This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.
Decumulation strategy: the No Cat Food Portfolio [Members]
The Latest Articles
Essential Reading
Better Investing
Property Posts
Get Money Motivated
Monevator is a place for my thoughts on money and investing. Read our disclaimer. Subscribe to get all our free posts via email. Follow us on Twitter, Facebook, or via RSS. You can also send us a message.
Copyright © 2007-2024 Monevator. All rights reserved.
Disclaimer: All content is for informational purposes only. I make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use. Full disclaimer and privacy policy. This site uses cookies and features affiliate links.
Comments on this entry are closed.
Thank you for the article , I was interested in the split between Global Equity Index and the multi factor index and the reasoning, be interesting to see how this plays out…
I understand the concern about the dominance of recent years of a few Large Cap growth stocks, but wonder if the fear is over done.
Looking back at the historical context of the late 1980’s Japanese equities had been on a tear and in 1987 both US and Japanese equities each represented around 35% of the index and yet by 1989 Japanese equities had a very large fall, that continued for many years, such that the Japanese share of the market is now around 1/10th the size of the US share, when you look at the index levels of that period the index fell but recovered fairly quickly ( far larger falls were to follow in 2000-2003 and 2007-2009)
Perhaps the nature of the global index is that it may well self correct fairly quickly ?
Thanks for the article. Interesting as my wife has a small sipp which she shouldn’t need to draw on for a while, if at all. For my own sipp I am aiming for 50:50 equity & volatile stuff v government bonds of all flavours. You seem to be 75:25. Mind you, I am 70 so the time horizon is foreshortening whereas my wife is 66 and to all purposes effectively immortal. UC15 chips in 5% gold I note. Will look at that.
Thanks for the update – very interesting.
Whilst you clearly explain you’re keeping things simple on the equity side – would it be *acceptable* to have 100% of the equity allocation in just a single global fund? ie if one didn’t have the level of insight/opinion you’ve explained?
Of course, an annuity or a defined benefit pension (or a state pension) which increases with inflation also protects your purchasing power against inflation.
But with an annuity you give up control of your capital. If you have a defined benefit pension then I congratulate you on your luck! And the state pension is a limited amount and its details could be adversely changed by future governments.
Brill! I’ve been waiting for part two for ages.
Love the short rolling linkers ladder. Brilliant. Might borrow that for GISG (my global short inflation linked etf). Mind you, at the worst of the bondpocalyse it was only down a few percent.
As a suggestion, maybe you could include a summary table showing a vanilla 60/40 to compare results? And/or a couple of other common allocations?
Or not 🙂
Fab stuff as always!
March will be an exciting month for sure
typo? Top table IGL5 -> IGLS
Interesting points on the rolling linker ladder. I was planning to hold on to some index-linked savings certificates to play a similar role, but the new rules (must hold to maturity) have probably scuppered that option.
Thanks TA, that was a really good read. I look forward to watching this over the years.
I am around 10 years away from hopefully reaching Financial Independence and my current plans are to use a bridging fund equal to £600k to provide £24k a year at 4% SWR for 21 years at which point I will have £24k in equivalent safe public pensions.
This bridging fund of 24k includes plenty of buffer to spend less during big market slumps. I am doing this personally because knowing my £600k has to last 21 years only and that I have a safety net of my £24k coming in at 68 is one way I can sleep at night more peacefully without needing a lower SWR.
This requirement of making money last until the public pension safety net makes me wonder if my approach to draw down should differ in anyway as I know if it were to go down to £0 – I would be fine as long as it didn’t happen within 21 years. I was thinking of a classic 60/40 split during the drawn down, I use 80/20 split currently during accumulation.
Love to hear anyone’s thoughts on drawdown techniques given the above.
Thanks again for a great article!
TFJ
Thanks for this. Interesting article – love the name. I’ve been giving quite a lot of thought to ‘holistic’ asset allocation and this is helpful.
You’re giving up quite a bit in fees, aren’t you? Your two equity ETFs are 17 and 50bps respectively. 50bps feels like a lot for the multi-factor portfolio particularly. Even if you believe that multi-factor ‘works’ – do you think it’ll work by more than 33bps a year in the very long run? I’m skeptical.
I’m such a (spiritual) Northerner – like a broken record I’m going to point out the dividend WHT issue with your Equity ETFs not being swap based. You’re giving up approximately: WHT * Av US div yield * US weight in Equity ETFs * Equity Wt -> 15% *1.44% * 60% * 60% = 0.08%. Sure only 8bps, but that’s still £800 on a £1m portfolio. Although I concede there’s no trivial fix to this problem, because, AWAIK there’s still no ‘global’ equity ETF that does the US bit as a Swap.
Many thanks for such an interesting and for me at least (yes, two more years!) highly relevant article, very much looking forward to following the series. Question: as a relative newbie to DIY personal finance management, is there a reason for all the funds, particularly equities, in the portfolio being ETFs?
@ Hariseldon – The performance of the global index after the Japanese bubble burst offer partial comfort. I think you’re right to point to the fact that as one engine of the world economy stalled, others took over. But growth in the 1990s was exceptional – collapse of communism, globalisation takes hold, emergence of China as the workshop of the world…
The global index can only be as resilient as the global economy that supports it.
Diversification into the multi-factor ETF is more of a hedge against continuing to expect one part of the economy to perform as it has. Say the US Government enacts regulation that crimps the major tech companies. Doesn’t put them out of the business, or stop them being great companies, but simply means they’re overvalued in comparison to previous expecations. The multi-factor move offers some limited protection against large growth having a bad decade – in much same way you might diversify across geographies.
@ DaleK – absolutely, it’s fine to just run with a global fund. Monevator has a great piece that argues exactly that: https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/
@ Brod – Good idea on keeping tabs on a vanilla 60/40, too. I’ll do that if I can mostly automate it.
@ Miner2049er – IGL5 is the accumulating version of IGLS. I’m a total return kind of guy 🙂
@TheFIJourney – Thanks! I think you’re including the State Pension in your assumption about what happens at age 68. I noted with some alarm this week the kite-flying of the idea that the State Pension age should rise to 70 (and beyond) for anyone born after 1970. It was yet another reminder that we all need to leave ourselves plenty of wiggle room. It sounds like you have done that, so I’m just thinking out loud really. My solution was always to think of the State Pension as a bonus extra. The airing of such a radical hike in the State Pension age is also another reminder of the perils of locking into a linker ladder.
@ Finumus – You’ve stolen my crown as resident skinflint! Yes, I’m sceptical about the multi-factor ETF, too, but hope springs eternal. John Bogle argued the same point against Smart Beta – he’s been right so far. Definitely listen to John Bogle and not me.
The vanilla Global ETF is competitive and I’ll take the hit on that one because I don’t want the faff of splitting it out into separates.
@ 2 more years – Mostly because there’s a couple of brokers out there that cap your SIPP fees on ETFs but not funds. Personally, I’m happy to hold either product.
Thanks for your comment back TA :). Yes I originally had my state pension as a safety net that would be a bonus for sure. I now include both my public sector job and state pension as a safety net which is my insurance for worrying about whether my 600k – 24k a year Post FI money would last longer than 20 years. This figure already includes being able to spend much less if needed as there is lots of buffer within it (house paid off already and live in the north). I am also aware that I will very likely receive an inheritance prior to pulling the public pensions which makes me even worry less about the SWR and why I still use 4%.
I hope to find myself in a situation where I will be pulling the public pensions at 68+ which could indeed be 71. It’s why I use the plus symbol as I am very aware this is something that could go higher. It’s one reason why I prefer my ISA to a normal SIPP pension even if I take the tax upfront and miss out on some of the benefits of a SIPP which I know you demonstrate very clear in other articles. It just doesn’t work for me personally when I already have a public sector pension, don’t intend to leave money tax efficiently to anyone and have more fear of the pension age and rules changing than I do of ISAs changing. I take the hit if it means I have the money earlier and with less restrictions.
Very useful article – thanks for continuing the series!
One question though. I have belatedly twigged that index-linked bonds are in fact nothing of the sort ; it is only the coupon which is index-linked, and the principal comes back to you at 100. Or so I now believe. Which would mean that “Holding individual index-linked bonds to maturity is the only way to reliably protect your purchasing power against inflation.” is in fact completely wrong.
Or am I (still) missing something?
https://www.dmo.gov.uk/data/gilt-market/index-linked-gilts/
@IG
The principal is also index linked.
@Boltt – thanks for the link. OK I am back to being confused, and failing to understand why INXG/etc were so thoroughly flattened despite the well-above-average inflation increases over the last few years…
@IG – I think, crudely, that’s because inflation linked bonds only protect against inflation if you hold to maturity. Funds are constantly selling bonds as they drop below the targeted maturity of the fund – so when interest rates rise they incur capital losses and behaving just like nominal bond funds.
@TA – thanks for responding. Since you’re already using a Global Tracker and Intermediate Govt. Bonds, maybe you could just re-use those? Simplest 60:40 out there.
@InvestorGeek. For a conventional bond, the price falls as the nominal yield rises. For an inflation linked bond, the price falls as the real yield rises. Yes, your coupon and principal are protected against changes in spot inflation, but you still have exposure to changes in real yields.
Given that real yields have risen by over 300bp in the last two years (from -2 to -3% to around 1%), then the price of those Gilts has dramatically fallen. It doesn’t matter whether you bought a fund like INXG or an equivalent duration linker. Linkers got crushed because real yields rose very rapidly from extreme negative levels.
Holding to maturity wouldn’t have helped. Buying at a -2 to -3% real yield to maturity, means you are locking in a real terms loss at maturity(the clue is in name). The size of that loss depends on the maturity. If you bought a 20 year zero coupon linker at -2% you would have lost 33% in real terms at maturity. So the loss was always there built into the bond. The question was only when that loss would be realized.
@Brod I’d be happy with a comparison to a vanguard LS60….
@KISS – not within my gift I’m afraid. TA is your man.
Hope I haven’t started a shopping list of people’s wants 🙂 Like, I dunno, comparison with 4% SWR (I can safely say this as I’m sure TA is planning to do just that)
@TA
The persistent underperformance of Factors over recent years prompts the thought that they must mean revert soon….they seem reluctant to do so, is that better knowledge of factors, markets are more aware ( Bernstein’s analogy of the French umbrella shop).
Antti Ilmanen commented that in the long term, factor investment was more of an investor problem ( lack of patience) rather than an investment problem.
If factor investing does provide protection / excess returns than surely we would see winning active managers over the longer term, does not appear to happen… is it excess trading ( by definition it’s a form of market timing) excess costs erode the benefits ?
I am sympathetic to the approach, 20-30 years ago , dividend investing ( proxy value investing) did well for me but not now. Is it corrupted by some companies borrowing to pay dividends for example.
Is factor investing a victim of Goodharts law of when a measure becomes a target , it ceases to be a good measure ?
I think it will be interesting to see how the multi-factor investing works out against the simple tracker, the contrarian side of me says go for it but the rational says we know there are extra costs as a certainty and any outperformance may very brief indeed.
Time will tell !!
Great article TA which I’m sure will be of much use to folk in their leap into the great unknown when the salary stops.
When I was considering how to tackle the De-accumulation strategy last year I kept coming back around to the the fact that you’re at the point of maximum vulnerability with the most assets and no salary. I don’t think I’d fully considered how that would feel in the acummulaton run up.
Carrion calls were ringing that something had changed for me. Admittedly, the timing wasn’t great in that the great inflation hit us about then so perhaps it was just a normal wobble after all. But as I tend to find investing interesting from a psychological and sociological perspective this self reflection was strangely unnerving.
With past speed bumps I’ve motored through and having worked in a very cyclical industry I’ve never known financial certainty, so why was this any different? I know the SWR with caveats abound and now we’re starting from a different place vis-à-vis bonds from pre crash and in theory its all in a better place. Why was I not hungrier for those potential gains? As you say retirees will probably end up with more. And ‘probably’ was fine in Accumulation, but it seems not to be so much the case in De-accumulation for me. It is interesting that I feel like I’m wearing a different hat and am a different investor pre and post ‘retirement’, or at least I find it interesting.
One of my very large considerations was shuffling off this mortal plain and leaving my spouse to deal with the psychological load. That won’t work, so to that end I needed regular cash drops come hell or high water with a minimum of admin. As you know I opted for linkers for a good part of that. I’ve got around a third of assets in a linker ladder and note that they still appear to be on positive yields as of today. It’s all a question of ‘safety first’ v ‘probability’ which Wade Pfau does a good deep delve into. The article is probably more in the former camp and I’ve gone more in the latter camp, but also have barbelled that with 10% equities that I will add to as and if funds permit for access in emergency or post 30 yrs.
For me, I think that hits the spot. I have to recognise that almost on the turn of a penny my risk appetite dramatically reduced on ‘retirement’, but I still have some desire to hunt out opportunity with the ‘fun’ pot as it sometimes is called. A final point that has also become apparent is that creating a ladder is tedious! More so with II than with HL, but it took a long time (2.5hrs) on the phone on several occasions. The line dropped out twice due to duration and so I had to agree with the broker for them to call me back. They did and that worked out fine in the end.
If anyone does take this route however, I’ve found that the very fact it was so fiddly and boring means that I am now a lot less likely to change the strategy. That may ultimately not be a bad thing, but recognising that I have chopped and changed strategy in the past, probably to my detriment on a risk adjusted basis, and with age creeping on, I think for me it’s a good thing.
I’ve thought it for some time now, but when I read it via Bernstein it rang the bell. I just don’t think the DC retirement system is fit for purpose for any nation. I’ve thoroughly enjoyed the Monevator academy and the investing insights it provides, but also recognise it probably puts us in a petri dish cast afloat an ocean of uncertainty, and we’ve got an oar! The rest of the population get a swimming costume, pair of armbands and a good luck badge.
Alas, you have to play the hand you’re dealt….
Maybe of interest to detail the practical progress of a retiree 21 years rtd -now 78
Generated my retirement pot- went for a 30/70 Asset Allocation -conservative investor
3 index funds only-Vanguard Dev World ex U.K.,Vanguard FTSE AllShare Index Tracker plus Vanguard Global Bond Index Fund hedged to the Pound-that’s it
45% of current (safe) income now comes from a Teachers Pension plus now 2 State Pensions
Took 25% tax free cash lump sum immediately on retirement from my larger SIPP (wife snd I have a Stocks and Shares SIPP and ISA each)
Lived on that tax free cash lump sum for a few years while adjusting to retirement
A Total Return portfolio-I sell required fund units once a year to top up cash account that feeds current bank account and at the same time maintaining my Asset Allocation
Currently I am 34/60/6-equities/bonds/cash-cash= 2 years+ living expenses
Very simple-cheap – easy to manage
Worked so far !
One problem -how will my wife run the Investment Portfolio if I become “hors de combat” -children have been well warned-one son in law a banker luckily
xxd09
Hi TA, did you consider including an etf that follows the FTSE RAFI All-World Index? What are your thoughts on the RAFI indices? I haven’t read much on them, but on first impressions I like that they maintain a passive investing style, but diverge away from a traditional market cap structure.
@ Hariseldon – nice, thought-provoking comment. By definition, factor investing is considered to be active investing – even if you do it with a tracker fund. There’s plenty of historical evidence for premiums in the data – so any active investor who chose that strategy would benefit from that premium, if viewed over an appropriate timescale. OTOH, if the crowded trade thesis is correct then the premiums have disappeared for all investors – active and passive.
I wrote a piece once estimating what might be left of a factor premium in reality – as opposed to the laboratory conditions of an academic’s paper…
https://monevator.com/why-return-premiums-disappoint/
The result of that exercise was not thrilling. Great Ilmanen quote, btw.
@ Sleepingdogs – really interesting insight into your process. Have you spoken to TI about doing a FIRE-side chat? Or have you done one already and I missed it? Love your swimming cossie and “Best of luck!” metaphor.
@ Rhodri – Last time I checked the RAFI All-World indices were a tilt towards value. I almost invested in them many times. In the end I became convinced that multi-factor diversification was better over the long-term than allocating to a single factor. If value outperforms then the RAFI indices will do well.
@TA. Sure, I’ll do one of the Fireside chats if you like. You fellas have done so much for my fininacial education. I can’t promise to set the internet on FIRE though….. Sorry for the pun!
Very interesting. I like the idea of using gold as “ablative armour”. Some might appreciate that as legal currency coins, gold gives some cover in edge cases (hacking, financial system meltdown) and doesn’t need tax shelters.
In the spirit of sequence-of-return protection, the 70% allocation to risk assets seems quite high? Commodities have a relatively low correlation with stocks, but both can tank together during a recession. I wonder if there is a way to manage this with a lower allocation to stocks at retirement and ramping up risk again after the first 10 years or so.
I’ve struggled with factor investing for a while. Interesting idea to use it for diversification in this way and dilute big tech. There’s still the country exposure though. FSWD has an 68% allocation to the US, actually higher than the MCSI ACWD index, so the portfolio is ~40% in US stocks. Personally I’d rather take the complexity of a few separate funds than make a bet on the fortunes of a single country for 40+ years.
Small caps have been a drag for me so far. Time will tell if there’s still a premium to be harvested.
Value has looked very tempting for years. It’s complicated because there are many ways to define “value” in simple metrics (as a factor ETF would) with very different outcomes. And simple value funds are mostly sector bets on banks and oil stocks, against tech/growth. And some companies are cheap for a reason, so I’d like those filtered out. My conclusion has been that Value requires active management, with the usual challenge of costs and selecting the good managers.
Momentum is already baked into index investing (in my limited understanding) so it might be overweight in this portfolio.
But have you seen how much cat food costs?! 😉
@ Sleepingdogs – I shall nominate you to TI. Don’t know how his process works from there. I imagine some Ordeal by FIRE follows.
@ Sarah – Chortle. Am looking after my neighbours cats at the mo. They eat better than I do!
@ Sparschwein – I think your point about 70% in risk assets is well made. Historically, adding commodities like this has produced a less volatile portfolio overall, but this exposure wouldn’t be ideal in a Great Depression type scenario.
I also hear you about the current dominance of the US in the global indexes. I’m not going to split things out any further at the country level for ease-of-use reasons but I can understand why you would. Indeed, I have UK and emerging market holdings in my own portfolio.
However, it may be better to think of the US as a continent than a single country. Obviously at a Federal level, it’s a single country, but then you have 50 states that compete with each other which could be one reason why the US economy is so dynamic in comparison to a centralised country like the UK.
@TA — Were you convinced to go down the multifactor route by McClung’s book? I’m reading it at the moment. I do wonder if the support he finds for these multifactor portfolios might be due to some sort of data mining bias. I don’t think he considers that possibility?
Was there a particular reason for choosing FSWD over say HWWA or IFSW?
@ Wodger – Sorry I missed your question. No, I’ve been invested in various risk factors long before McClung. Evidence for the main factors has been found by various researchers, across multiple countries and historical timeframes. If we’re talking value, size, profitability, momentum and low vol then the concern is less about data mining and more about whether they’ll persist into the future, and whether the factor portfolios can be replicated with long-only products. My expectations are low but I think it’s worth diversifying my sources of return all the same.
@ Natural Yielder – I didn’t want the exposure to low vol included in HWWA’s portfolio. FSWD and IFSW are the same product available in two different currency classes: GBP and USD.