Good reads from around the Web.
A post from UK blogger – and Monevator contributor – Retirement Investing Today took my recent article on sequence of return risk a step further.
For his piece, RIT ran some numbers to see how a UK retiree accepting a P45 a year before the crash in 2008 would have fared with various simple stock/bond allocations.
Here’s the pain dealt out with a 4% withdrawal rate:
On the one hand, this is pretty sobering stuff. The heaviest 75% allocations to shares – represented by the green lines above – are down as much as 24%. That’s quite a drop in just six and a half years.
On the other hand, you could argue it’s reassuring how well the retiree’s position has held up, given the turmoil of 2008 and 2009.
Sure, it was a disastrous time for this hypothetical desk-dodger to go into retirement with his or her risk setting set to “Hell yeah!”
But thanks to the 25% bond allocation, it hasn’t yet been a total wipe-out. An income has been taken as planned, and there’s still some potential for shares to bounce back.
Of course many people who went gung-ho into OAP-hood with a 75% weighting towards stocks would take fright after a crash, and belatedly sell shares to buy bonds or an annuity. They’d therefore already have missed much of the rebound.
Far better to set your asset allocations prudently from day one.
A report from the retirement trenches
Another UK blogger, John Hulton, is already in income drawdown mode with his SIPP. He updated us this week on his progress.
John retired last year, so he’s already off to a more fortunate start than those hapless share-heavy retirees of 2007, reporting:
Including income, the total return for the 12 months is over 20% which is obviously pleasing. The market generally has performed well over this period.
The technical term for this is “jammy”, when it comes to sequence of returns risk. Early gains are a boon once you’re in drawdown mode.
At the core of John’s SIPP strategy is a portfolio of income investment trusts after my own heart.
Assuming I am rich and bold enough to have a healthy buffer zone when I eventually retire (and if not then something has gone very wrong!) then John’s approach is similar to what I’d do myself, with perhaps a few index funds in the mix, too.
By drawing income and leaving capital untouched, I believe you boost the chances of your retirement pot outlasting you – and I don’t care that Messrs Modigliai and Miller won a Nobel Prize for saying otherwise
Live off your income but never touch your capital, if you’re rich enough.
It worked for the landed gentry for generations. I suspect it will work for us, too.
From the blogs
Making good use of the things that we find…
- Opinions: Has Bogle’s index investing already won? – Abnormal Returns
- Can a ‘total shareholder yield’ ETF work? – Clear Eyes Investing
- Why dividend investing is better than buying the market – The Dividend Guy
- 10 great Jesse Livermore quotes – Joe Fahmy
- Those end-of-the-world gold trades: Whoops! – The Reformed Broker
- Bill Gates: What I’ve learned from Warren Buffett – LinkedIn
- The second half of retirement – Vanguard blog
- Research paper on ‘the ostrich effect’, which sees people logging in to check their share accounts more often in the good times and less in the bad [PDF] – Download at SSRN (Via SquaredAway / Oblivious Investor)
Mainstream media money
Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site.
- How much luck is there in investing success? [Video] – Morningstar
- Why a stumbling market is good news – Wall Street Journal
- Your last remaining edge on Wall Street – Motley Fool US
- Top 10 holding of the ‘ultimate stockpickers’ – Morningstar
- How to invest in farmland [Search result] – FT
- Three traps for bond investors [Search result] – Telegraph
- The long-term case for emerging markets [Search result] – FT
- Taper tantrums – The Economist
Other stuff worth reading
- Swedroe: It matters how you frame your investing decisions – CBS News
- Get a house to do up in Stoke-on-Trent, for just £1 – The Guardian
- How to pay £400 tax on a £100,000 income [Search result] – Telegraph
- Test driving Britain’s cheapest car – The Guardian
- Who’s rich? [Graph] – The Economist
- Going green could boost your home’s price by 16% – This is Money
Book of the week: A lot of DIY stock pickers read share blogs and magazines, and occasionally even a company report, but they never read business books. Yet some of the great investors – Charlie Munger and David Gardner, for example – read nothing else. A good halfway house to start with is The Outsiders, the definitive book on CEOs who were also excellent capital allocators.
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