This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.
Buying The Living is Yield-y: a natural yield model portfolio [Members]
Next post: Weekend reading: You will probably die old. That’s a good thing.
Previous post: Investing for beginners: Risk versus reward
Comments on this entry are closed.
Nice article and great idea to do this portfolio. Thank you. I understand why you haven’t done it but it would interesting to see what the average weighted TER and other non platform costs are just as a ball park comparison to the 0.2-0.3% which is easily achievable for a global tracker.
@TI – brilliantly timed for me. Thank you.
I decided several months ago to view my stash as having three legs – state & equal DB pension as the floor (in 7 years); SIPP post-PCLS is mostly Global tracker, BHMG, Gold and enough cash to cover my next 7 years family expenses. I need some resilience here as I still want to go on holiday if the market crashes 50%. This is for my contribution to family living expenses and to use up the personal allowance until pensions kick in and as cash for holidays, new car, other lumpy big ticket items and hopefully provide house deposits for the kids in 15 years (optional); and my ISA to provide my personal, monthly expenses.
Yes, I know money is fungible and all that, but it works for me.
The ISA is invested mostly in ITs and should generate 133% of my expenses (I hope it also force some budgeting discipline on me!) which I hope is enough fat to see me through. The 33% will be re-invested in FI, probably cheap ETFs as I’m looking to sell these down if the dividends aren’t sufficient, rather than contribute to dividends. It will be my personal expenses emergency fund . I’ve been a fair bit more aggressive than you and I’ve a few holdings I’ve been waiting to trim and reinvest – HICL, INPP and SPDR Global Dividend Aristocrats are all x2 overweight. I’ve been waiting for your model portfolio to give me some ideas. Once I’ve trimmed, it’ll give me 12 funds of about equal value. That’ll do for the time being.
I’ve also gone big into renewables (TRIG – mostly wind – and Foresight Solar – mostly… err, solar. The dividends are juicy and they’re on big discounts (as are HICL & INPP). The discounts protect me as long as I monitor that asset disposals are near book value.
Now I just need to be brave and retire. Ho hum.
@Brod #2 > Now I just need to be brave and retire.
JFDI. Every OMY at work is one more year you’ll never live again 😉 Not a universal recipe but you’ve thought it long enough. Don’t just load the gun, pull the trigger.
@Adrian — Glad it’s hit the spot for you. Hmm, perhaps I could do a deeper dive into the metrics of the portfolio in some future post. As you anticipate, I do think it’s kind of pointless. I’m going to discover that the TER is about 30-80 basis points higher than a tracker for most of the funds, and (much) more so with the property and infrastructure ones. But would does this information give us? It’s a price of entry as far as I’m concerned for building this engine, and for keeping it on the road. If you want a management layer to help husband the income flow for you (the trust managers, and their dealing costs and cock-ups) then that has a price, as you appreciate. But yes, will keep in mind for a future piece! 🙂
@Brod — Cheers for sharing your thoughts. I see the appeal of the renewable trusts too, of course, and indeed I currently own small holdings of TRIG and UKW in my vaguely bucketed ‘pay off the mortgage one day’ sub-portfolio. But I do think there’s potential existential risks with these trusts that you don’t get with some of the others. Perhaps a future post — I could do with the excuse to dig into the whole sector much more deeply.
@ermine — Indeed. I think if the sort of people who read Monevator for years think they’re probably ready, then they *are* ready. 🙂 Good luck Brod!
Timely, thank you. The headline of article made me upgrade to Mogul to see if it can provide some inspiration for a variant of this problem! Ignoring equity in property, 2/3 of my net worth is in pensions. The remaining 1/3 is £500k in mostly stock & share ISA which I hope can fund me for 10 years until I get to 57 when the pensions kick in. I’ve limited the yield / volatility problem to just the ISA part of my portfolio for now. Started to move £100k into fixed term cash ISA (4.2%) to guard against market mischiefs but need to do a bit more if I do FIRE in 2 years. I may skip the property part of your model portfolio due to previous poor experience (when liquidating), and I am already exposed to property via a rental income.
@TI – existential risks?
Yes please, a deep dive would be very welcome! Superficially, Renewables (and Infrastructure) are on big yields and bigger discounts. The discounts offer some protection to my stake. My take on this is that governments need this stuff building and are offering good, almost guaranteed returns to keep this stuff off balance sheet, as it were, so they don’t spook the bond markets. Good for investors, not so good for tax payers and users who end up paying more in the end.
On the costs front for the Trusts, it may be closer to a tracker than it appears.
The combination of discounts ( if you have a 10% discount then you are enhancing the dividend stream by a similar amount and for a higher yield portfolio that takes the edge off the extra costs) and gearing gives a lift, hopefully too .
Thanks @ Investor. The reason I’d be interested is that I am very attracted to the idea of a natural yield portfolio for all the reasons you explain. This is particularly so as I get older or if I predecease my wife. I obviously also accept that having money managed by the Investment Trusts would not come for free. But the difference between 30 and say 100 basis points is key. Taking a draw down rate of say 3.5% then 30 basis points of costs represents approximately 8% annual reduction in income (0.3 x 100 / 3.5) but 100 basis points is a nearly a 30% reduction.
Just wanted to add my thanks for doing this, am very interested in pursuing this way of funding retirement.
@reddot I upgraded to Mogul for the same reason!
@TI really great you’re doing this – not sure I’d put so much into property and infrastructure personally, and a little worried about putting anything into ‘junk’ bonds. I’ll read all the links you provided in the article.
I’m about a year away from pulling the retirement trigger and still can’t reconcile my risk stance between going all-in on the McClung total return approach to deaccumulation or the living yield approach. There’s an IFA, Chancery Lane, that specialises in the IT route for living yield (that’s all they do I believe). They published a substantial paper last year with stats that purport to prove that their approach beats the total return strategy invested cheaply in the global market long-term. I remain sceptical about the numbers though and not happy to pay a 1% fee even if it does include a full financial planning service (the paper is not on their website, you have to request it – though thankfully they don’t chase you for your business). I’m more than happy to manage my own affairs.
I’m thinking of splitting my pot between the two approaches in order to get some of the potential upside from total return and some of the comfort from living yield. I need to do more modelling of my own.