originally posted by coastline
    Thanks again.

    Breakdown of S&P 500 ratios showing various time periods.
    https://www.quandl.com/data/MULTPL-S-P-500-Ratios
    Originally posted by coastline
    Thanks once more.

    Is it fair to say that real dividends have been erratic in the past (pre 1951, say), but less so recently? Except, I suppose, that "erratic" should cover upwards movements too so that after the Global Credit Crisis is also erratic.

    Ignoring the era of the US Civil War and immediately afterwards, we've got the following pronounced leaps:

    (i) Post-1900 (ii) The roaring twenties, (iii) The short-lived false dawn of the mid-late 30s (well done, FDR!), (iv) post-WWII, (v) post-2010 i.e. the era of ZIRP and QE.

    I note that real dividends hardly responded to the bursting of the dot.com bubble. That's presumably because the companies in the most trouble had never paid dividends anyway.

    There's nothing before 2010 that would encourage me to guess that the post-2010 leap will continue for long, but what's a guess worth?

    I wonder what future historians will call the current era? I suppose that depends entirely on what happens next.
    Free the dunston one next time too.
    • MK62
    • By MK62 16th Jan 19, 10:04 AM
    • 376 Posts
    • 281 Thanks
    MK62
    As well as UK equities and bonds, my income portfolio includes global equity funds and an Asian equity fund. The yield is just below 4%, and would be higher if you invested in these funds now as the capital values have fallen a bit with the recent correction.
    Possibly, although my income portfolio with less than 60% equities has similar total returns over the last 3 and 5 years with the VLS60 and HSBC Global Strategy Balanced funds which I also hold. I'm not sure which will fare better going forward, but the thing I like about the income funds is that they should continue to produce dividends of up to 4% of my original investment increasing with inflation, even when the capital is volatile. I would be more wary about drawing 4% from the VLS60 in loss years by selling capital, as I think you are more likely to deplete the growth fund balance if you have a bad run of loss years early on, than if you were just taking dividends and not touching the capital. Do you and others agree?
    I agree, and that's why I steer clear of the maximiser/high income funds with yields of 6% and 7%.
    Originally posted by Audaxer
    One thing missing......"growth" funds tend to take their charges from the income generated (to make the growth look better), whereas "income" funds tend to take them from the the capital returns (to make the income look better), so you often aren't really comparing apples to apples by just comparing fund yields.

    Total return (after charges) is where it's at, at least imho.


    PS, by growth and income I mean funds targeted toward that specific aim, I don't mean INC or ACC versions of the same fund.
    Last edited by MK62; 16-01-2019 at 10:08 AM.
    • kidmugsy
    • By kidmugsy 16th Jan 19, 2:13 PM
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    • 8,845 Thanks
    kidmugsy
    Bond/gilt yields tend to move with interest rates ... and share gains don't.
    Originally posted by zagfles
    And yet the Holy Buffet swears that ain't so. Share price gains happen when interest rates decline - that's his doctrine. I gather that broadly history bears him out.
    Free the dunston one next time too.
    • kidmugsy
    • By kidmugsy 16th Jan 19, 2:18 PM
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    kidmugsy
    There's nothing before 2010 that would encourage me to guess that the post-2010 leap will continue for long.
    Originally posted by kidmugsy

    About the remarkable leap in inflation-corrected dividends post-2010 i.e. post the Global Financial Crisis: I wonder, are companies simply distributing earnings (including share buybacks) rather than making capital investments? If so it bodes ill for future economic growth and future dividends.
    Free the dunston one next time too.
    • coastline
    • By coastline 16th Jan 19, 4:45 PM
    • 987 Posts
    • 1,122 Thanks
    coastline
    About the remarkable leap in inflation-corrected dividends post-2010 i.e. post the Global Financial Crisis: I wonder, are companies simply distributing earnings (including share buybacks) rather than making capital investments? If so it bodes ill for future economic growth and future dividends.
    Originally posted by kidmugsy
    This link is a 3 page summary.

    https://seekingalpha.com/article/439171-has-dividend-growth-kept-up-with-inflation

    Looking at this it appears buybacks have been pretty solid since 1998.

    http://2.bp.blogspot.com/-HxRg5f8YpE0/VB7XtHiJYDI/AAAAAAAABe4/juPlWmLXAVE/s1600/DivBuybackChart.jpg

    https://www.globalbankingandfinance.com/are-share-buybacks-a-key-factor-in-the-continued-rise-in-us-equities/

    Annuity link

    http://www.pensionchoices.com/annuity-rates/index-linked-annuity-rates/
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