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Thrugelmir
Posted: 03 October 2022 15:31:25(UTC)
#45

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Tim D;241330 wrote:
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.)


There's a generation who have never experienced a torrid bear market. Where everything you believed to be true in relation to a particular investment is found to have built on foundations of sand. I was personally scarred by the Nikkei crash of 1990. Not a huge sum fortunately. Has shaped personal my investment strategy ever since. Not to say that I don't invest for high stakes. But I spend many hours formulating ideas. As there's downside in every investment choice. Being aware of the negatives is far more important than identifying the positives.

In summary my approach is:-

1. Successful investing is only common sense. Each system for investing will eventually become obsolete.
2. Be mindful that companies are about people, not assets
3. Remember, balance sheet strength is critical
4. Understand what you’re buying
5. Be wary of over-ambition
6. Think long-term
7. Benchmarks are just measuring devices
8. Take advantage of irrational behaviour
9. Do your own research
10. Make sure that any competitive advantage is sustainable.
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Jimmy Page
Posted: 03 October 2022 15:42:09(UTC)
#42

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Thrugelmir;241324 wrote:
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.

I wouldn't be that patronising to claim anything of 'my' strategy. I'll leave that unattractive characteristic to others.

I've covered what I do, and the mitigations. 2%? 4% drawdown? Eating into capital? You're talking to yourself, not what I do.

Point 1. Pitch at something 'sensible' My original 90/10 (10% cash) yielded just under 4% (then).
Point 2. Year 1 drawdown set at 3.6%
Point 3. Increase withdrawals by inflation. Allow yield to add to cash reserves as/if excess occurs.

Short term? Were it starting today, that starting cash (representing c.3 whole years of income) would protect required drawdown if received yield fell short. (A 10% shortfall year 1 would diminish reserves from 3 years to 2.91).

But you're more interested in the longer term? Drawdown still matched to inflation ('though currently capped to stay under 40% tax), and required drawdown is now down to near 3%.
Cash reserves have grown to represent c.5 whole years of income.

Why isn't it mainstream? Don't know. I've read the books, listened to the industry and made my own mind up. Some good arguments, many seemed very weak to me-
eg-
One major criticism of 'natural yield' was it couldn't work because there was no historical data to prove it did or didn't.
(From a book written by the owner of a software company selling drawdown calculators to the industry).

Or, from the same source, that it only works if you've got 'enough' money.

But I wouldn't dream of arguing against the mainstream. I really have no ego to burst. If it goes wrong I'll let you know - the day after I bail out and buy an annuity from this bucket.

(Another random piece of historical data - MYI yield increased by 212% since 2006. CPI up by 54%.)
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Jimmy Page
Posted: 03 October 2022 15:56:51(UTC)
#44

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Tim D;241330 wrote:
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.)

I get the overall thrust of what you're saying, but a choice between 2% (dividends) or 4% (harvesting) is a red herring surely, and only thrown up perhaps by the fact I only had BNKR data to hand last night!

Ten odd years ago, I pitched the yield at just under the 4% generally accepted as the norm for harvesting.
Didn't overreach for yield with 100% junk, zombies, etc. Had a core of 'divvie increaser' ITs, and the start yield raised with the likes of MYI. REITs and green stuff as well.
90/10 - every bit of the 90% was producing dividends.

Required yield is now naturally down to nearer 3%, the pf balance 85/15, but, in our case importantly, the capital is still growing, no panic sales, no hard decisions.

If it turns sour, then so be it. An annuity would be the only other option for this pot, and that's what it will continue to be compared against - tempered with a desire to pass on some/ all of it IHT-free (it's in a SIPP).
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Thrugelmir
Posted: 03 October 2022 16:35:14(UTC)
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mark spurrier;241118 wrote:
Thrugelmir;241041 wrote:
I suspect that the reality of what lies ahead hasn't fully sunk in yet. Many investors are still living in the bull market era. Viewing many shares ( and indirectly) asset prices as cheap or offering a discount.

A famous quote sums on the current mood.

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” - Sir John Templeton,

Government Bonds are entering a new era. Higher yields are here to stay. They offer a risk free return in an unstable climate. As a consequence there'll be a period of adjustment while individual company shares are rerated. At the core the financially weak companies will portionately suffer.

Next year investment into Government Bonds will back on the agenda. As sure as night follows day.


The risk free return relates to the very small likelihood that the coupon wont be paid and they wont redeem at par in "n" years.
Investment risk is another thing all together
If anyone can assess the macro and political risks correctly at the moment they are better man than me.

If Central Banks want to increase rates by 1% jumps the bond market is going to leap around US is looking at a 300% rise in rates - what does anyone think is going to happen with a fixed return bond?

Low risk? Absolutely not.

If you want a laugh at gilts = low risk have a look at the chart on this one

TREASURY 0.125% 22/03/2073

Why were the pension funds screaming ?


You appear to be confusing volatility with risk. Government bonds, other than index, return a fixed amount over the term held Totally predictable. Government debt globally is graded. My observations relate purely to the UK , US etc.

Pension funds have been using derivatives. I doubt that they were screaming. That's just media hyperbole. The BOE will simply act as a market maker to stabilise matters and allow time for the positions to unwind.

US 30 year mortgage rates are already approaching 7%. There's a reset underway.

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Harry Trout on 07/10/2022(UTC)
Jimmy Page
Posted: 03 October 2022 17:52:29(UTC)
#41

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Thrugelmir;241324 wrote:
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:







.



.


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


If it were that easy why isn't your investment strategy mainstream then?


Is there one true mainstream strategy? A consensus amongst the experts?

"As the inventor of the MPT, the Nobel-prize-winning economist Harry Markowitz, himself acknowledged,
it was not designed for running an individual's portfolio, but an open-ended, undated, mutual fund with
daily cashflows, seeking to grow in value. Indeed, he rejected the MPT for his own pension"

Checking some other expert's personal pension funds in a 1997 piece, when bonds offered a return-

WF Sharpe - Started 75/25, stocks/ bonds but 'now considerably different due to no rebalancing'.
RJ Shiller - Has other assets but has been exiting the stock market. Has some inflation linked bonds - the 'riskless asset' of the theory.
NG Mankiw - Move assets when one asset outperforms another. Real estate, like foreign equities, offer substantial diversification. The new inflation linked bonds earn 3.5% over inflation which, looking back over a century or more, looks attractive for an investment with minimum risk.
HM Markowitz - initially 50/50, but then 'I split my money between asset classes, like efficient portfolios. But.. I know I should overweight small-caps and perhaps EM...and then get a comfortable balance stocks/ bonds' (Phew!)
RH Thaler - From day 1, 100% stocks. 'When the Dow reaches 8000 it is tempting to sell but I'm not smart enough to market time'.
LB Siegel - Nearly 100% stocks, but not bullish right now (1997), so if needed for all income, would probably allocate 50% equities (rather than normal 60%), the rest to long term treasury bonds.

Consensus?

Then there's this take.
https://static1.squaresp...ail+online+08072019.pdf
(credit strangways).

By the way, don't confuse 'natural yield' with 'equities'. The 90% bit (currently 85%) is there to generate yield, I couldn't care less where it comes from, within reasonable bounds of security, performance and future proofing.
I have always had a guilty corner with a small percentage of NCYF. If yield picked up I'd happily buy more bonds further down the risk register. It's the yield that would drive it though, not some need to dampen day to day volatility of the bottom line. (Don't also confuse volatility with risk...)
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Harry Trout on 07/10/2022(UTC)
Mr Helpful
Posted: 04 October 2022 11:30:59(UTC)
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Thrugelmir;241041 wrote:
I suspect that the reality of what lies ahead hasn't fully sunk in yet. Many investors are still living in the bull market era. Viewing many shares ( and indirectly) asset prices as cheap or offering a discount.

A famous quote sums on the current mood.

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” - Sir John Templeton,

Government Bonds are entering a new era. Higher yields are here to stay. They offer a risk free return in an unstable climate. As a consequence there'll be a period of adjustment while individual company shares are rerated. At the core the financially weak companies will portionately suffer.

Next year investment into Government Bonds will back on the agenda. As sure as night follows day.


Would be interested in light of opening para, how your portfolio was positioned Nov 21,
and how you are adjusting portfolio currently.
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Bulldog Drummond
Posted: 04 October 2022 11:35:12(UTC)
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I see that Royal London, who are pretty good on fixed income, have said that they are not yet positive on gilts.

https://citywire.com/funds-insid...30?section=funds-insider
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Harry Trout on 07/10/2022(UTC)
Thrugelmir
Posted: 04 October 2022 12:21:39(UTC)
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Mr Helpful;241450 wrote:
Thrugelmir;241041 wrote:
I suspect that the reality of what lies ahead hasn't fully sunk in yet. Many investors are still living in the bull market era. Viewing many shares ( and indirectly) asset prices as cheap or offering a discount.

A famous quote sums on the current mood.

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” - Sir John Templeton,

Government Bonds are entering a new era. Higher yields are here to stay. They offer a risk free return in an unstable climate. As a consequence there'll be a period of adjustment while individual company shares are rerated. At the core the financially weak companies will portionately suffer.

Next year investment into Government Bonds will back on the agenda. As sure as night follows day.


Would be interested in light of opening para, how your portfolio was positioned Nov 21,
and how you are adjusting portfolio currently.



Prior to November 2021. I had built significant holdings in energy in particular, i.e.the likes of Shell, BP, Total , Gore Street Energy Storage, Downing Renewable & Infrastructure, Gresham House Energy Storage. On the back of a combination of rising energy prices, falling exchange rate boosting earnings, high premiums, political risks. I trimmed back exposure progressively. Shell in particular was a bargain to buy when the anti fossil fuel brigade were in full voice.

My largest holding by far was and still is in Contourglobal plc. Spent many hours researching the company. Although a FTSE250 company, was an illiquid stock with some 70% of the shares in management hands. Received little press coverage but had a progressive dividend policy (objective to raise by 10% a year). Then earlier this year the company received a knock out bid. 38% gain overnight. While the formalities are being completed for the takeover I have subsequently received another two quarterly dividend payments.

With the cash from disposals. I've been drip feeding into the likes of Nat West, Legal & General, Glencore, City of London Investment Group, Renishaw, Ruffer, XPS Pensions, Aberdeen Diversified Income and Growth Trust. Also some small cap AIM listed shares.

Other than Total (which I bought in quantity in 2020 due to the 11% yield on offer). All my other foreign exposure is through Investment trusts and companies. At heart my core strategy now is one of good solid companies that have sound management teams , strong balance sheets and are cash generative. As with GLO which I've described above. I don't attempt to time or beat the market or even benchmark. Investing is akin to fishing, can require years of patience to reap the full rewards.

PS. I hold no Government stock currently but will be constantly evaluating the situation. There's going to be a time to buy and lock into long term yields. Smooth away the volatility of equity markets.
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paul armstrong
Posted: 04 October 2022 14:04:08(UTC)
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For lots of very clear discussions on drawdown strategies such as bucket strategies and going for natural yield, the late Dirk Cotton had a great website which is still up
http://www.theretirementcafe.com/

Calculation of yield to maturity is quite straightforward, its an internal rate of return calc, and for reasonable maturities the difference between clean and dirty price won't matter much I wouldn't have thought..

Gilts are only risk free if held to maturity and yep thats just the £100 principal ( except for IL stuff).

With halifax online I recall gilts can only be bought by telephone and is expensive (£70 springs to mind).

Does anyone know of a reliable source for the real yield to maturity for IL gilts ?
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Harry Trout on 07/10/2022(UTC)
Thrugelmir
Posted: 04 October 2022 14:28:41(UTC)
#53

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paul armstrong;241471 wrote:

Does anyone know of a reliable source for the real yield to maturity for IL gilts ?


Handy resource.

https://www.dmo.gov.uk/d...tareport?reportCode=D9C

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