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Mr Helpful
Posted: 02 October 2022 13:38:26(UTC)
#49

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Sequence of Return Risk is only a problem where the investment pot capital is to be drawn down over retirement years.
Then a stocks decline, esp in the early years of retirement, will have the 100% stocks retiree needing to sell stocks at silly artificially low prices, from which their portfolio may never ever recover.
In this situation, the role of a second basket of firmer priced assets to provide income over the lean years,
becomes key.

If the natural yield of the portfolio is sufficient for expenses, such that no investments need be sold at any time for income, then SOR Risk is not an issue. The main thing then to look out for is whether the income stream is keeping up with inflation.

Apologies to those for whom all of this is 'bleedin obvious'.
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ANDREW FOSTER
Posted: 02 October 2022 14:33:13(UTC)
#6

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Harry Trout;241074 wrote:
ANDREW FOSTER;240875 wrote:

With 4.25% available on High Street savings, the risk premium isn't looking too attractive to me...


Hi Andrew

Thanks for the reply

The funds I am looking to invest are within Hargreaves Lansdown ISA and SIPP wrappers. The best ISA rate I can find is the 5 year fixed rate ISA with UBL at 3.7% and there the money is tied up for 5 years.

According to Trading View the 5 year UK Gilt Yield at close of play yesterday was 4.4%

I've run the 2.25% 07/12/27 Gilt through my calculator and come up with an estimated yield on a prudent basis of 3.95%. Prudent basis because I can't get a live price today so I have made worse case assumptions.

Thus, for an ISA scenario, I think Gilts could be a good option, especially as you can access the money in term if needed.

Well, for the purposes I intend it for it would certainly appear so (background upthread)

Cheers

Harry


If you think the next rate move is going to be up (I do) then it is also reasonably likely that Gilt yields are going to go up to.

Thus it seems likely that the SP you could buy for today is going to fall, which means you could be locked into a capital loss for a few/some/many years.

I appreciate you might be thinking about ISA but don't let the tax tail wag the investment dog. Saving 19% of 4.35% in tax may well pale if you suddenly see a 20% capital loss on the SP.

That what I mean about the risk premium.

A say, two year High Street bond is definitely going to pay out and definitely not going to suffer capital loss. You could then review the situation then and re-invest. If rates are still High it might go straight back in. If low, then revert to equities. If you are carrying a 20% loss at that two year point, you are kind of stuck in limbo.

But of course that balance of risk is something only you can asses for yourself.

[EDIT] I see non wrapper rates now 4.5% for 5 years, 4.35% for 2 years. Protected, zero risk.

I'm shortly be going to start one of these off....
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Jimmy Page on 02/10/2022(UTC), MrFlibble on 02/10/2022(UTC), Harry Trout on 03/10/2022(UTC)
Jimmy Page
Posted: 02 October 2022 15:22:45(UTC)
#50

Joined: 11/11/2017(UTC)
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Mr Helpful;241192 wrote:
Sequence of Return Risk is only a problem where the investment pot capital is to be drawn down over retirement years.
Then a stocks decline, esp in the early years of retirement, will have the 100% stocks retiree needing to sell stocks at silly artificially low prices, from which their portfolio may never ever recover.
In this situation, the role of a second basket of firmer priced assets to provide income over the lean years,
becomes key.

If the natural yield of the portfolio is sufficient for expenses, such that no investments need be sold at any time for income, then SOR Risk is not an issue. The main thing then to look out for is whether the income stream is keeping up with inflation.

Apologies to those for whom all of this is 'bleedin obvious'.

'Bleedin obvious'?
That was as incendiary and divisive a statement as you could get on here, once upon a time. ;-)
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4 users thanked Jimmy Page for this post.
Captain Slugwash on 02/10/2022(UTC), Harry Trout on 03/10/2022(UTC), Mr Helpful on 03/10/2022(UTC), SF100 on 03/10/2022(UTC)
Thrugelmir
Posted: 02 October 2022 15:52:35(UTC)
#35

Joined: 01/06/2012(UTC)
Posts: 5,331
Keith Cobby;241188 wrote:
Harry Trout;241173 wrote:
Keith Cobby;241151 wrote:
A very interesting chart Harry. It clearly shows that gilts aren't the simple, fluffy, risk-free investments a lot of investors think they are, but can actually be incredibly toxic as we saw this week. As you know I have a life-long aversion to them.


Thanks Keith

I think that, if I recall correctly, you are keeping a 100% allocation to equities?

Might I enquire if it's not too nosey how you cope with sequence of returns risk when it comes to your living expenses for example?

Do you have any allocation to risk-free / lower risk assets? Or maybe it's more correct to talk about "low-volatility" than "low-risk"

Perhaps you just live off the dividend yield?

Many thanks

Harry



Overall portfolios to be about 70% global dividend paying ITs (eg FCIT, BNKR, SAIN, JGGI etc which have been very stable over time) and 30% growthier trusts. No intention of investing in any fixed income. This should give protection against sequence of returns risk, which is really only a problem if you require a high yield on your pf each year.


How you are intending to maintain the buying power of the dividends. If the annual increases in the dividends declared fail to match your personal rate of inflation?
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Jimmy Page
Posted: 02 October 2022 16:54:07(UTC)
#37

Joined: 11/11/2017(UTC)
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Thrugelmir;241215 wrote:
Keith Cobby;241188 wrote:
Harry Trout;241173 wrote:
Keith Cobby;241151 wrote:
A very interesting chart Harry. It clearly shows that gilts aren't the simple, fluffy, risk-free investments a lot of investors think they are, but can actually be incredibly toxic as we saw this week. As you know I have a life-long aversion to them.


Thanks Keith

I think that, if I recall correctly, you are keeping a 100% allocation to equities?

Might I enquire if it's not too nosey how you cope with sequence of returns risk when it comes to your living expenses for example?

Do you have any allocation to risk-free / lower risk assets? Or maybe it's more correct to talk about "low-volatility" than "low-risk"

Perhaps you just live off the dividend yield?

Many thanks

Harry



Overall portfolios to be about 70% global dividend paying ITs (eg FCIT, BNKR, SAIN, JGGI etc which have been very stable over time) and 30% growthier trusts. No intention of investing in any fixed income. This should give protection against sequence of returns risk, which is really only a problem if you require a high yield on your pf each year.


How you are intending to maintain the buying power of the dividends. If the annual increases in the dividends declared fail to match your personal rate of inflation?

Clearly can't speak for anyone else, but in our case by
1. Pitching year 1 yield at something 'sensible' with a core of ITs who had a history of well covered annual increases.
2. Pitching withdrawals below dividend income year 1. Excess added to cash reserves within the account.
3. Increasing withdrawals annually by personal inflation (required for non-discretionary spending only). Excess again saved within cash reserves.

Cash reserves have increased significantly over the last ten years - dividends have increased ieo inflation. That, plus the widening gap between dividends and withdrawals has worked ok so far.

Also - option exists to buy an annuity in later life. Or indeed to start running down capital. But so far, so good. No sleepless nights, no selling decisions.
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4 users thanked Jimmy Page for this post.
Captain Slugwash on 02/10/2022(UTC), Keith Cobby on 02/10/2022(UTC), Harry Trout on 03/10/2022(UTC), Mr Helpful on 03/10/2022(UTC)
Thrugelmir
Posted: 02 October 2022 17:36:02(UTC)
#38

Joined: 01/06/2012(UTC)
Posts: 5,331
Jimmy Page;241217 wrote:
Thrugelmir;241215 wrote:
Keith Cobby;241188 wrote:
Harry Trout;241173 wrote:
Keith Cobby;241151 wrote:
A very interesting chart Harry. It clearly shows that gilts aren't the simple, fluffy, risk-free investments a lot of investors think they are, but can actually be incredibly toxic as we saw this week. As you know I have a life-long aversion to them.


Thanks Keith

I think that, if I recall correctly, you are keeping a 100% allocation to equities?

Might I enquire if it's not too nosey how you cope with sequence of returns risk when it comes to your living expenses for example?

Do you have any allocation to risk-free / lower risk assets? Or maybe it's more correct to talk about "low-volatility" than "low-risk"

Perhaps you just live off the dividend yield?

Many thanks

Harry



Overall portfolios to be about 70% global dividend paying ITs (eg FCIT, BNKR, SAIN, JGGI etc which have been very stable over time) and 30% growthier trusts. No intention of investing in any fixed income. This should give protection against sequence of returns risk, which is really only a problem if you require a high yield on your pf each year.


How you are intending to maintain the buying power of the dividends. If the annual increases in the dividends declared fail to match your personal rate of inflation?

Clearly can't speak for anyone else, but in our case by
1. Pitching year 1 yield at something 'sensible' with a core of ITs who had a history of well covered annual increases.
2. Pitching withdrawals below dividend income year 1. Excess added to cash reserves within the account.
3. Increasing withdrawals annually by personal inflation (required for non-discretionary spending only). Excess again saved within cash reserves.

Cash reserves have increased significantly over the last ten years - dividends have increased ieo inflation. That, plus the widening gap between dividends and withdrawals has worked ok so far.

Also - option exists to buy an annuity in later life. Or indeed to start running down capital. But so far, so good. No sleepless nights, no selling decisions.



Investment trusts can only distribute what they receive or generate. Whether it be income or cash generated from a realised capital gain. When using retained or capital reserves to provide an increasing dividend. Shareholders are simply receiving their own money back. As there's a corresponding drop in NAV.

My question was posed looking into the future. Been an easy ride for investors for the past 12 years. The next decade is likely to be far more challenging. With assumptions around sequential risk severely challenged. There's a first time for everything.
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Harry Trout on 03/10/2022(UTC)
Keith Cobby
Posted: 02 October 2022 17:39:19(UTC)
#36

Joined: 07/03/2012(UTC)
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Thrugelmir;241215 wrote:
Keith Cobby;241188 wrote:
Harry Trout;241173 wrote:
Keith Cobby;241151 wrote:
A very interesting chart Harry. It clearly shows that gilts aren't the simple, fluffy, risk-free investments a lot of investors think they are, but can actually be incredibly toxic as we saw this week. As you know I have a life-long aversion to them.


Thanks Keith

I think that, if I recall correctly, you are keeping a 100% allocation to equities?

Might I enquire if it's not too nosey how you cope with sequence of returns risk when it comes to your living expenses for example?

Do you have any allocation to risk-free / lower risk assets? Or maybe it's more correct to talk about "low-volatility" than "low-risk"

Perhaps you just live off the dividend yield?

Many thanks

Harry



Overall portfolios to be about 70% global dividend paying ITs (eg FCIT, BNKR, SAIN, JGGI etc which have been very stable over time) and 30% growthier trusts. No intention of investing in any fixed income. This should give protection against sequence of returns risk, which is really only a problem if you require a high yield on your pf each year.


How you are intending to maintain the buying power of the dividends. If the annual increases in the dividends declared fail to match your personal rate of inflation?


Couple of points. The yields of the big global ITs have been sustainable over decades in all weather and have a good record in keeping up with and often exceeding inflation, although as you point out each of us has a different inflation rate. Also, given that this is a retirement scenario, just spending yield leaves your capital (hopefully growing) untouched. Although most commentators concentrate on the downside of sequential returns, it might be that if returns are higher than planned, you could still be accumulating. The 30% in growth funds (eg SMT/PE etc) would hopefully provide additional flexibility.
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2 users thanked Keith Cobby for this post.
Harry Trout on 03/10/2022(UTC), Mr Helpful on 03/10/2022(UTC)
Jimmy Page
Posted: 02 October 2022 19:50:51(UTC)
#39

Joined: 11/11/2017(UTC)
Posts: 1,686

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Thrugelmir;241219 wrote:
Jimmy Page;241217 wrote:
Thrugelmir;241215 wrote:
Keith Cobby;241188 wrote:
Harry Trout;241173 wrote:
Keith Cobby;241151 wrote:






How you are intending to maintain the buying power of the dividends. If the annual increases in the dividends declared fail to match your personal rate of inflation?

Clearly can't speak for anyone else, but in our case by
1. Pitching year 1 yield at something 'sensible' with a core of ITs who had a history of well covered annual increases.
2. Pitching withdrawals below dividend income year 1. Excess added to cash reserves within the account.
3. Increasing withdrawals annually by personal inflation (required for non-discretionary spending only). Excess again saved within cash reserves.

Cash reserves have increased significantly over the last ten years - dividends have increased ieo inflation. That, plus the widening gap between dividends and withdrawals has worked ok so far.

Also - option exists to buy an annuity in later life. Or indeed to start running down capital. But so far, so good. No sleepless nights, no selling decisions.



Investment trusts can only distribute what they receive or generate. Whether it be income or cash generated from a realised capital gain. When using retained or capital reserves to provide an increasing dividend. Shareholders are simply receiving their own money back. As there's a corresponding drop in NAV.

My question was posed looking into the future. Been an easy ride for investors for the past 12 years. The next decade is likely to be far more challenging. With assumptions around sequential risk severely challenged. There's a first time for everything.

aka drawdown. However you do it, it's drawdown. Drop in NAV or drop in shares held, it's drawdown. That's retirement for you.
If future market conditions are significantly more challenging, it will significantly challenge any drawdown method. Still 4% from 60/40? If not, what?
My reply described three mitigations we use for 'natural yield'.
If push comes to shove and us pensioners have to reduce withdrawals below personal inflation, I'd prefer it was done by a 'natural' reduction in received dividends than having to decide what reduction, and then what to sell into a significantly challenging down market to achieve it.
This pf covers all day-day spending. Discretionary spends - spending that can be deferred, timed, if necessary to suit the market - is taken from elsewhere.

A quick fag packet check - BNKR have increased dividend every year. (50 years?). Sometimes not to inflation, but has exceeded it over time.
Recent example figures-
CPI over last 5 years 19% (from BoE calculator).
BNKR dividend increase 26.6%. (assuming last divvie 6p)
Year 1 withdrawal less than received dividend, and annual inflation increases thereafter have allowed more and more cash reserves to be built. And the BNKR price is also up 16%.

CPI from 2006 - 54%. BNKR dividends up 148%.

Not waving a flag for BNKR particularly, but figures were reasonably close to hand.
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4 users thanked Jimmy Page for this post.
Captain Slugwash on 02/10/2022(UTC), Harry Trout on 03/10/2022(UTC), Mr Helpful on 03/10/2022(UTC), Keith Cobby on 03/10/2022(UTC)
Thrugelmir
Posted: 03 October 2022 14:14:07(UTC)
#40

Joined: 01/06/2012(UTC)
Posts: 5,331
Jimmy Page;241234 wrote:
Thrugelmir;241219 wrote:
Jimmy Page;241217 wrote:
Thrugelmir;241215 wrote:
Keith Cobby;241188 wrote:
Harry Trout;241173 wrote:
Keith Cobby;241151 wrote:






How you are intending to maintain the buying power of the dividends. If the annual increases in the dividends declared fail to match your personal rate of inflation?

Clearly can't speak for anyone else, but in our case by
1. Pitching year 1 yield at something 'sensible' with a core of ITs who had a history of well covered annual increases.
2. Pitching withdrawals below dividend income year 1. Excess added to cash reserves within the account.
3. Increasing withdrawals annually by personal inflation (required for non-discretionary spending only). Excess again saved within cash reserves.

Cash reserves have increased significantly over the last ten years - dividends have increased ieo inflation. That, plus the widening gap between dividends and withdrawals has worked ok so far.

Also - option exists to buy an annuity in later life. Or indeed to start running down capital. But so far, so good. No sleepless nights, no selling decisions.



Investment trusts can only distribute what they receive or generate. Whether it be income or cash generated from a realised capital gain. When using retained or capital reserves to provide an increasing dividend. Shareholders are simply receiving their own money back. As there's a corresponding drop in NAV.

My question was posed looking into the future. Been an easy ride for investors for the past 12 years. The next decade is likely to be far more challenging. With assumptions around sequential risk severely challenged. There's a first time for everything.

aka drawdown. However you do it, it's drawdown. Drop in NAV or drop in shares held, it's drawdown. That's retirement for you.
If future market conditions are significantly more challenging, it will significantly challenge any drawdown method. Still 4% from 60/40? If not, what?
My reply described three mitigations we use for 'natural yield'.
If push comes to shove and us pensioners have to reduce withdrawals below personal inflation, I'd prefer it was done by a 'natural' reduction in received dividends than having to decide what reduction, and then what to sell into a significantly challenging down market to achieve it.
This pf covers all day-day spending. Discretionary spends - spending that can be deferred, timed, if necessary to suit the market - is taken from elsewhere.

A quick fag packet check - BNKR have increased dividend every year. (50 years?). Sometimes not to inflation, but has exceeded it over time.
Recent example figures-
CPI over last 5 years 19% (from BoE calculator).
BNKR dividend increase 26.6%. (assuming last divvie 6p)
Year 1 withdrawal less than received dividend, and annual inflation increases thereafter have allowed more and more cash reserves to be built. And the BNKR price is also up 16%.

CPI from 2006 - 54%. BNKR dividends up 148%.

Not waving a flag for BNKR particularly, but figures were reasonably close to hand.


If it were that easy why isn't your investment strategy mainstream then? Investors demonstrate many traits, hindsight bias being one of them. As reaffirming one's own decisions is totally understandable. As we all start with limited knowledge and experience.

With a current yield of 2%. You'd need to model whether the investment would support say a 4% drawdown. Through all the ups and downs of market volatility. Eating into capital reduces the future income stream. With inflation likely to run over 5% for a couple of years. There's considerable challenges even in the short term.

The 60/40 portfolio may well return into vogue after a decade in decline. The mechanics of smoothing out equity returns date back as far as 1952. Everything moves in cycles.
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Harry Trout on 03/10/2022(UTC)
Tim D
Posted: 03 October 2022 15:00:50(UTC)
#43

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Thrugelmir;241324 wrote:
With a current yield of 2%. You'd need to model whether the investment would support say a 4% drawdown. Through all the ups and downs of market volatility. Eating into capital reduces the future income stream. With inflation likely to run over 5% for a couple of years. There's considerable challenges even in the short term.


The problem with talking yourself into "I must amass a big enough pot that I can live off the 2% natural yield without drawing on the capital" vs. "I think the safe rate of withdrawal is about 4%" thinking is that the former may need a decade or more extra saving and investing (which requires working and earning) to achieve. And we all only have so long to live; how much of what could have been your best retirement years (the ones where you're still fit and healthy) do you want to spend still grafting to build capital so that you're completely secure when you do retire, vs. how much are you prepared to take a bit of a chance to retire earlier?

No easy answers to this. I appreciate people have different priorities though; folks who do want to leave a big pot to their heirs probably have the easiest decision: just keep earning and investing. (But it's not necessarily a binary decision; there's a whole middle ground of "downshifting" too.)
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SF100 on 03/10/2022(UTC), Harry Trout on 03/10/2022(UTC), Keith Cobby on 03/10/2022(UTC), Guest on 23/07/2023(UTC)
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