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On the plateau

On the plateau post image

This article on the plateau on the road to financial freedom comes courtesy of Budgets and Beverages from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

The Oxford English Dictionary defines ‘plateauing’ as:

‘A time of little or no change after a period of growth or progress.’

It’s the worst, isn’t it?

Starting something new brings a feeling of excitement. Seeing progress in ability and knowledge brings a sense of euphoria. But then your ascending race to the top suddenly halts and is accompanied by exhaustion. Ending all too easily with you losing interest and letting your hard work go to waste.

I didn’t expect to experience this in investing. But the plateau has arrived and it’s making itself known to me.

Not a time to be negative

‘To plateau’ is a phrase that carries negative connotations. Understandably so. As the dictionary states, it suggests a lack of progression and a failure to keep moving forward.

We’ve all experienced a plateau at some point – whether in school, at work, or on that never-ending journey to get in shape. (And there were plenty of people making me feel guilty about that last one in Tokyo this summer…)

But last weekend, with a cup of tea in my hand (and a biscuit alongside it – when is there going to be an Olympic event for the most bourbons eaten in a minute?) I sat and wondered whether plateauing in investing might actually be a good thing?

And I’ve concluded that it most definitely is.

I only discovered the concept of financial independence last September. And as I alluded to in my previous Monevator post I’ve consumed as much information as I can since then.

I’ve changed my habits and curbed my spending. I’m now fully invested – financially and metaphorically – into this world.

So it’s not really a surprise I saw change and I saw it quickly.

But as my first year comes to a close, the rate of change has slowed.

Sometimes, it feels like it’s stopped altogether.

Automatic accumulation

It would be easy to panic, to wonder where I was going wrong, and to question if I should be making changes.

Thankfully I haven’t done that. Instead, I boiled the kettle again (obviously!) and reflected.

Given how much I’ve learnt and changed in the last 11 months, it was inevitable that the momentum would slow down at some point.

Now I think it’s a compliment to myself that things are happening at a slower pace.

My accounts are set-up, my transactions are automated, and my index funds have been chosen. As I understand it, that’s me done for the next 10-20 years.

Time to become a plateauing perfectionist. (It’s not the sexiest of superhero names, I grant you.)

A plateauing stock market?

It’s not just me that faces a plateau. There’s the stock market, too.

Now I can feel you all screaming at your screens: “The stock market doesn’t plateau! It’s exactly the opposite! It’s volatile!”

And you’d be right.

But I’m not talking hour to hour, or even day to day. I’m thinking about longer periods.

Because when you start to look at returns over months or even years, then there’s plenty of plateauing in the stock market, especially in index funds.

To save you from scrolling, here’s that dictionary definition again:

‘A time of little or no change after a period of growth or progress.’

Well here are examples of plateauing in action in three popular index funds over a 12-month (or longer) period.

S&P 500
30th June 2000: 1454.60
29th June 2007: 1503.35

In these seven years, the S&P 500 only increased by 48.75. That was definitely a time of little or no change!

FTSE Global All Cap
June 2018: 10,000.00
May 2019: 9945.25

In the space of a year in the FTSE Global All Cap, there was a small decrease of 54.75. Pfft.

Vanguard LifeStrategy 100
May 2015: 14,537.97
May 2016: 14,298.10

In these 12 months in the LS 100 fund, there was a small change of 239.87.

Think too about the UK’s index of 100 largest companies – the FTSE 100 – which famously went nowhere for most of the past two decades.

Investors in the FTSE 100 got dividends, so the return they received was far better than nowt. And there were certainly ups and downs along the way.

But all told, anyone looking for excitement from the UK’s benchmark index would been better off heading to Wickes for a pot of paint to watch dry.

Flatter to deceive

Obviously, I cherry picked those numbers to support my argument. And I wouldn’t blame you for finding numbers that go against it.

Also, it’s true that when you expand the view out from a year to two years, or five, or ten, then plateauing is less seldom seen – in your portfolio or in the markets.

So given enough time your index funds *should* rise, barring an ill-timed crash or a global pandemic.

And at that point you’ll thank yourself for being a plateauing perfectionist.

Your portfolio should be up, too – from the rise in the markets, and from your slow, steady, and consistent investing habits.

Compound interest is on your side, after all. But compounding does not happen overnight.

Outside of the Olympics, slow and steady wins the race

We’re so often encouraged to go at 100 miles an hour, to chase that next milestone, and to beat our competitors.

But I’m enjoying taking things at an apparently boring pace.

I won’t be chosen for Team GB any time soon. But I have got my eye on winning gold in the art of plateauing, at least when it comes to my finances.

Let’s be proud to be boring in the world of investing. Be proud to slow down. And be proud to plateau.

I’m sure we’ll all thank ourselves in the years to come.

See more posts from Budgets and Beverages in his personal archive.

{ 48 comments… add one }
  • 1 Luke August 30, 2021, 11:27 am

    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…

  • 2 SemiPassive August 30, 2021, 11:33 am

    The markets seem to be plateauing at the moment. In your position you should be hoping for a crash and long bear market to accumulate at low prices.
    Any paper losses now will be more than made up for later.

    While I’m still accumulating, I’m just a few years (5, 7 maybe) from potentially starting to drawdown.
    As such it is your S&P500 stats that concern me most. This is helping reinforce my preference for a global dividend/income biased portfolio combined with a cash reserve bucket to cover a couple of years or so of mass dividend cuts.

    Shoud the S&P500 drop 30/40/50% I will scale any new money into it, as by then it would be much less risky in valuation terms and likely to yield closer to 3% in dividends alone, with the prospect for healthy gains on top.

  • 3 Neverland August 30, 2021, 11:48 am

    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.

  • 4 Seeking Fire August 30, 2021, 8:36 pm

    It’s a great article mostly because the FIRE scene and saving generally is rife with the perception that markets now well…..just go up. How many blogs are now just writing if I invest x with the market return of y% I’ll have Z in ten years time, job done.

    And who can blame people, we’ve seen single / double digit index increases (global / S&P500) for over a decade now. I’m sure many investors (if you are new you’ve never experienced it and if you are old memories fade) are not prepared for a sustained bear market. I keep reminding myself how I felt in 2008 having seen close to a decade of equities doing nothing and asking myself am I prepared for that given my net worth is materially different to what it was back then. The fact is that equities could go nowhere for circa 20 years and the long term S&P 500 return would look just fine with the thesis for investing in equities intact.

    I’ve no idea what equities will do and I’m pretty heavily invested – just worth reminding one’s self it probably will not always be like this. In fact after this bull run – a decade of going no where seems quite reasonable for the S&P – maybe less so for global valuations.

  • 5 Budgets and Beverages August 31, 2021, 10:56 am

    @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.

  • 6 Foxy August 31, 2021, 11:03 am

    Well, you know what they say:

    “There are decades where nothing happens; and there are weeks where decades happen”

  • 7 Budgets and Beverages August 31, 2021, 11:10 am

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

  • 8 Rob H August 31, 2021, 1:33 pm

    @Budgets and Beverages, @SemiPassive & @Seeking Fire – I share your worries that the markets are heading for a crash and it’s not really a question of If but When?

    My current dilemma is that I have a SIPP that is currently mainly in cash, as a result of a transfer from another pension scheme, so investing at the current high valuations (both Global index and UK trackers) is anything but stress free!

    I am fortunate that I have an income floor of £12k from DB pensions, just commenced (age 60), plus some other investments in an ISA and share portfolio that provide dividends of a few £k, so income currently exceeds my modest expenditure, having managed to survive on £6300 per annum for the last 3 years 🙂

    If the S&P 500 represents approximately 75% of the All-US stock market and the US weighting in global index trackers is well over 50%, or 66% in the case of Amundi Prime Global (PRIW) then perhaps, with p/e valuations heading towards 40, tapering and interest rate rises in prospect, a major US led correction/crash appears increasingly likely.

    A >= 50% stock market fall would hurt! The 2000 dot com bubble crash took 8 years for the S&P 500 to reach the previous peak and 6 years for the 2008 financial crisis. There were buying opportunities during the recovery phase plus most recoveries are considerably faster (1 year) but with no guarantee.

    Decisions, decisions: The markets continue to surge upward but for how much longer – 3 months, 6 months…?

  • 9 Seeking Fire August 31, 2021, 4:18 pm

    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!

  • 10 Rob H August 31, 2021, 5:59 pm

    Seeking Fire – I listened carefully to the Jerome Powell speech to see what he actually said regarding tapering bond purchases and raising interest rates. He confirmed that back in July a majority of Federal Open Market Committee members wanted to start tapering this year.
    “We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December, when we first articulated this guidance. My view is that the “substantial further progress” test has been met for inflation.

    There has also been clear progress toward maximum employment. At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.

    The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.”

    The US Fiscal year ends on 30th September, assuming this was what he was referring to, rather than this calendar year? Either way, if this does goes ahead, it could be within one month or three – there is another meeting of the FOMC on 21-22 September at which the announcement is likely to be made. The tapering according to hawkish members of the committee should complete by the second half of next year (calendar or fiscal) at the latest. This timeline was endorsed by Powell last Friday. ​
    On interest rates he was more ambiguous but inflation remains a concern.

    What would a reduction from the current $120 bn per month, to zero by this time next year, do to the US stock market – I assume the only way is down? If this is coupled with interest rate rises then it’s a double whammy for shares! There was a good writeup in the FT, which seems to be viewable by non subscribers.

    I haven’t entirely mapped out my retirement strategy yet but a big crash, followed by a slow recovery would definitely impact my original 5 year plan, which was to remain invested (portfolio growing 🙂 ) and then re-evaluate when I was 65.

  • 11 Griff August 31, 2021, 6:09 pm

    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 August 31, 2021, 6:13 pm

    @Seeking Fire (#9),

    Re: “If you’ve FIRED back in 1999 not quite so good eh…..Still a 1999 disciple of the 4% rule ……”

    Take a look at the [US] results towards the end of: https://retireearlyhomepage.com/reallife21.html

  • 13 Seeking Fire September 1, 2021, 11:13 am

    @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.

  • 14 Al Cam September 1, 2021, 11:42 am

    @SF (#13):
    Yup >10% for that 75/25 portfolio down to around 2.6% for the “Warren Buffett” portfolio – a rather unwelcome lesson for some me thinks!

  • 15 Budgets and Beverages September 1, 2021, 12:45 pm

    @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.

  • 16 Rob H September 1, 2021, 3:04 pm

    @Budgets and Beverages – I think that @SeekingFire is correct that market professionals had already priced in the expected statement from Jerome Powell. However, other financial commentators are putting their own spin/interpretation on what he said, emphasising the fact that he didn’t actually specify a start date for tapering and therefore implying that it is not imminent, which appears to be a misreading – deliberate or otherwise.

    The effects may not be predictable, as covered in an interesting article from Charles Schwab, predating the latest Powell speech.

    There may be greater consensus that the US market is overvalued, relative to the rest of the World and comprises an increasing percentage of the recommended global index trackers.

    I thought that I had technically achieved FIRE 10 years ago but then suffered from dwindling or suspended dividends, in recent years, on individual stocks such as: Lloyds, BT and Stobart/Esken and significantly trimmed my expenditure while waiting for the DB pensions to commence. Greater diversification, in the form of index-trackers, would also have resulted in reduced dividend income, so it’s not completely clear cut on the overall result.

    I will adopt a more cautious approach with my SIPP, perhaps 35% – 50% in equities/index-trackers but the market has already risen significantly in the 9 days since the cash arrived, while I considered my options/dithered.

  • 17 Budgets and Beverages September 1, 2021, 4:45 pm

    @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!)

  • 18 Rob H September 1, 2021, 6:50 pm

    @Budgets and Beverages – I can see some similarities with the 2000 dot-com bubble: The assumption that markets will continue to rise, even when the valuations are increasingly detached from expected future earnings and/or growth prospects for the economy. Technical Analysts would say this doesn’t matter but that’s another argument.

    Momentum plus the fear of missing out on these atypically generous rates of share price growth (guilty myself) keeps things going for longer than is rational and everyone is enjoying the ride, while it lasts. Despite my reservations, I ended up buying some Amundi Prime Global Ucits Etf Dr (D) (PRIW), just before the end of trading today 🙂

    I suppose that some people do manage to time the market, to an extent, by partial or complete withdrawal ending up holding a lot of cash and being regarded as foolish/brave, depending on your perspective, while they wait things out.

  • 19 Naeclue September 2, 2021, 4:21 pm

    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.

  • 20 Rob H September 2, 2021, 7:11 pm

    @Naeclue – My curiosity is piqued by your use of the term “Systematic investing”. Using the Cambridge dictionary definition: In a way that is done according to an agreed set of methods or organized plan – What was the rationale for your move, from a fairly conventional 60/40 equity/bond split, to a far more adventurous/risky 90/10 equity/cash portfolio allocation?

    It’s been a very good year for equity growth, so the plan obviously worked well in this instance but (investment time horizon/circumstances dependent) not so good in other less favourable scenarios.

  • 21 Naeclue September 3, 2021, 12:20 pm

    @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 😉

  • 22 Al Cam September 3, 2021, 1:52 pm

    Re #21
    Are you able to say a bit more on how you estimate “how much we could prudently afford to give away”? I assume you may want to do this approximately annually as you state that your wish is “to make gifts to family and charities while we were alive”.
    I suspect anything you can share about your thinking on this topic would be widely appreciated as most of the literature seems to only consider legacies.

  • 23 Naeclue September 3, 2021, 3:10 pm

    @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.

  • 24 Al Cam September 3, 2021, 3:45 pm

    Thanks and now that you mention it I do recall you explained your Equities cap before. Clearly it makes numerical sense to decrease this cap as you age. I know we all like to think we will live for ever, but it has so far eluded most folks. Given you already hit your overall 66 years buffer earlier this year I wonder might you be revisiting this whole area sooner than you had originally anticipated?

  • 25 Naeclue September 3, 2021, 4:20 pm

    @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.

  • 26 Al Cam September 3, 2021, 5:15 pm

    Gotcha. Simplicity, flexibility, and reversibility are oft under-valued.
    I guess you are familiar with RMD’s as used in the US?
    And have you also ruled out annuities for the time being too?
    Lastly, does it make some sense to get the ball rolling sooner rather than later re gifting whilst alive and the potentially tax exempt window?

  • 27 Naeclue September 3, 2021, 5:43 pm

    @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.

  • 28 Rob H September 3, 2021, 7:12 pm

    @Naeclue – Thanks for the explanation. I have now read many of the articles and responses on this site but as a newcomer it is often tricky to determine, in most cases (unless declared and actually remembered), whether a poster is:

    1. Accumulating – for the next decade or three.
    2. Been retired for at least 10 years and/or aged over 70.
    3. Within 5 years of retirement/about to retire/recently retired

    Portfolio allocations appear to range from: 20/80 equity/bonds to 100% equity, with falls in portfolio value during the 2020 Covid 19 crash, from less than 8%, all the way to to wiping out 5 years of gains! OK, the recovery was very rapid, helped by the S&P 500 doubling in 16 months, with the UK market highly correlated. It seems that most remain happy with their choice and it’s hard to draw any firm conclusions from this particular event?

  • 29 Al Cam September 3, 2021, 7:28 pm


    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.

  • 30 Naeclue September 3, 2021, 8:00 pm

    @Rob H, the conclusion I would draw is that trying to predict what will happen to share prices is a futile activity, as is taking any notice of anyone’s opinion about them. Particularly so in the short term. In the long run shares have delivered good returns and there are very reasonable grounds to expect that to continue, but no guarantees.

    @Al Cam, I see your point about RMDs now. Might be worth looking into at some point.

  • 31 Al Cam September 3, 2021, 11:47 pm

    @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.

  • 32 Rob H September 3, 2021, 11:51 pm

    @Naeclue – “the conclusion I would draw is that trying to predict what will happen to share prices is a futile activity, as is taking any notice of anyone’s opinion about them. Particularly so in the short term. In the long run shares have delivered good returns and there are very reasonable grounds to expect that to continue, but no guarantees.”

    I agree wholeheartedly with your third sentence but regarding the first: Trying to predict what will happen to future share prices is certainly prone to error but may (and perhaps should) be considered, in individual investment decisions. To deny this means completely abandoning contrarianism and discounting several very successful investors, who are habitually referenced on this website 🙂 Instantly responsive and perfectly efficient markets are, in essence, a theological standpoint but going against the consensus can sometimes pay off.

  • 33 Marcus September 4, 2021, 10:56 am

    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.

  • 34 Al Cam September 4, 2021, 2:10 pm

    Another paper that IMO is worth hunting out is:
    Spending Retirement on Planet Vulcan: The Impact of Longevity Risk Aversion on Optimal Withdrawal Rates By Moshe A. Milevsky and Huaxiong Huang

  • 35 Naeclue September 4, 2021, 2:58 pm

    @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.

  • 36 Rob H September 4, 2021, 6:52 pm

    Having reread some of the earlier articles and comments, particularly https://monevator.com/are-bonds-a-good-investment/, I have now seen your analysis and rationale for a 90/10 equity/cash portfolio allocation.

    Warren Buffet’s 2013 recommendation, for his wife’s pension, is similar to your own, the difference being short term bonds instead of cash and your lower SWR. To be fair, if you take the 11 year period to the end of 2020, Berkshire Hathaway outperformed the S&P 500 in 7 of those 11 years and was ahead by the end of 2018. Since then we have had the S&P 500 tech bubble and Covid 19 (Berkshire Hathaway suffered less in the latter)

    The Berkshire Hathaway portfolio is concentrated, with 42.8% represented by Apple and 68% in just four stocks. It does hold lots of cash and equivalents but for a value orientated investor there is a lack of investment opportunities, particularly in the US, at current valuations. Warren Buffet is now 91, so it is quite possible that his wife may inherit some of his Berkshire Hathaway shares because he still has half his shareholding left, although his stated intent was to distribute it all to philanthropic causes before he died.

    Your asset allocation and that of xxd09 are at opposite ends of the scale: (30/65/5 and held for many years at this same allocation), so represent an interesting contrast in approach – to be tested, if the next crash is a 2000 or 2008 type event.

    I don’t have huge confidence in my predictive powers at timing the market but share the worries, expressed by others here, that we are currently in a US market bubble. If I could manage to partially exit before it bursts, then I would consider that a success. NB. I first started investing in early 2000 🙂

  • 37 DavidV September 4, 2021, 6:54 pm

    @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.

  • 38 Al Cam September 4, 2021, 8:07 pm

    @ DavidV (#37)
    Even more spooky – if you believe in such things – I also get the weekly Retirement Researcher emails. The M & H paper is a classic. M is a particularly well known academic in the field. The book https://www.amazon.co.uk/Most-Important-Equations-Your-Retirement/dp/1118291530 is amongst his best known work.

  • 39 DavidV September 4, 2021, 10:03 pm

    @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.

  • 40 Al Cam September 4, 2021, 11:09 pm

    For completeness, I received the RR email around the same time you got yours – i.e. about an hour after I had posted the suggestion to read the M & H paper.
    Personally, I have always had a problem with the conventional homo economicus (or if you prefer planet Vulcan) model and thus find behavioural economics (BE) interesting. On the other hand – as a physical scientist – I fully understand why others see similarities between BE and “hand waving” and other less polite phrases!

  • 41 The Investor September 4, 2021, 11:39 pm

    Regarding Berkshire Hathaway and Buffett’s directions for how his wife should invest post-himself, remember:

    1) If you were in the world’s richest top 10, asset allocation to meet the living expenses of an aged surviving partner would be very different from divvying up a SIPP under the Lifetime Allowance! 🙂 Buffett will be leaving a lot of money to his wife. The S&P500 could crash 80% and she’d still be a very rich woman.

    2) When looking at say the position size of Apple, remember only about half the book value (from memory) of Berkshire is in the stock portfolio. It also has operating businesses (insurance, railroads, energy, etc) that I’d suggest are worth much more than half the business. So Apple would make up less than a quarter of the intrinsic value of Berkshire, versus nearly half. Still a very chunky share of course but dramatically less than it might first appear.


  • 42 Naeclue September 5, 2021, 7:44 am

    @Rob H, I think it completely reasonable and sensible at times of high CAPE and low bond yields to err on the side of low SWRs.

  • 43 DavidV September 5, 2021, 1:51 pm

    @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.

  • 44 Rob H September 5, 2021, 2:27 pm

    @The Investor – Warren Buffet’s wife will probably inherit at least as much as he has given to his children’s charitable foundations (they got $2 bn each), providing he manages to keep to his pledge: to donate 99% of his total Berkshire Hathaway shareholding to charities (half way there), plus he has 1% of his wealth outside of this approx. 8.5 bn, perhaps more, if she challenges the will 🙂

    Berkshire Hathaway are ranked at number 9 , in terms of global market Cap and Vanguard is the largest shareholder, at just under 10%.

    I am not in possession of a 7 figure portfolio and extremely unlikely to be challenged by the Lifetime Allowance 🙁

    @Naeclue – Yes but it is far more feasible to do so if you have a ginormous portfolio. 🙂

    I am at the other end of the scale: DB pension of £12k, indexed by CPI, 7 years to wait for my State pension (age 60). Fortunately I have some additional dividend income, mainly from fixed interest preference shares: NWBD, GACB, RSAB plus LLOY, BT.A etc. I have a SIPP, with very recent cash transfer of an AVC, currently 72% in cash, after buying some PRIW and a couple of stocks, plus other cash reserves.

    I suppose that I could take more of a risk with equities (why change the investing habits of the last 21 years 🙂 ), given that I have an income floor >> recent expenditure but perhaps I am becoming slightly more risk averse and contemplating holding some bonds for the first time, despite the lousy returns.

  • 45 Al Cam September 5, 2021, 3:18 pm

    @ 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!

  • 46 Budgets and Beverages September 5, 2021, 3:31 pm

    @Marcus – Thanks Marcus, that makes a lot of sense. It’s very easy to want to get there quickly, rather than enjoy the journey and you’re exactly right, it’s important to enjoy the small wins along the way. I’ve been investing for a year and I’m in a stronger position now than I was 12 months ago, that’s a win!

    @Al Cam
    @Rob H – I’m not ignoring any of you. I’m just reading and learning from your conversation! For what’s its worth, you are all clearly further along in the journey than I am, so I’m 100% equity with the bulk of it in America. If a crash was to happen, sure it would be a shock, but I’ve got plenty of time to recover and buy when costs are low.

  • 47 Naeclue September 6, 2021, 11:00 am

    @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.

  • 48 Rob H September 6, 2021, 4:24 pm

    @Naeclue – I finally bit the bullet and my SIPP is now loaded with 50.95 % in equities and the remainder currently in cash. It includes: HSBC FTSE All-World Index Fund Accumulation C, Amundi Prime Global UCITS ETF DR (GBP) (PRIW) ETF plus 3 individual stocks (LLOY, BT.A and PHNX).

    I also have a trading account, plus a stocks and shares ISA, that combined are larger than the SIPP, so quite heavily invested already.

    I don’t really have any real worries about bridging the 7 years to my state pension (lived recently on a lot less) but still concerned about market overvaluation and an impending large >50% crash, followed, in the worst case scenario, by a slow recovery taking 6 – 8 years – some may shrug and say: “Shit happens! It will all be OK in a decade, another buying opportunity, seen it all before etc.” 🙂

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