On the plateau

Great article, although I am not sure that reaching the plateau is something so positive. I’ve started this journey almost 4 years ago (after discovering Monevator and other crazy good blogs) and I have been saving quite hard in the last few years. However, I’ve recently crossed the small but significant threshold where market returns often exceed my monthly contributions – also thanks to the bull market. I now regularly see my monthly net worth swinging up or down regardless of what I have saved in that specific month – this has actually led me to save less, since I feel I am less in control of the outcome at this point.

Maybe I should start tracking my investments not in terms of their market value but in terms of number of shares of Vanguard’s ETFs I own…

Since everything you actually need to know about investing passively can be learned in a week there is a lot of plateau.

FIRE via index investing is only really feasible for people who can stay on a path for at least a decade, usually more.

@Luke – Hi Luke, so often I hear ‘enjoy the journey’ when it comes to the world of investing and FI and I think it sounds like it’s applicable here. Congratulations on being able to save and invest so hard over the past few years. Getting yourself to a stage where you’re seeing market returns exceed your monthly contributions is nothing less than a huge win and wonderful milestone to tick off. So congratulations! As for control, we can only do so much through diversification and from time in the market so your monthly net worth will naturally swing up and down, that’s just the way of the world, but continue to save hard and believe in the process, you’ll thank yourself in the long run I’m sure! (and maybe don’t check your net worth so regularly!…)

@SemiPassive – That’s so interesting to hear. Obviously the last 11 months have been kind to me in the market, so the thought of a crash or long bear market still fills me with fear, yet I completely understand the concept of buying at low prices. I’ve still got a solid decade ahead of me (at least!) so I know I’d come out the other side eventually. It sounds as though you have your plans in place for starting to drawdown, which can be a nervy experience too, I’m sure. But your plans make complete sense, it’s all about flexibility. In the worst case scenario (such as the S&P500 dropping), have you got flexibility? I would argue you have.

@Neverland – I think it depends on how deep down the rabbit hole you want to go. In regards to picking a platform and an index fund, followed by investing regularly for a decade then it is relatively simple on paper. But I really believe there’s never a finish line. I want to know where my money’s going, what the trends are, what can impact the market, could I be better placed elsewhere? The questions are endless for me right now. But just because I feel I still have lots to learn, questions don’t always = results, hence the feeling of plateauing.

@Seeking Fire – this is so true. All I’ve seen for the last 11 months is the market going up. ‘This is great! This is easy!’ would be very understandable perceptions to have. Thankfully, I know a crash is coming at some point. I know my funds will fall and I have to be willing to ride that out. Your experience in 2008 will stand you in great stead and an experience that will give you a clear mind when a drop or sustained run of the market plateauing eventually arrived.

@Foxy – I’ve never heard this before, but I love it and I’m running with it!

Rob H – That’s a useful link to remind people – So effectively from 2000 the S&P didn’t really hit those highs until around circa 2013/4. Of course you would have received dividends and monthly investing means you would have invested at lower levels throughout thus averaging your return. And 2008/9 was a great year to invest! If you’ve FIRED back in 1999 not quite so good eh…..Still a 1999 disciple of the 4% rule should fingers x still make it to 2030 intact with presumably a few minor heart attacks in 2001 – 2003, 2008 and then 2019 so far.

I wouldn’t say I am worried about the stock market falling. I really have no clue although I can hazard a guess it’s very sensitive now to interest rates – kind of like the convexity in bonds where we are today although no doubt that’s technically wrong. Many commentators flag the CAPE of 40 etc etc but then don’t mention changes to interest rates – 10 year treasuries in 1999 were paying roughly 6%, now they are paying roughly 1.3% – with a whole lot of QE to boot. I personally find that very relevant – money has to flow somewhere. For me personally the outturn of the market is just a lot more relevant given I’ve a lot at stake now which I didn’t really have in 2000 etc. That age old conversion of human capital to financial capital. Given I can’t predict it, I just need to plan accordingly.

I’m sure if we had a decade suck out there would be a big shake out of a lot of FIRE blogs….obviously not this one!

Dec to Feb 2020
I had a play with my isa portfolio, bought a vanguard ftse tracker, couple of house builder stuff a hotel company and a gold mine (why)few mths later I was battered,down about 40 %. (No stop losses set up doh) I decided to let it ride but having saved a bit of powder, bought vanguard 250 tracker. End result Aug 2021 portfolio down 3 %. The house builders etc still 20 odd % down but my ftse 250 tracker up nicely about 15 % and ftse tracker 4.5 % up. Learning from this, stick with trackers.

@12 – Al Cam. Thanks I knew you’d have the link and was hoping you would provide it! I may have ready this wrong but it seem the bottom chart is indicating a retiree in 2000 is now withdrawing circa 10% of his pot. Should be ok until 2030 fingers x but let’s hope they don’t live another 10 – 20 years and presumably the old ticker is beating a bit faster.

@10 – Rob H. Thanks. Myself I’m not sure I’d bother to pay too much attention unless your job requires you to do so. I feel his statement had probably been priced into the markets before you had had time to read it and probably gives no insight on the future for equities. Unfortunately, the likely best solution to the problem you are rightfully articulating is to have a healthy slug of cash / intermediate bonds and adjusting your spending accordingly to provide a decent margin of safety. Very dull.

@Rob H – first of all, a yearly expenditure of £6300 is highly impressive. I tip my hat to you for that. Secondly, your comment has a number of questions in it and unfortunately, they mainly revolve around ‘ifs and buts’. The joy of the stock market! As I mentioned to @SemiPassive, all you can do (I think) is have flexibility and a safety net as big as possible. Given your income from your pension and your diversity elsewhere, you have covered yourself as much as possible. A market crash always feels like it’s round the corner, but none of us ever truly know. Your process doesn’t appear to have led you in the wrong direction so far, so my gut says stick with it, with the safety net in place.

On a separate note, I could let you and @SeekingFire discuss the topic all day. I make no secret of the fact I’m new to this, so reading your thoughts and comments regarding the recovery time for the S&P500 and the impact of the crashes in 2001 and 2008 is always useful to hear. It’s been too good for many of us for the past 12 months, if not longer.

Your comments of Jerome Powell would not only eye-opening but insightful too. I wasn’t aware of Jerome, or his speech, but it was really interesting to read, so thank you for passing it across.

As @SeekingFire mentions in his last comment, you have a solution in mind. The fact that it’s ‘dull’ can only be a good thing!

@Griff – It’s easy to ask why in hindsight. All you can do is learn from it, which you mentioned you have. It’ll takes time and I’m definitely not in a position to be passing on any kind of advice, given the infancy of my investment strategy. If you’ve gone from down 40% to down 3% then there’s obvious improvement there. Stick with it, trust in the process.

@RobH – I hope it doesn’t come across as cliché, but it’s fascinating to read about. In relation to the article I wrote, this feels like the next step or the sort of information I should be across to move my progression forward. No longer am I just investing in Global All Cap with a strong US percentage, but now it’s understanding how the different countries in that index fund can be affected by different factors, and whether, to a degree, we can pre-empt what could happen. (While obviously not trying to time the market. We all know where that gets you!)

IMHO it is best to invest (and disinvest) entirely systematically. That removes all concerns about what Powell said, what the markets might think about it, etc. and reduces the risk of becoming a victim of the many behavioural biases that everyone is predisposed to. It also saves a lot of time and worry.

Personally I am happy to stick to FTSE World market weights, but if you want to take account of particular market valuations, eg reducing exposure to markets with high CAPEs, work out a way to do that systematically and then stick to your rules.

Systematic investing does not mean you cannot change the system. I changed my system last year from 60/40 equity/bonds to roughly 90/10 equities/cash with a new set of rules for rebalancing. But changes should be done infrequently, dispationately and with a lot of thought as to why the change is being made.

@Rob H, the answer is complicated and relates to the fact that we have a low SWR (less than 2%) and a desire to have our portfolio work hard in order to produce returns for others (family/charities).

In our accumulation phase we invested 60/40 equity/bonds from the late 1990s, rebalancing when necessary at the start of each year. Once we started drawing an income we just carried on with this and each year set a spend buget of 3% of the portfolio value at the start of the year. That worked well enough as the portfolio value kept on rising, but it had a number of potential issues. For example, it was likely to result in a significant drop in the budget at some point when the next crash came long. We also wanted to make gifts to family and charities while we were alive and it was not clear how much we needed to keep and how much we could prudently afford to give away.

The lockdown provided an opportunity to assess and estimate what we actually needed in order to fund our likely future consumption and to study the decumulation literature. From the spending estimates, literature and my own back tests I estimated that a SWR of 2% was all we really needed and was available to us with money left over. Within that SWR there is plenty of scope for belt tightening and we could also downsize property as a plan B. With SWRs below 2%, 90% equity is not particularly risky. Also, the higher the equity allocation, the higher the expected or average return, which means higher average gifts compared to a lower equity valuation.

I chose cash rather than bonds for 2 main reasons. The first was that I was uncomfortable continuing to hold increasingly volatile long dated bonds at such low yields and FSCS protected cash deposits just seemed to offer better risk/reward. The second and more important reason is that in the worst case historical scenarios, holding cash worked out at least as good as holding bonds and sometimes much better. Holding longer duration bonds came out better on average, but not in the worst cases and it was the worst cases I wanted protection against, even if that meant dragging down average returns.

That’s basically it I think in as few words as I could manage. Or if you prefer, I am an investing genius and saw a perfect opportunity to buy more equities 😉

@Al Cam, there is a figure built in to our SWR for regular gifts to family, friends, charities, etc. What we would expect to spend on birthdays, etc. Above that I have set a cap on our equities portfolio of 60 years expected annual spending. I consider it highly unlikely that we will need more than that even with very extreme valuations, so at the start of each year any excess over that amount is sold and added to our cash allocation. If the cash allocation is more than 6 years spending, the surplus is allocated to the “to be given away” pot. There is an additional rule which says, if we have over 66 years spending at the end of any quarter, the excess over 60 years is sold. That rule was triggered at the end of June.

We will occasionally review our estimated annual spending in light of events, experience, inflation etc. My expectation, based on what I have read and anecdotal observation, is that our annual spending will not increase as fast as inflation. Most peolple spend less as they get older unless care costs mushroom. Provided the care costs don’t kick in for many years (if at all), then I would expect to see the total value of what we need in the equities pot decrease in real terms. We will still cap at 60 years spending, but the value of 60 years spending dropping in real terms.

Also, we should be able to drop the 60 years cap as we get older. We are not going to need 60 years spending in our 90s! As yet though I have not thought through how to go about reducing the number of years in the cap in a systematic way.

That’s the current plan, but life has a habit of throwing spanners into the best laid plans, so I think the key thing is to expect those spanners to turn up and to stay flexible.

@Al Cam, not with respect to the 60 years spending cap just yet. My wife has vetoed any plan that involves actuarial tables, CAPE values, etc. I think we shall just have a discussion in a few years time and decide to knock the cap back to 50 years. Of course if we are nowhere near 50 years due to a market crash, we will not need to have the conversation 😉

One aspect that has altered recently is that my wife has expressed an interest in taking our boat over to the Caribbean again for a couple of months, after previously saying she would not want to do it again. If that happens it will take a bite out of the To Be Given Away pot.

@Al Cam, RMDs? Yes, introduction of those in the UK would be an interesting development. Scupper our current plan to not withdraw from either SIPPs or ISAs while we still have unsheltered investments. Not sure why you bring the subject up though?

Annuities, not yet maybe one day. I got a quote a couple of years ago from HL and it was derisory.

Agree with your last point and it is what we are trying to achieve, whilst not ending up short of money. An option I have explored, but ruled out is for each of us to put money into discretionary trusts, naming each other as a potential beneficiary when the trustee dies. That gets money out of the estate after the 7 year period but puts off the choice of the ultimate beneficiaries. The main drawback is that it is not tax efficient due to the way trusts are taxed. Trusts also introduce complexity. I would rather gift money directly to beneficiaries, who can then put the money into ISAs or SIPPs (or spend if they so wish, but I would encourage otherwise) and take the risk of not needing the money later.

@Naeclue:

I only brought up RMD’s as they are effectively actuarially calculated, and thus increase as you age – conceptually they may therefore be helpful in this case.
Interestingly, the UK used to used GAD calculations to limit/cap withdrawals whereas the US uses RMD’s to force minimum withdrawals from a certain age. If the UK ever went for RMD’s I suspect in fairness (if such a concept really exists) they would have to drop the LTA.

@Naeclue (#30):

If/when you ever get around to looking again at RMD’s: an interesting place to start IMO would be the Stanford Spend Safely in Retirement Strategy (SSiRS).

This is essentially a hybrid approach that uses US Social Security as a partial Floor, see for example: https://longevity.stanford.edu/wp-content/uploads/2019/07/Viability%20SSiRS%20Final%20SCL.pdf

Pfau is one of the three authors. And whilst the study is primarily aimed at a US audience it is intended to be “a fully-featured, practical solution for DIY decumulators”. There are lots of detailed documents available about the SSiRS approach – but the one I linked to concentrates on “various design and implementation details”.

FWIW, I reckon designing an effective gifting strategy whilst alive AND not inadvertently ending up short of money is probably even more tricky than selecting a withdrawal rate! Having said that, I am convinced that there are some guiding principles such as remaining lifespan, risk tolerance, and risk capacity that can help guide such a strategy, albeit that one must also recognise that the aging process will not help.

As someone who’s been at this for some time, I’d say there are subtle but continuous changes. My financial confidence changed slowly, my attitudes towards work and what I wanted to get out of it, my attitude towards money once I had some, then once I had enough for a year, then 5, then a decade, then life. It’s easy to miss these subtle changes as you get caught up in the day-to-day, but they are there and as they have compounded, I have found they become quite fundamental. Good luck on the journey, and I hope you too notice change amid the apparent plateau.

@Al Cam, thanks for the link, it does look interesting. McClung’s book has sections on feeding mortality information into a variable withdraw rate which I thought was interesting when I read it.

@Rob H, I doubt there is much I can say to make you change your mind, but you might want to listen to what arguably the world’s most successful investor has to say. Warren Buffett’s view is that you should buy a tracker, don’t market time and don’t trade. WB has underperformed the market over the last decade by the way, illustrating that even he does not get it right all the time. Take a look at the return gap that @TI has linked to in this week’s weekend reading as well.

Another thing you could do is run an experiment. Imagine you have £1000 per month to invest in the global tracker ETF SWDA. Using your powers of foresight, pick time’s and prices to invest the money coming in and also to disinvest when you think it is a good time to sell. In addition note the opening prices assuming you invest on the first trading day of each month, middle of each month and the end of the month (you can get those from the iShares web site). Keep a spreadsheet updated with all 4 portfolios. After a year start comparing your portfolio with the other 3 to see whether your deliberations have added any value. Running 3 systematic portfolios will give you an idea of the natural spread as a result of trading at different times, there is nothing special about the dates.

@Al Cam (34) Spooky coincidence that an hour after your comment I received my weekly Wade Pfau Retirement Researcher email. This links to an article he wrote that also references the Milevsky and Huang paper.

@Al Cam (38) I half assumed that you also got the Retirement Researcher emails – it was just the respective timing of your comment and my email that prompted the coincidence remark, always conscious of course that our emails may have arrived at different times.
I have read one of Milevsky’s books, and have heard of the one you link but not read it. I confess, though, that I hadn’t come across the Planet Vulcan paper until now. The synopsis of it in Pfau’s article seems to be an intriguing approach to assessing attitude to longevity risk.

@Al Cam (40) As a retired engineer, supposedly in decumulation, I should be in favour of rational approaches to investment and spending. I say ‘supposedly’ as my secure income currently seems to more than cover my reasonable spending needs, particularly during the pandemic. As I’ve mentioned on this site previously, my rationality seemed to evaporate once I entered ‘decumulation’, so I share your interest in behavioural economics, feeling myself to be a prime candidate for a case study.

@ DavidV (#43)
Re: “… supposedly in decumulation …”
I remember the chat and it is certainly not the worst problem to have. Furthermore, you are far from alone – on average, UK pensioners spend less than their income and, the gap grows as they age.
Seems that the so-called Die With Zero (DWZ) philosophy is a hard one to live by!

@Rob H, have you considered holding ~£60k in cash as a bridge to the state pension? Once you do that you might find it easier to invest the excess in equities.