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Portfolio (basket) case study

Portfolio (basket) case study post image

Every now and then someone sends me their portfolio for thoughts and suggestions.

One particularly stuck in my mind because it’s the type of portfolio I could have had if events had turned out differently.

Reviewing it made me feel like I’d been transported to an alternate timeline.

One of those parallel universes where the US and UK had fallen to fascism. Everybody wears military uniforms and clipped moustaches, including the women.

The letter ‘K’ has replaced the letter ‘C’ to prove we no longer live in the free world. Y, know – people get their burgers from MkDonalds, and their propaganda updates from Fakebook. (And there’s one fewer episode of Sesame Street.)

I’m not saying this portfolio was overweight authoritarian states (unless you count contemporary Britain, right kids?)

But this is the place I might have wound up in if I hadn’t found the passive investing freedom fighters early on.

Where – instead of the Bogleheads – I’d fallen under the sway of nefarious choice architects such as newspapers and stock brokers – all broadcasting their wealth-lists like martial marching music across every channel.

Time for a debrief.

What a state

The portfolio under interrogation comprises 25 actively managed funds. 

Now to be fair, some of these funds handed out a beating worthy of a brownshirt to anything I own.

Beneath those headline victories, though, all is not well.

Alarm bells ring for me when I see a long tail of micro portfolio allocations as in the screenshot below.

Dwindling portfolio weights undermine the overall contribution each holding can make, and imply a chaotic strategic approach. 

Do not adjust your set! The holding names have been redacted for privacy reasons. The red box shows the majority of holdings make up less than 5% of the portfolio’s weight, while 44% of holdings weigh under 1%.1  

The portfolio's funds ordered by weight. 6 out of 26 funds are worth more than 5% of the portfolio.

Remember those winning active funds I mentioned? Alas these stars made only a minor overall contribution, because they were typically held in very small amounts. 

This doesn’t say much for the forecasting skill of whoever picked most of these funds. Spray a target with enough bullets and you’ll get some hits. 

The offset, I suppose, is that the dogs also only inflicted flesh wounds. 

The majority made a marginal difference to overall returns – for better or worse – so what was the point of them?

What’s the strategy here?  

Big bother

Overall, the portfolio has done well. It’s netted double-digit nominal returns for a decade.

So what am I complaining about?

Well, the snag is this active assortment was comfortably beaten by a world tracker index fund. A simple choice that would have saved money and bother.Table showing that the most expensive funds typically offer poor returns in this portfolio.

(Specific holdings again redacted. It adds to the crypto-fascist theme of today’s post, wouldn’t you agree, citizen?)

I’ve ranked the portfolio’s funds by performance (best to worst) and noted the OCF, too.

We can see that only seven out of the 25 active funds beat the simple MSCI World ETF I used as a benchmark (the green row in the table).

I knew the funds 10-year annualised return in most cases, but where I only had the 5-year return I’ve shaded the cells grey. I’ve rounded the returns and Ongoing Fund Charge (OCF) to the nearest quarter point, except the portfolio’s average OCF. 

A crude projection of this portfolio back ten years sees it lag the MSCI World ETF by a few percentage points annually. It trails by about half that against Vanguard LifeStrategy 100.

I don’t know the trading history of the portfolio – and not all the funds were available 10 years ago – so my estimate is not the realised return. It’s useful only to see whether these active managers together would have added any value versus a passive investing strategy.

Also, I should state this portfolio is over 90% equities. Most of the remaining allocation is in high-yield fixed income.

I’m not saying this portfolio was fated to trail a standard issue index tracker.

What’s the complexity adding?

My question is what is this investor getting for all the cost and risk of holding this motley crew?

It’s not adding diversification compared to a global tracker, that’s for sure.

The portfolio is tilted 60% towards Blighty. It would have made mincemeat of my comparison ETF if UK plc had trounced the US this past decade.

Alas, the opposite happened.

Moreover it’s not blind chance this portfolio under-performed.

Global capital simply wasn’t lining up to back Britain ten years ago. The world market told us that an 8% holding in UK equity was about right back then.

The sub-text read: “Don’t overdo it.”

Today UK stocks weigh in at around 4% of the global benchmarks.

So why is this portfolio stuffed to the gills with British-focused funds?

Perhaps because UK broadsheets and brokers are primarily incentivised by what sells. And that’s typically recent winners and the reassuringly familiar.

Such a pitch – ten years ago – got you a portfolio that banked too much on the UK, and funds vulnerable to a mean-reversion smackdown.

To emphasise the redundancy here, Morningstar’s Instant X-Ray tool found the portfolio’s top ten (underlying) share holdings present in anywhere from four to seven of the portfolio’s constituent funds. 

Feeling all the fees

You may also have noticed that even the cheapest active fund in the mix costs more than three times the fee charged by the ETF.

The most expensive fund charges you more than 11 times the tracker’s fee! Yet it delivered less than half the annualised return over the decade.

For simplicity, imagine this portfolio’s weighted total OCF was 1% (instead of the 1.2% it actually sums to).

Let’s also generously assume returns were the same between the active funds and a global tracker (rather than the case study lagging, like it did in reality).

If the portfolio’s gross annual return was 10% for each of the next 10 years, its 1% charge would consume 10% of the profits.

The index tracker’s 0.15% fees would only eat 1.5% of the profits.

This cost differential makes all the difference when compounded over the years.

Price does not equal quality

Still, those skilled active managers will justify their fees eventually, right?

Well, 18 out of the 25 failed to match a simple tracker, over a meaningful time period, despite their proprietary trading strategies, PhD-bedecked support teams, and glossy brochures.

Worse, the performance ranking above sees the most expensive funds clustered in the bottom half of the table.

Granted, my case study is a random snapshot.

Better evidence comes from the long-running, regularly updated SPIVA analysis that confirms the best performers are not the ones that charge you the highest fees. 

Back in the real world

If all this is true then there’d be an outcry, wouldn’t there? The hard-charging active fund industry would be found out, surely?

Yep, just like ageing women stopped buying expensive anti-wrinkle products years ago.

The evidence has favoured passive investing for even longer than Monevator has been blogging – coming up to 15 years for us – and yet the gravy train rolls on.

At least fit your own oxygen mask first. If your portfolio exhibits traits similar to this case study then I’d urge you to benchmark it against a global tracker using Morningstar’s Portfolio Management and Instant X-Ray tools.

And if that sounds like we’re on some kind of deal for Morningstar endorsement, know we’re not, sadly. I just genuinely think you can learn a lot from using those tools. (A similar analysis of my own portfolio prompted my recent investing mistakes post.)

I don’t pretend passive investing is perfect. Maybe you’ll own some over-bloated winners. Perhaps it encourages hands-off capitalism. Indices stuffed with sin stocks. Pick your poison.

Indeed just like democracy, passive investing is probably the worst strategy – except for all the others you could try instead.

(With grateful thanks to Winston Churchill.)

Take it steady,

The Accumulator

  1. Some shares and even an ADR add to the fund fun, if you’re wondering why there are more than 26 holdings. []
{ 43 comments… add one }
  • 1 Marco October 13, 2021, 10:53 am

    I used to have a portfolio even more complicated than this with > 50 holdings including random shares, ETFs, funds and ITs. Fortunately, I saw the light before I started to get proper money.

    These days I have one holding VWRL

  • 2 mr_jetlag October 13, 2021, 11:27 am

    Yep, the constant reminders of my pre-VWRL/P days are in my SIPP account. “reliable” dividend payers that stopped paying in the pandemic, “hot” sector and conviction based buys. I will sell one or two on a break even basis occasionally, but most are still either deep underwater or just under. Thankfully they’re less than 10% of the overall portfolio. (This is separate to my memestonk and crypto fun money… imagine being a “serious” trader in this market! Sorry TI…)

  • 3 weenie October 13, 2021, 11:54 am

    Hah, reminds me of when back in 2014, I posted up my own ‘fledgling’ porfolio full of managed funds and it was described by one reader as crazy and expensive! That comment, combined with lessons learned from this website and Tim Hale’s book had me switching to index trackers. Over the years, my head’s been turned by ‘themed’ index trackers, some of which have done quite well, others not so well – I think it’s time soon to get rid of (most of) those to stick all in VWRL/P.

  • 4 Whettam October 13, 2021, 11:54 am

    Great article as always @TA, a few comments:

    – in addition to Morningstar portfolio tools for comparing vs. a benchmark, I really recommend unitising as @TI describes:
    https://monevator.com/how-to-unitize-your-portfolio/
    I have only done this since the start of this year, but wish I had done it when I started investing, the great thing is it lets me choose my benchmarks
    – in terms of benchmarks will not be appropriate for all to choose a global equity tracker, if you have a bond allocation then you are going to underperform, I benchmark vs. three benchmarks Lifestrategy 60, Lifestrategy 80 and CPI(H) +5%. My equity allocation is actually 50% currently, but I also hold 20% property and alternatives, so I think these are reasonable targets for me to try and beat.
    – finally I know you are passive all the way 😉 and its what monevator recommends .. etc … but for those of us who use both active and passive funds, the approach its still valid

  • 5 mwb October 13, 2021, 1:01 pm

    Excellent article as usual @TA.

    It seems home bias is quite common, although I’d imagine Vanguard would know better and want to spread funds (and risks) geographically wider; their LifeStrategy 100% Equity has 24.8% exposure to the UK market. Why do they do that?
    Also, you mentioned that UK stocks are at around 4% of global markets. Is there a good website which shows this global capitalisation by country? I haven’t be able to find one.
    Thanks very much.

  • 6 Barney October 13, 2021, 3:01 pm

    It’s what I believed all along, but it’s good to see it validated.
    Ref Morningstar X-Ray, that is a premium feature, £19 per month, £159 per year, although you can get a 14 day free trial which should be enough time to check all your stocks. Also, their latency problem appears to have been resolved.

  • 7 Brod October 13, 2021, 3:14 pm

    @TA – lovely article about an insane portfolio. How can you see what’s what? Answer, I suppose, is you can’t and that’s part of the problem.

    My portfolio is too complex with 7 funds. Two will be merged (do I really need hedged and unhedged versions of iShares Core Global Aggregate Bond?) and one sold down as I increase my equity allocation in a reverse glide path. Five feels about right and allows me to overweight EM and include small companies. Not for over-performance so much as diversification and it move me from Global Large Blend to sort of TSM. Well, these are the stories I tell myself anyways…

    @mwb – the MSCI indices should give you that answer, no? https://www.msci.com/our-solutions/indexes/acwi

  • 8 MRW October 13, 2021, 3:38 pm

    If you don’t want to be all in Vanguard, are there any other accumulation ETFs other than VWRP that are all-world including emerging markets?

  • 9 Brod October 13, 2021, 4:22 pm

    @MRW – I use HSBC FTSE All World Index C. Tracks the same index but slightly cheaper (0.13% vs 0.22%).

  • 10 Moo October 13, 2021, 4:39 pm

    @MRW – iShares MSCI ACWI UCITS ETF USD (Acc) (GBP) SSAC – (TER 0.2)
    if you want an ETF

  • 11 Mr Optimistic October 13, 2021, 7:11 pm

    John Redwood has some sort of model portfolio he writes for the FT. Something like 21 holdings and excluding cash, two holdings at 12% the rest below 6%. Very strange.
    https://www.ft.com/content/23d4100e-a903-49d7-b4a6-7941da263de5

  • 12 MarkR October 13, 2021, 8:11 pm

    It’s all very well trying to consolidate one’s holdings but have you tried doing an ISA transfer? One took nearly 6 months rather than the “approximately 30 days”, and another that I initiated in February still hasn’t transferred yet.

  • 13 Peter October 13, 2021, 8:38 pm

    I used to jump unprofessionally from one asset to another to finaly settle with:
    70% – Global All Cap Index Fund

    10% – Emarging Markets Index Fund
    Overweighting EM as I am persuaded by Ray Dalio about China as the rising power, plus EM is not as expensive as developed world.

    20% – U.K. Inflation-Linked Gilt Index Fund – I’m a bit uncomfortable with long duration risk here. If anyone knows Inflation Linked Gilt fund with shorter duration and ideally with possibility of wrapping it into ISA please share.
    10-15 years investment perspective.

  • 14 David October 13, 2021, 9:34 pm
  • 15 Jeffrey Beranek October 13, 2021, 11:20 pm

    @David, that’s a high-yield smart beta tracker, not a pure passive tracker. The UK is currently on a high yield, which is why the larger than usual % allocation.

  • 16 David October 14, 2021, 8:31 am
  • 17 The Accumulator October 14, 2021, 11:01 am

    @ MWB – I think LifeStrategy is home biased because that’s what some of Vanguard’s customers prefer. VWRL exists for the global cap purists.

    Statista.com is reasonably up to date on global stock market breakdown:
    https://www.statista.com/statistics/710680/global-stock-markets-by-country/

    I tend to look at VWRL’s composition as a proxy.

    @ Whettam – MorningStar’s Portfolio Manager gives you a unitised as well as a money-weighted view. I don’t get the relevance of unitisation for non-fund managers though, except as an interesting benchmark.

    I understand why people are attracted to active investing and why Weenie likes theme ETFs. I’m attracted to this stuff too. If you don’t think risk factor investing is passive then I also use a mix of active and passive. I haven’t seen anyone articulate a good case for active investing backed by evidence though, outside of the risk factors. And they haven’t worked for me so far!

    @ Brod – I agree. The complexity implies incoherence which is confirmed by the duplication. Emotionally it may look and feel like diversity but really it’s redundancy.

    @ Mark R – it’s shocking isn’t it? I’ve done this twice with simple portfolios and mistakes were made both times.

    @ Peter – Re: linkers, see this article for a discussion of some options:
    https://monevator.com/the-slow-and-steady-passive-portfolio-update-q1-2019/
    Also Lyxor’s GISG ETF is now on the market. Make sure you’re looking at GISG (hedged to £) and not GIST or some other non-hedged version.

  • 18 Brod October 14, 2021, 12:37 pm

    @TA – what is your opinion on having a small DB pension? Mine will cover food and utilities and not much more more when I’m 65/7. So maybe in the meantime 10-20% of my SIPP in some type of linker until I get there ?

    Btw, how would you value a DB? I use a 3% withdrawl rate (which I’ll use for my SIPP) to give me a rough, truer idea of my position. Or just just say I need £xxxx.xx less a year therefore my WR is £xxxx.xx less? Actually, I think I may have answered my own question 🙂

  • 19 ZXSpectrum48k October 14, 2021, 1:15 pm

    @TA. I think Whettam has a relevant point. I think there is confusion between passive investing and index investing and also that somehow passive investing is somehow related to the efficient markets portfolio. Your passive portfolio should be the portfolio that should meet your long-term objectives, typically your future liability curve, with the lowest tracking error. It’s the replicating hedge.

    By comparison, index products are just are just some collection of securities, typically market cap weighted. I can actively invest using index trackers by simply allocating more risk than my passive weighting to them. So there is nothing inherently passive about using index trackers.

    You would typically construct your passive portfolio with index based products. The problem is some elements of your future liability profile may are not well represented by index products. You can’t hedge residential property exposure through index trackers: they don’t exist. You hedge that buy owning a house to live in. That’s clearly an active investment since you’ve bought just one house of millions. Hardly well diversified, market cap weighted etc.

    To me this is another aspect of the “equity centric” view that somehow everyone’s passive allocation should be 100% market cap weighted equities. If the objective is to maximize wealth over the long-term (seemingly the objective of the FIRE community), it’s probably the correct passive portfolio. I don’t believe, however, that is everyone’s objective. I just don’t see how such an allocation in any way hedges accurately my future liability profile without taking unnecessary basis risk.

  • 20 Barney October 14, 2021, 2:04 pm

    Ok, I’m somewhat confused now. I always assumed that an Index fund and passive fund were the same, if they’re not, I’d really appreciate some further information on this please.

  • 21 Kraggash October 14, 2021, 7:08 pm

    Sounds a bit like my portfolio, except without the home bias. About 50 holdings, both passive and active. I’d love to move to just e.g. VWRP, but trustnet shows I beat it by about 15% over 5 years. Hard to give up that advantage, but gradually migrating as simpler to manage.

  • 22 Naeclue October 14, 2021, 8:09 pm

    @Barney, the terms index fund and passive fund are used interchangeably, but I have always thought the word “passive” is a misnomer and confusing. You can buy ETFs where the underlying index is a momentum index. A fair amount of trading takes place in momentum funds, so in what way are they passive? There are actively managed funds (I think Terry Smith’s funds for example) in which very little trading takes place, other than as funds are added/withdrawn. Much less trading takes place than in a momentum index tracker, yet these funds are are labelled “active” rather than “passive”.

    Then of course many investors in index funds are active investors. Instead of stock pickers they are index pickers, market timers, etc. The biggest ETF is SPY, an S&P 500 fund. Not only is this actively traded, but there is a very active options market in it.

    I have always thought the term “systematic” better describes passive investing. That means investing is carried out in a rules based manner, devoid of human judgement calls. The rule might be to track a cap weighted index, or a much more complicated set of rules such as for momentum or factor investing. Systematic also covers activities such as rebalancing and “glidepath” investing. Activities which, for me, the word passive makes little sense.

    A global equity index tracker fund (or ETF) may be deserving of the title “passive” though as minimal trading activity is required to track the index, but even then some trading is required to handle corporate actions and new companies joining the index.

  • 23 Naeclue October 14, 2021, 8:14 pm

    @Kraggash, ever considered quitting while you are ahead? One of the worst things to do when gambling is to stay at the table.

  • 24 David C October 14, 2021, 10:56 pm

    @Brod – Valuing a DB pension…the Lifetime Allowance for pensions uses 20x your annual DB pension (plus any lump sum) as the equivalent pot. istr another calculation uses a figure of 16x (or maybe that’s a previous version of the Lifetime Allowance calculation). Or you could look at annuity rates and see what it would cost you to buy an annuity paying the same as your DB pension (with similar index-linking if you can find an equivalent). Or you could multiply the DB pension by your life expectancy from whatever age your DB kicks in. None of them are exact equivalents, but they might put you in the right ballpark. What they don’t account for is the big benefit (imo) of the DB pension: someone else is carrying the risk. Which ought to influence your asset allocation for your DC or SIPP component, but I’ve no idea how you decide how much. If your DB and State Pensions give you a livable floor to your income, you could probably justify quite an aggressive approach to the rest of your pension pot.

  • 25 Al Cam October 15, 2021, 12:09 am

    @Brod; @David C
    David C’s suggestions all have merit. IMO the annuity equivalent is probably the most “meaningful” – in so far as this quickly gives you what it would cost you to buy an equivalent pension on the open market. However, all insurers want to make a profit, so these figures are generally rather high. BTW, DB Schemes are notoriously complex, so trying to work out exactly what an equivalent open market annuity would look like is often easier said than done. A broad approximation is generally good enough though.

    Depending on how quickly you need the information, another approach would be to contact the scheme administrators and request a cash equivalent transfer value (CETV). IIRC you are entitled to one CETV per annum free of charge. In principle, this should get you closer to what the scheme thinks it needs to hold for you at normal retirement age discounted back to the current date. However, the choice of CETV discount rate may not be disclosed and may not be the same as that used in scheme valuations – which I understand must be disclosed. IMO the discount rate is probably the most influential parameter in the CETV calculation. Also, if the scheme is in deficit CETV’s may be reduced. Lastly, several months may pass before you get your CETV.

    There is no easy answer!

    Finally, and FWIW, I agree entirely with David C re risk ownership.

  • 26 Andrew October 15, 2021, 8:48 am

    Does anyone know why JustETF’s Strategy Builder[0] no longer works for UK accounts? I get the error “Currently, there are no strategies available for your country of origin.”

    It’s a real shame as it used to be a good tool, offering GDP weighted ETF allocations and optimizations for lowest possible OCF.

    [0] https://www.justetf.com/uk/etf-strategy-builder.html

  • 27 Andrew October 15, 2021, 9:15 am

    @Peter

    I agree with your Emerging Market skew. Both the VWRP/VWRL ETF’s and the Vanguard “Global All Cap Index” Fund (basically equivalent in terms of past performance although the latter has >2x the holdings) are about 60% in US equities, which is too high for my tastes. They are also both only 10% EM.

  • 28 The Accumulator October 15, 2021, 9:18 am

    @ ZX – I agree a portfolio of index trackers does not automatically lead to passive investing. Nor does the use of active funds necessarily signal a rampant market-timing, stock-picker.

    I replaced a linker index fund with an actively managed linker fund in the Slow & Steady portfolio when I concluded that was a better way to access the asset class. I’m not a fan of dead dogma.

    I use the term active investing as short-hand for attempting to beat the market, commonly due to belief in management skill. I think management skill exists, but I’m highly sceptical of my chances of benefitting from it. That’s the drum I beat.

    Passive investing to me is meeting long-term financial needs – largely by accepting the market return – and constructing my portfolio to do that by the light of the best evidence I can access, at as low a cost as possible.

    The term passive investing is born of history – as proponents sought to distinguish it from a previous norm. Few descriptors can capture the breadth of a topic. Passive investing as a term is a gift for pedantic mischief-makers e.g. “You decided to have toast this morning? Well that’s changed your exposure to wheat hasn’t it? You naughty passive investor. Total fraud more like!”

    For me, the objective of FIRE is to sustainably maintain a level of income that enables me to retire from the rat race. If I wanted to maximise wealth, well, I’d stay in the rat race and climb the backs of my opponents with curved daggers.

    Much is lost in communication, especially as the art of reaching people is to simplify. Moreover, we just can’t help wanting to get ahead. That’s why I hoped to beat the market with a risk factor allocation. I’m only human but so far, so disappointing.

    @ Whettam – do come back on this with your view. I found your comment interesting and was hoping to kickstart further discussion with my reply.

    @ Barney – An index fund is the right tool to use for a passive investing strategy. It does get confusing though. For example, Vanguard LifeStrategy – the classic passive investor’s friend – is not actually an index tracking fund although it is constructed from index trackers. In a world without index trackers you could still implement (as best you could) a passive investing strategy and as Naeclue points out there are index funds which don’t belong in a passive investing portfolio. We humans have a wonderful talent for muddying the waters.

  • 29 Whettam October 15, 2021, 11:40 am

    Really interesting followup conversation @TA and everyone else, my objective is the same as yours e.g “sustainably maintain a level of income”.

    Our approaches are similar, I have just decided to use more active funds (mainly Investment Trusts) than you 😉 I know I have too many holding, if you were to look at my portfolio, you may be of the opinion, it has some similar faults to those in the post.

    I use both index trackers and active funds. For me active is not stock picking or market timing. I think a passive core is sensible for me, its about 70% of my 50% equity allocation. But I’m not sure I totally buy into the passive mantra that choosing good active funds is impossible. I think with research, I might be able to pick good managers. I also think active is sometimes a better way to invest in certain regions and themes, than ETF’s by sectors and smart beta’s, etc. I also think private equity will have a role in future growth, so I have an allocation to this.

    I have an old with profits policy which is active, I regard this as defensive. Our bond allocation is low, mix of passive and active. As I’m intending to take TFC in a couple of years, I’m also increasing the cash in the portfolio. I have a 20% allocation to infrastructure, renewables and property, I use active funds for these sectors.

    If I benchmarked my portfolio vs an all world equities, my performance would be worse, but with the portfolio I hold, I don’t think this the right benchmark for me. I want the TFC in 2 years, so for some of my portfolio the investment horizon is short. I’ll probably be looking to start taking an income shortly after that. I don’t actually care whether I underperform, beat or track all world equities, I just want to achieve our sustainable income target. Personal Inflation Rate +5%, would probably be the best benchmark. I always tracked portfolio % growth and XIRR of each individual investment I make. But unitising my portfolio, has made comparison vs. any benchmark easy.

    I thought your comment about unitisation, only being useful for fund managers, was really interesting. I absolutely view myself as a fund manager running a fund for just my wife and I. I might not be a very good one, but ultimately I know who to blame, if it all goes wrong.

  • 30 Al Cam October 15, 2021, 11:55 am

    @Whettam:
    Come hell or high water, inflation plus 5% would IMO be some achievement; especially if you insist it achieves the benchmark each and every year and not just on average.

    Your fund manager comment reminded me of this post: https://earlyretirementnow.com/2019/08/29/you-are-a-pension-fund-of-one-swr-series-part-32/

    I understand your comment “I know who to blame, if it all goes wrong” but do please remember cognitive decline, etc is a real thing. This is one critical area where DB’s (and maybe even the dreaded annuities) score highly.

  • 31 Barney October 15, 2021, 2:14 pm

    @ Naeclue, @ TA. Many thanks for that info and explanation, It’s much appreciated.

  • 32 Paul Armstrong October 15, 2021, 6:07 pm

    @Whettam. Inflation plus 5% is ambitous especially if you have a defensive portfolio holding some cash. If you treated it as a drawdown pension pot with an assumed maximum safe withdrawal rate of 3% adjusted for inflation you’re planning on net growth of 2% in real terms despite your withdrawals aren’t you? Doesn’t look a very conservative basis for planning.

  • 33 Brod October 15, 2021, 7:29 pm

    @ David C and Al Cam – thanks for your responses. I’ve considered both those methods but the 20x seems too low and annuity rates ridiculously high.

    But it doesn’t really matter, I’ve no interest in cashing it in (impossible anyway.) Just trying to get a handle on whether I’ve enough to retire or not.

  • 34 Whettam October 15, 2021, 7:41 pm

    @A1 Cam and @Paul Armstrong I agree inflation + 5% over a longer duration will be challenging benchmark, for the last five years or so I have achieved this. But I agree with larger cash allocation (which is only temporary) and current higher inflation, it’s becoming more challenging.

    Re cognitive decline agree totally, I’m only 52 at moment, think still OK! But have asked wife to let me know if she starts to see any signs. If it becomes more affordable I’m also really open to the idea of inflation linked annuity to secure income, that’s my priority.

    The main point I was making, is I have decided there is a role for active funds in my portfolio, alongside the core of equity trackers.

  • 35 Jonathan B October 15, 2021, 8:21 pm

    @Brod, work in income rather than capital, that was our solution. The assured income from an occupational DB pension, and (possibly later) a state pension comes off your target total income – the question is whether the capital you have saved allows you to make up the difference.

  • 36 Brod October 15, 2021, 10:39 pm

    Thanks Jonathan B – yes, when I reach 67 the DB and SP will do most of the heavy lifting. Whatever remains of my investments will add the cream on top. Just worry about the thickness of the cream.

  • 37 Al Cam October 16, 2021, 12:51 am

    @Brod (#36):
    Nice way to put it!
    I have often used the thickness of the carpet above the flooring.

  • 38 Al Cam October 16, 2021, 9:32 am

    @Brod (#33):
    It did not occur to me that your DB would be a public sector scheme. However, a CETV is still likely possible. Otherwise, pension splitting (as sometimes used in divorce cases) could not be implemented. The procedure for obtaining a civil service scheme CETV is outlined at: https://www.civilservicepensionscheme.org.uk/media/95073/alpha_schemeguides3_colour.pdf
    FWIW, Jonathan B’s suggestion at #35 is an entirely practical solution for understanding income needs, but nonetheless there are situations (like that mentioned above) where a capital valuation would be required.

  • 39 Jonathan B October 16, 2021, 10:06 am

    @Brod, sounds the same as us except that I have already reached 67 so our savings drawdown is making up the difference since my wife retired early. The situation will change when her main pension matures at 65, and then state pension at 67, after which we expect to be able to manage on pensions alone except when we fancy some “cream”.

    (The other factor in our case is a daughter at university who we fund with parental contributions, and we hope that expense will disappear).

  • 40 Al Cam October 16, 2021, 12:13 pm

    @Jonathan B (#39)
    OOI, have you given any consideration to the very real probability that you will start to see your savings grow again?

  • 41 Jonathan B October 16, 2021, 5:55 pm

    @AlCam. You are right, there is probably a fair chance that once my wife has all her pensions, we won’t need that much “cream” for fun activities and savings may well grow faster than we deplete them.

    At the moment that is still quite a few years away, so we haven’t thought too much about it. Our expectation is that once our daughter gets to the point of wanting to buy a house it will only be possible with a fairly hefty contribution to the deposit. Even so, the risk is bigger of having too much money rather than too little. We will see, that also depends on the wider economy.

  • 42 Al Cam October 16, 2021, 11:44 pm

    @Jonathan B (#41)
    Apparently, on average, UK pensioners spend less than their income and, the gap grows as they age. Thus, it seems likely you will be able to support your daughters deposit. Laudable aims – like Die With Zero – thus seem somewhat unlikely. Having said that, very few people ever strive to be average.
    As you say, time will tell!

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