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Weekend reading: We all feel the pain of active fund managers now

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What caught my eye this week.

Fund managers have bemoaned their benchmarks for as long as I’ve been investing – or at least whenever they’re lagging behind them.

Large cap UK fund managers will try to convince you to ignore BP or Shell or some other big energy stock in the UK market if the oil price soars, for example.

Meanwhile hedge fund fans invariably ask you to look past their (nowadays typically middling) gains to focus on risk taken or volatility endured. Yet as an industry they seem to do this less at the marketing stage and more for the post-mortems.

I could go on, especially given that me and nearly everyone else I know who picks stocks are mentally side-stepping our benchmarks these days too.

Even some dedicated passive investors are making excuses.

Size matters

The cause of this angst is of course the top-heavy US market – and the triumph of the so-called Magnificent Seven tech giants – which we touched upon the other week (see The 7/93 portfolio).

For those napping at the back, here’s an update via John Authers of Bloomberg:

Startling, but some still say there’s nothing to see here. That this sort of concentrated performance happens all the time.

And it’s true that in any particular investing era, a few large winners do tend to be stomping around the top of the index like they own the place.

But what is unusual with this generation of ‘inevitables’ is that they’ve kept at it. Their 2020-2021 market-beating advance was repeated right after their 2022 swoon.

Big but blundering

It’s rare for such dominance to go on so long. As GMO points out in its latest quarterly letter [gated], while the largest firms by no means consistently underperform, over the long-term they tend to trail the average stock:

This lagging makes sense, intuitively. Trees don’t grow to the sky and all that.

Of course mildly big companies become giant companies regularly. Winners do win.

But eventually size, complexity, missed expectations, and disruption by upstarts tends pulls down their future gains.

Which is exactly why the news is full of stories about Elon Musk and Mark Zuckerberg and not John D. Rockefeller the 7th or the CEO of the Dutch East India Company.

Looking at GMO’s graph, whenever it did seem like the biggest trees might keep bolting heavenward and then they didn’t after all, the aftermath was not pretty. Think the Dotcom boom and bust, or the crash of the early 70s.

So it’s all of legitimate concern.

Weight for it

I’ll save my musings on what might undo the dominance of the Magnificent Seven for another day. (It strikes me as potential Moguls material…)

But in the meantime, even passive investors are getting antsy.

Our own passive guru The Accumulator wavered from the true path – aka buy a global tracker for all your equities – in devising his No Cat Food portfolio this week.

And judging from the Monevator comments, plenty of you have similar concerns.

The principle worry for everyday folk is of course that our portfolios will take one between the eyes if and when the big winners finally fall (or fade) from grace.

No wonder! The US market now makes up 70% of a global tracker, and Bloomberg’s graph above illustrates where much of its gains have been coming from recently.

But for those of us who play the naughty active game – whether privately or professionally – there’s also the matter of keeping score.

Which brings me back to the benchmark blues I talked about at the start of this post.

Bench pressed

Fund managers are judged on their outperformance, or more likely the lack of it. The rest of us naughty active investors wonder what our hobby is costing us.

Conor Mac put this well on his Investment Talk blog this week:

So what’s a good compounded annual growth rate (CAGR) for 40 years of work, assuming you invested $10,000 per year?

Opinions on this matter vary, but for the sake of argument let’s say that buying a hypothetical index fund and sitting in it for 40 years would have returned 8% compounded annually.

Suppose after 40 years of hard work you look at your portfolio report and see that you generated a 6% compounded annual return.

One perspective is that you made yourself a small fortune of ~$1.4 million.

Another is that you lost ~$1.4 million because if you had instead invested in the fund you would have earned ~$2.8 million and 4.75 years of your life back.

This isn’t just about ego and beating an arbitrary benchmark, it’s about maximising return and considering opportunity costs.

People want to know if what they are doing is worth their time.

Of course the trite answer is the best stockpickers should have bought the Magnificent Seven companies, sat on them, and smashed their S&P 500 benchmark.

The Mag Seven are undoubtedly some of the greatest (/ least regulated / most monopolistic) companies of all-time, so I’m not being quite as glib as it sounds.

Alas, the best stockpickers also tend to be students of history – and a decent majority are believers in reversion to the mean. This made it hard to buy and hold the world’s first $1 trillion listed companies on their way to their becoming the first $3 trillion listed companies.

At least that’s what I’ve been telling my girlfriend. Who has little interest in my returns and even less so in my investing. I guess it’s been on my mind.

It shifts all the time, but I’ve got only 35% or so in US equities presently. No wonder I’m already lagging in 2024.

(And no honey we can’t finally go to the Maldives this summer after all.)

Of course another flavour of active traders do ride momentum – and they would have been buying these stocks accordingly.

Momentum works brilliantly until it doesn’t though, and it’s more easily done within a computer model than lived in reality.

At least that’s my excuse.

Passive violence

To return to passive investing, its critics also hold up momentum as one of their grudges against index-tracking (and never mind indexing’s superior returns).

Veteran hedge fund manager David Einhorn has even been arguing that the markets are ‘fundamentally broken’ due to passive investing:

“All of a sudden the people who are performing are the people who own the overvalued things that are getting the flows from the indexes. You take the money out of value and put it in the index, they’re selling cheap stuff and they’re buying whatever the highest multiple, most overvalued things are in disproportionate weight,” [Einhorn] said.

Then the active managers participating in that part of the market get flows and they buy even more of the overvalued assets.

As a result, stocks, rather than “reverting toward value” instead “diverge from value,” Einhorn said. “That’s a change in the market and its a structure that means almost the best way to get your stock to go up is to start by being overvalued.”

Personally I don’t believe complex, adaptive systems like markets get ‘broken’. Rather, I suspect if there’s a reckoning due then it’s merely been postponed.

But Einhorn is smart and time will tell.

Stay on target

In the meantime Einhorn says he’s looking to those running his cheap and unloved companies to return capital to shareholders via buybacks and dividends.

Which doesn’t sound too new-fangled to me. But it is more honest a mission tweak than changing your benchmark when you’re lagging, so one and half cheers from me.

Also, Einhorn might take heart from the conclusion of GMO’s letter. The wonks argue that active investors have taken their pain, and sooner or later they’ll enjoy the gain:

Time will tell if the Magnificent Seven turn out to be as fallible as the Nifty Fifty or the TMT darlings that preceded them at other notable times of mega cap outperformance, but the history of mega caps when they are trading at a substantial premium to the rest of the market is particularly poor.

If the U.S. equity market becomes less concentrated – our bet for the next decade – skilled active managers are poised to have a decade for the books.

Allocators who stick to basics, reminding themselves of the virtues of diversification, stand to benefit handsomely.

That would be nice, wouldn’t it?

Maybe next year…

Have a great weekend.

From Monevator

Decumulaton strategy: the No Cat Food Portfolio – Monevator [Members]

What your retirement living standards could look like – Monevator

From the archive-ator: 10 tips for Britain’s blighted young things – Monevator

News

Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Barclays to buy Tesco Bank in £600m deal – BBC

UK retirement age may need to rise to 71, say experts… – Guardian

…but others are sceptical and argue it’s a ‘blunt tool’ – Which

Woodford scheme of arrangement sanctioned by High Court – Investment Week

UK house price rises to highest for a year in January, says Halifax – BBC

What’s happening to buy-to-let mortgage rates? – Which

Products and services

Chip launches its first cash ISA, paying a 4.75% rate – This Is Money

Five ways to help your child buy their first home – Which

UK lender offers long-term mortgages that cut rates over time – Guardian

Get between £100 and £5,000 cashback when you open a SIPP with Interactive Investor before 29 Feb. New SIPP customers only. Minimum £10,000 account value. Terms apply. Capital at risk – Interactive Investor

Six reasons not to switch your bank account – Which

Shedding light on the finances of solar panels [Search result]FT

Obsessed with the markets? Cutting-edge data platform Koyfin is offering Monevator readers a seven-day gift of Koyfin Pro, as well as a special pricing offer of 20%-off all Koyfin plans. Sign-up with our link – Koyfin

Portfolio Charts now enables you to visualise strategy returns over time – Portfolio Charts

Barclays Smart Investor scraps £4 minimum monthly fee and fund dealing charges – This Is Money

Tips and tricks to find cheap flights – Be Clever With Your Cash

Homes for sale in urban villages, in pictures – Guardian

Apple Vision Pro mini-special

A review of the Apple Vision Pro – The Verge

Is spatial computing the future of work? Not yet – Stratechery

A day wearing Vision Pro [Video, check out the cooking at 4:14]WSJ

Bullish for Apple, bearish for society – A Wealth of Common Sense

Comment and opinion

Paying into a pension can dodge the 60% tax trap for £100K+ incomes – This Is Money

How to buy a house these days [US but relevant]Mr Money Mustache

25 investing mistakes that you can easily avoid – Darius Foroux

Time to tax billionaires [Search result]FT

No Worries? More thoughts on FIRE – The Italian Leather Sofa

The most overrated things in personal finance – Of Dollars and Data

Why you’re better off not borrowing – The Atlantic via MSN

A bullish take on Bitcoin – Advisor Perspectives

Good-looking parents? You probably earn more money – MarketWatch

Sandpiles and market unpredictability – Novel Investor

The total return rollercoaster – Advisor Perspectives

Capital gains cogitations – Simple Living in Somerset

Naughty corner: Active antics

Which type of investor are you? – Behavioural Investment

Pods, passive flows, and punters – Albert Bridge Capital

The investor experience with thematic funds – Klement on Investing

Using valuation metrics to navigate the cycle – Topdown Charts

Better than they were, but bonds are still too expensive – Morningstar

Are the Magnificent Seven too dear? [PDF]Goldman Sachs

Kindle book bargains

How Not To Be An Antiques Dealer by Drew Pritchard – £0.99 on Kindle

I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle

The Tipping Point by Malcolm Gladwell – £0.99 on Kindle

Money Box by Paul Lewis – £1.99 on Kindle

Environmental factors

Europe’s deepest mine to become a giant battery – Independent

Should ESG investing be criminalised? – Morningstar

The Earth is getting – literally – greener – Vox

Meet the world’s most amazing tiny creatures – Guardian

The rise of ESG among (wealthy) retail investors – Klement on Investing

Robot overlord roundup

AI is quietly changing everyday life [US but relevant]Politico

How Microsoft’s lead is showing up – Axios

Brexit going as great as ever mini-special

Young people’s desertion of conservatism is not a global phenomenon [Search result]FT

Italian man removed from UK despite post-Brexit Home Office certificate – Guardian

Penury and decay mark Brexit’s miserable anniversary – Guardian

Brexit dividing opinions and families four years on – BBC

Off our beat

Our complicated relationship with ‘stuff’ – Root of All

‘Enshittification’ is coming for absolutely everything [Search result]FT

Have the Dutch found the answer to the burnout problem? – Guardian

The surprising resilience of the Russian economy [Search result]FT

Chris Dixon: crypto can save the Internet – Semafor

So you want to be a centenarian? – A Teachable Moment

What your brain is doing when you’re not doing anything – Quanta

Everyone’s a sellout now – Vox

And finally…

“Crowds are often surprisingly wise – the market can be right even when everyone who makes it up is individually wrong.”
– Lee Freeman-Shor, The Art of Execution

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{ 37 comments… add one }
  • 1 Hariseldon February 10, 2024, 7:20 am

    Good article, I’m sure that this speaks for many of us, climbing a wall of worry springs to mind…..

    The question is what do you do about it ?

    1)Buy the Global Small Cap Index or S&P400 / 600 ( probably fall in sympathy…)

    2) Take money off the table / rebalance to bonds

    3) Do nothing ( Peter Lynch’s comments about more money being lost in preparing for the next recession/ fall

  • 2 Hak February 10, 2024, 9:11 am

    Not quite the same pain as the fund manager gets paid regardless of their under performance of the benchmark!

  • 3 Faustus February 10, 2024, 10:35 am

    The ‘experts’ who were in the media this week peddling a further raise in the SPA on the basis of ‘growing life expectancy’ don’t seem to have been paying much attention to the ONS, which this week revealed that life expectancy has not risen in the UK since 2011 and is actually falling in many areas. In fact life expectancy in 2023 is significantly lower than was predicted when the Pensions Act 2007 was enacted raising the SPA to 68 in due course. Would be nice if the ‘journalists’ at the Grauniad actually checked their facts before printing, but perhaps that is too much to expect from a tabloid.

    Moreover, high levels of immigration have made the ratio of working age people to pensioners in the UK fall much more slowly than was originally predicted at the time of the 2007 Act. As a result the OBR recently stated that the UK would have ‘one of the least aged populations amongst the advanced economies in 2070’. But I suppose that doesn’t make for lurid headlines.

    What could make current plans for the SPA unaffordable is the triple lock which didn’t exist in 2007 and has been a massive bung to boomer pensioner voters. As the IFS has said, this should be removed as soon as possible to ensure pensions are affordable for the next generation. And where the report is on more solid ground is the problem of rising long-term ill-health since the pandemic. Solving that issue though requires other policy levers not the SPA.

  • 4 marc1485153 February 10, 2024, 10:51 am

    My portfolio is 90 – 100% all world index. I expect drops of 30 – 50% now and again, it’s just par for course on the journey up the mountain. If the Mag 7 plummet, so be it, but I’m not going to change my strategy.

  • 5 xxd09 February 10, 2024, 11:01 am

    Ancient retiree here…..
    Portfolio now back at 7% less than the peak in Sept 21 when I thought I could now buy a yacht!
    Stockmarkets go up and down!
    Aiming to be a constant winner is very exciting and stressful-often complicated and expensive
    Unfortunately also is not a guarantee of success except for a very lucky/clever few
    Setting your Asset Allocation and sitting tight for most of us seems to work best
    Doing nothing of course is stressful too but perhaps easier for most of us to manage
    I certainly haven’t changed anything for years now and what’s more it seems to work -in the words of the song”Could you ask for anything more?”
    xxd09

  • 6 pourquoi pas February 10, 2024, 11:23 am

    What’s the correct share of the US market for Europeans? Just buy a global index tracker and let it fluctuate? I’ve settled for 45% but would like to be able to justify it with something else than a gut feeling.

  • 7 The Investor February 10, 2024, 11:34 am

    @pourquoi pas — From memory the US share of GDP is between 25-30%, and generally closer to the lower end. As I say in the piece, the US share of global equities is currently around 70%.

    This is also a crude metric (plenty of companies and economic activity globally and in the US is not listed, and anyway equities are not the only fruit) but I think it’s directionally suggestive that US equities are a bit bloated.

    It’s a conundrum though. Those Mag 7 companies really are among the greatest money making machines we’ve ever seen. We do seem to be at a potential inflection point with AI, and it’s hard not to think they’re in the right place at the right time for that, with potentially inescapable lock-in consequences.

    US companies (and institutions) have treated their shareholders very well over the years too. Something that can definitely not be said of much ex-US listed GDP-generation. (Look at China, where the Chinese equity market is basically flat over 30 years versus a multi-bagging in GDP.)

  • 8 Naeclue February 10, 2024, 11:37 am

    This one comes round regularly. “Expensive” stocks are made more expensive because market neutral passive investors are buying them. Yes sure, nothing to do with some active investors choosing to overweight those expensive stocks and underweight the cheap ones then? No of course not.

    Loved the Enshittification link.

  • 9 Naeclue February 10, 2024, 11:52 am

    ps, I am not sure where your 70% is coming from. As at year end, US listed stocks made up about 61% of the FTSE All-World Index, with the top 7 about 16%. High, but not something I find particularly alarming.

    There are always plenty of things to be worried about when investing in equities!

    pps, if I had listened to GMO over the last 10 or so years I would be a lot poorer than I am.

  • 10 Calculus February 10, 2024, 12:10 pm

    I’ve also wondered about the effect of the 60/40 global index approach on valuations, but having benefitted from increasing concentration in US and technology over the last few years I’m reluctant to shout too loudly:) – Now about 90/20 with the 90 in Nasdaq and Semiconductors mainly, so good for me to read the counter side. Having lived through 2000 I don’t see this as the same level (yet anyway) – some at least of these companies are making money and are effective monopolies as you say. The US gov is also a factor – restricting which countries have access to high end chips. A softer outcome may be where growth slows and the focus shifts towards income, dividends or buybacks. Sticking for now, its hard to get on and off the train mid station.

  • 11 Calculus February 10, 2024, 12:28 pm

    Another thought – Trees don’t grow to the sky, but forests have lived longer than humans have been around.

  • 12 BBBetter February 10, 2024, 12:30 pm

    Active managers claiming they’ll do well in the future? Shocking!
    Never read that before!

  • 13 BBBetter February 10, 2024, 12:38 pm

    It’s funny people trying to match their portfolio share to GDP. Much of Asian and European businesses are private with China moving even more backwards curtailing private companies and letting government entities become even bigger. Good luck putting more money in those markets.

  • 14 The Investor February 10, 2024, 1:03 pm

    @Naeclue — Hmm, 70% is a little high yes, Vanguard has it at very nearly 64% in VRWL:

    https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/portfolio-data

    I’m pretty sure it was approaching 70% at some point in 2023, and maybe I got anchored on that.

  • 15 Seeking Fire February 10, 2024, 1:17 pm

    It’s liberating to acknowledge and accept that you haven’t much of a clue what’s going happen. Those who don’t know and those who don’t realise they don’t know…..

    As Naeclue commented, there’s been a sizable recent chorus of wealth managers sagely pointing out how the US market is cheap ex these tech behemoths and where you should search for value. Poor trade….

    What you can do though is have an awareness of valuations and go ok look, maybe it’s not such a sharp idea to be applying the same swr regardless of valuations. That works both way. If your portfolio halves a sustainably wr as a % will increase. Can help calm your nerves.

  • 16 ZXSpectrum48k February 10, 2024, 1:55 pm

    With equities, a large amount of total performance stems from a small number of stocks during their bubble phase (often only known in hindsight). Some make argument that when you spot a bubble, then rather than avoid it, you should actually increase exposure since these bubbles extend way beyond what is expected. Eventually, when the bubble pops, you give back a large amount, but it’s often still a better return than steering clear. It does require an ability to close one’s eyes and go with momentum. It’s diametrically opposed to anyone with a value orientation.

    It’s why I tend to use trackers for my equity exposure and active elsewhere. Trackers are blind and provide that momentum bias. That offsets my tendency to look for mean reversion. I don’t think this works well for other asset classes since they don’t exhibit the same return distribution.

    As for index investing, it hasn’t “broken” the market. It has changed markets’ characteristics. In some bond markets, where 40% of the real money AUM is indexed and the rest is technically active, but 90% indexed, the effective indexation is around 95%. Leveraged players (banks, hedge funds) much smaller than 20 years ago. Stronger momentum/lower mean reversion, lower background volatilty but much higher “air gaps” in stress. Price discovery less efficient, liquidity much worse. Twenty years ago, it would not have been possible to “break” the US Treasury market. Now it happens with a certain regularity. It’s just a temporary issue – the central banks regain order quickly – but for a short time it can feel like the sky is falling.

  • 17 TheFIJourney February 10, 2024, 2:54 pm

    Thanks for the weekly links TI, interesting as always. The take on the Apple Vision Pro was something I have read about in many other places as well. I love technology and I do feel that VR headsets are revolutionary in general. I only recently had the PSVR2 and I had a new wow moment that I haven’t had in a while with technology, not since I got to flick content up and down on a touchscreen phone. I was blown away experiencing no the walking dead in VR, being able to pick up objects and literally stab zombies in the head, peek round walls and such. It’s just so immersive. This makes me very curious to try the Vision Pro as usually they do make tech that’s niche and in its infancy mainstream. The iPhone, iPad and iWatch are of course examples.

    The huge cost of this Vision Pro though and the concerns put forward are understandable. I still certainly want to try one and if I can when I go to America late this year, I will at least try it. I might even buy the second one if it were to come down in price and blow me away even more. I feel so fortunate to be alive when this kind of tech has become available.

    TFJ

  • 18 expatscot February 10, 2024, 5:22 pm

    Agree with the general worry, but then ’tis been ever thus.
    The market, and individual stock prices, are a weighted gauge of the overall sentiment of current value and future prospects, regardless of past behaviour, based on the sum of all current knowledge.

    I have no “edge”. I don’t think the markets or anyone has any insights we don’t yet know about, so in the absence of a better alternative I plough on with my 100% global trackers.

    It’s probably punchy, but I don’t have a better answer.

    Whilst I over-monitor performance, currently daily as a near the magic 55th birthday, I don’t stray from the course, and haven’t for the past >decade. There will be drops. Covid was one; Autumn 2022 another; there will be more and severerer.

  • 19 Boltt February 10, 2024, 5:53 pm

    @expatscot

    I’m 55 in the next 12 months and am currently planning to take the lump sum and drain the SIPP over the next 5-7 years (pre DB).

    The timing aspect of taking the 25% and subsequent lump sums leaves me exposed to significant timing issues – do you have similar concerns (and any plans to dial down the 100% equities?)

  • 20 Factor February 10, 2024, 7:32 pm

    Sandpiles and market unpredictabilty (Comment and opinion)

    I’m reminded of J K Galbraith: “The only function of economic forecasting is to make astrology look respectable”.

  • 21 Al Cam February 10, 2024, 8:00 pm

    @Boltt (#19):
    IIRC, the benefits of your DB scheme at a given age are not subject to any [nominal] uncertainty – as it is revalued at a fixed rate. Could you please explain what ‘significant timing issues’ (over and above those that everyone else is exposed to) you foresee?

  • 22 Boltt February 10, 2024, 9:07 pm

    @A1cam

    My timing issues are selling out all my DC funds over the next 5-7 years. It’s currently all in default funds and I’m effectively a forced seller at semi-fixed points in order to minimise tax (I’m aiming for ~11.5% tax, taking into account the TFA).

    I need think through the options:
    – just sell and don’t worry about it
    – switch a % in cash/cash like (active timing decisions)
    – something else
    – if I didn’t need the cash for living expenses/mortgage I could rebuy similar in my ISA and not have an issue/risk

    I haven’t given enough thought into the volatility of the DC pot – probably should have “lifestyled” the DC assets ready for withdrawal to some degree

    Ps good memory

  • 23 Al Cam February 10, 2024, 11:12 pm

    @Boltt (#22):
    Thanks for the extra details.
    Does not look like an unfamiliar scenario to me.
    As long as you are clear why you are doing the sell out over the period in question then I see nothing unique to you.
    Your point 4 [if I didn’t ..] did not apply in my case and I guess this might be a cause for concern – but it hardly should be news to you!
    Some hopefully useful thoughts follow:
    a) If you are worried about default funds why not transfer SIPP elsewhere?
    b) You can sell any time within the tax year – so not really a forced seller IMO; but FWIW my experience says best to sell nearer the end of the tax year as you will have a clearer view of your tax situation for that year and pay less excess tax initially too – but not everybody would agree.
    c) Have you considered UFPLS or even partial crystallisation vs full crystallisation at outset?
    d) Not convinced that ‘life-styling’ would have been a good move

    Some additional chatter (with multiple contrasting viewpoints/strategies) you might find useful at https://simplelivingsomerset.wordpress.com/2024/01/11/mustelids-mulling-a-new-year-at-megalithic-sites/

    Finally, one lesson I took from my experience was that apparent ‘tax efficiency’ might not actually be the best metric; having said that I fully understand why you might start from there; I did!

  • 24 Stephen February 11, 2024, 7:33 am

    I see the link to Chris Dixon’s latest on “web3”. Molly White’s review of his book is salutary: https://www.citationneeded.news/review-read-write-own-by-chris-dixon/

  • 25 Marco February 11, 2024, 8:42 am

    @Stephen – Molly White is great. Pro Bitcoin articles are always super cringe.

  • 26 Marco February 11, 2024, 9:36 am

    Just read the “bullish for Bitcoin” article. It’s just the usual crypto bro cult nonsense. Might as well read article on child health written by an anti-vaxxer.

  • 27 Slg February 12, 2024, 9:13 am

    As ever, I love the weekend links as there’s always content I would never come across usually.
    Seems to be a lot of doom and gloom and woe is me in there this week though; previous generations of artists, youths, fund managers, investors, manual workers, tech workers, knowledge workers, government workers etc, had it so much better /easier…..
    It might just be that my complainy pants news filter is set too high to assess the state of the nation but are you sure you’re getting a balanced reading breakfast to keep your glass topped half way up @TI?

  • 28 Hariseldon February 12, 2024, 2:47 pm

    @Boltt

    You need to drain a SIPP over a 5-7 year time period , are invested in ‘default’ funds and question when to sell portions and when to take the 25% pcls.

    Might I suggest you look at the problem from the investment perspective first.

    You need a series of annual cash flows over a 5 to 7 year period.

    If you were to consider the investing policy to fund a cash flow in say 5 to 7 years time then a ‘default’ investment equity/bond mix would probably be just fine , to fund a years expenses due in 6/12 months time then a cash /ultra short bond portfolio would be a good choice.

    To fund the intermediate periods something in between….

    The previous suggestion of UFPLS sounds sensible, spread the lump sum into each annual cash flow and after each annual withdrawal the portfolio should become more defensive.

    Personally I’d use a mix of cash/ultra short bonds, a 0-5yr gilts fund and a global tracker , as the years roll on , sell down equity first then the 0-5 bond fund to leave the cash at the end on a glide path to cash at the very end when you take the DB pension.

  • 29 Al Cam February 12, 2024, 3:51 pm

    @Boltt:
    If you really need all the cash [from the DC] for living expenses/mortgage across the period in question*, then as @Hariseldon (#28) hints, your primary objective should be meeting your cash flow needs [across those years] with a very high confidence. IMO, minimising tax paid to empty the DC should be well down the pecking order in such a scenario.
    If, after laying out all your cash flow needs, it seems a tad tight/risky then why not just carry on working for a bit (I assume you are still working as you refer to DC scheme and default funds) rather than a SIPP. Each extra year worked should:
    a) boost your DC Pot; and
    b) reduce the number of years to fund before commencing your DB.

    FWIW, I funded my gap from jumping ship to commencing my DB using a floor and upside approach. And I locked in something like 85% of my foreseen flooring needs for the assumed duration from the outset. I mostly used approximately laddered fixed rate savings bonds (subject to FSCS limits, etc) – or CD’s as our American cousins prefer to call them – and an assumed rate of inflation. I also held specific reserves too. So a pretty low risk, but relatively costly approach.

    *which may also mean you have no ‘dry powder’ once your DB scheme commences

  • 30 Naeclue February 12, 2024, 7:52 pm

    Personally I cannot see any point holding equities you know you will need to sell in 5 years time. That’s gambling, not investing.

  • 31 Boltt February 12, 2024, 8:59 pm

    Thanks @ Hariseldon / A1Cam

    I’ve not moved my work(s) DC into a personal SIPP – it’s a job that needs doing soon.

    My ISA is pretty large and I have ~1.5x annual spending in savings – part of the need to empty the DC is just to avoid paying 40% after 5-7 years. The choice is rip it out now (next 5-7 years) for a blended 15% (o%x12.5k + 20%x37.5) or pay 40% later.

    Spending from ISA is possible but highly undesirable- so spending DC /savings while trying fill 2 ISAs annually is the plan until the DB kicks in. A £300k mortgage needs settling/reducing at some point too.

    UFPLS v taking the 25% – the 25% lump is slightly preferable as it can reduce the 6% mortgage interest, which is pretty good return for the next couple of years.

    Shifting a chunk of the DC into short gilts is a good idea – but crystallises a poor performance on DC investments (a sunk cost so should probably just eat it)

    I’ve not earned for 4 years and apart from selling a couple of BTLs this is the first time I’ve had to think about selling equity investments to fund living/mortgage cash flows – hence over thinking and over sharing

  • 32 Boltt February 12, 2024, 9:10 pm

    @naeclue

    “ Personally I cannot see any point holding equities you know you will need to sell in 5 years time. That’s gambling, not investing.”

    I guess that’s why I feel uncomfortable, as I’ll be gambling on the sales dates.

  • 33 ermine February 12, 2024, 11:44 pm

    @boltt #22

    I need think through the options:
    – just sell and don’t worry about it
    – switch a % in cash/cash like (active timing decisions)
    – something else
    – if I didn’t need the cash for living expenses/mortgage I could rebuy similar in my ISA and not have an issue/risk

    I’d be tempted to graduate into something less risky in the DC, if you need the money for living costs.

    But that’s not what my younger self did, and I gained from the run out of the GFC. I had no mortgage but was seriously skint in the early RE days, eventually shunting my DC SIPP out into the ISA under the tax threshold. Rebuying in the ISA gets you out of the forced seller game, but there’s an argument you aren’t a forced seller in that case, just an elective shifter from a pre-tax to a post-tax regime. You may be doing that for a tax win, but it presumes you don’t need the money from the DC.

    I even considered (and did, very part-time) work for a little, which of course is your other option if the mother of all bear markets shows up in a year or two making the forced seller of equities option look ugly. I didn’t really need to do it, but it staved off drawing down from the ISA.

    Being seriously skint in the early part of your FI/RE journey is a rough ride. It was worth it in my case because no consumer spending tasted as good as freedom from workplace toxic crap felt. I was fortunate enough not to run into health issues over the last ten years, that could have made the early period of being skint look like a misallocation of capital, it is all the luck of the draw looking at my peer group. I have lived higher on the hog for a few years now so it will soon become a wash, but it’s worth asking yourself the wider question of what living well means to you relative to not paying 40% tax. It is not just money you are running out of…

  • 34 Al Cam February 13, 2024, 1:02 am

    @Boltt (#31):
    Thanks for the further info; clearly much more to the story and a whole load of additional optionality too!

    I fully understand your desire to not pay HRT as a retiree and/or to access your erstwhile DC. However, unless something changes, will this not happen if/when you reach state pension age? This is a scenario I am pretty familiar with.

    I can see your logic re the PCLS (vs UFPLS) and your mortgage. Is the 6% rate fixed, and, if so, for how long?

    Re: “hence over thinking and over sharing”:
    I guess in reality you must be fairly relaxed about the situation as that is the only way I can square away your following comments:
    a) “crystallises a poor performance on DC investments”;
    b) “I’ve not earned for 4 years”; and
    c) “I’ve not moved my work(s) DC into a personal SIPP – it’s a job that needs doing soon.”

    Best of luck – I am sure you will figure it all out.

    PS filling 2 ISAs from 42.5k net DC withdrawal plus savings (worth some 1.5 years of annual spending) and interest and covering annual living costs [for 5 to 7 years] sounds like a bit of an ask to me – but I might have misunderstood your plan

  • 35 Valiant February 15, 2024, 10:21 pm

    @xxd09 #5

    What is your asset allocation please? Asking as a fellow decumulator.

  • 36 xxd09 February 15, 2024, 11:42 pm

    Currently 34/60/6-equities/bonds/cash
    3 index funds only
    Equities-2% Vanguard FTSE AllShare index tracker fund
    -32% Vanguard DevWorld exUK index tracker fund
    Bonds-60% Vanguard Global Bond Index Fund hedged to the Pound
    Cash-6% -2-3 years living expenses
    Regard investments as one portfolio for management and withdrawal-ie Total Return-portfolio splits into 2x SIPPs,2x Stocks and shares ISAs,2x Instant Access Cash ISAs and a High Interest Bank Account
    Half our income comes from a Teachers Pension +2x State Pensions
    Other half comes from Investment Portfolio
    xxd09

  • 37 Delta Hedge May 2, 2024, 8:40 pm

    @ZX #16: you note:

    “As for index investing, it hasn’t “broken” the market. It has changed markets’ characteristics.”

    What do you make of the inelastic market hypothesis?

    The lead research paper on this (“In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis”, by Xavier Gabaix and Ralph S.J. Koijen; first published 2020, last revised 2022) is on SSRN here:

    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3686935

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