Sequence of returns risk?

[jonesa1]

Whilst I agree with most of the above post I haven't seen any evidence that natural yield is more reliable than SWR and total return approaches. I have seen evidence that natural yield leads to poorer returns, higher risk, and a volatile income stream during times of market distress. It exemplifies many of the problems that SWR and portfolio diversification strategies try to mitigate against.

Part of the problem is that higher yield is often an indication of higher risk or distressed assets. In addition people often look at percentage rather than absolute returns and moreover fail to account for inflation.

Agreed. As previously pointed out, if you have enough capital that your SWR would be very low, then it probably doesn't matter what strategy (income ITs or selling accumulation units in a tracker) or asset allocation (60:40, all equities, all weather, etc) you use). If you're only taking a couple of percent per year, it's very unlikely you'll run out of money and simply taking dividends could be an attractive option. If you need 4% or more, then any "all eggs in one basket" approach could turn out badly if the wrong circumstances arise in the wrong order.

[Degsy67]

Whilst I agree with most of the above post I haven't seen any evidence that natural yield is more reliable than SWR and total return approaches. I have seen evidence that natural yield leads to poorer returns, higher risk, and a volatile income stream during times of market distress. It exemplifies many of the problems that SWR and portfolio diversification strategies try to mitigate against.

Part of the problem is that higher yield is often an indication of higher risk or distressed assets. In addition people often look at percentage rather than absolute returns and moreover fail to account for inflation.

Agreed. As previously pointed out, if you have enough capital that your SWR would be very low, then it probably doesn't matter what strategy (income ITs or selling accumulation units in a tracker) or asset allocation (60:40, all equities, all weather, etc) you use). If you're only taking a couple of percent per year, it's very unlikely you'll run out of money and simply taking dividends could be an attractive option. If you need 4% or more, then any "all eggs in one basket" approach could turn out badly if the wrong circumstances arise in the wrong order.

I also agree with the points raised above. Just wanted to clarify. When I said “For those intending to live off the natural yield of their portfolio… then it’s [sequence of return risk] much less of an issue”, I didn’t mean that I think living off natural yield is less risky as an approach to retirement income. For someone living off natural yield, the more significant risk is the continuation of dividend payments and increases in payments ahead of inflation through significant economic downturns. Also, specifically in relation to HYP as opposed to other income/natural yield strategies, adequate diversification to help partially mitigate this risk.

Degsy

[NotSure]

When I said “For those intending to live off the natural yield of their portfolio… then it’s [sequence of return risk] much less of an issue”, I didn’t mean that I think living off natural yield is less risky as an approach to retirement income. For someone living off natural yield, the more significant risk is the continuation of dividend payments and increases in payments ahead of inflation through significant economic downturns.

To my (very limited) understanding, you first state that SoR is much less of an issue for natural yield approach, then describe exactly why it carries high SoR risk?

Year 1, yield drops 50% (SoR downside). So you must sell distressed assets, leading to a requirement for big increases in yields (need more income, have less assets).

Isn't that just a very good example of SoR downside risk?

Completely different issue, but not much mention here of SoR upside risks - if you pay no attention to SoR, you may unecessarily take a lower standard of living than you could - i.e. years 1, 2, 3 are really good, but you don't exploit it. Fine if you have far more than you need, but for many that would mean fewer holidays, maybe a delayed hip replacement, not helping kids and grandkids out when you could etc.

Therefore I think SoR risk is to be considered and taken seriously (unless of course you have well in excess of your and your nearest and dearest's needs).

[AWOL]

Completely different issue, but not much mention here of SoR upside risks - if you pay no attention to SoR, you may unecessarily take a lower standard of living than you could - i.e. years 1, 2, 3 are really good, but you don't exploit it. Fine if you have far more than you need, but for many that would mean fewer holidays, maybe a delayed hip replacement, not helping kids and grandkids out when you could etc.

Therefore I think SoR risk is to be considered and taken seriously (unless of course you have well in excess of your and your nearest and dearest's needs).

I agree although I would point out that for an increasing number of people as final salary pensions become rarer and annuities seam poor value (precrash, after a crash the maths may look different although cash may still come on top), then I think that basics like food, heating, housing may be at risk if we had a bear market.

I think the uncomfortable truth is except for those that have in some way annuitised (with rising income) ,have significant overprovision of assets, limited or no bequest needs, and/or a short life ahead of them there is much to fear and limited scope for doing anything about it.

Diversifying assets that are uncorrelated and able to deliver a return are increasingly exotic and tend to come with dubious histories or unpleasant characteristics. People are arguing the case for REITS, absolute return (cough), alternative assets, etc. as an alternative to holding bonds but the reality is that we are in uncharted territory.

Personally I am gambling on an acceptable SoR with only 90% equities/5% PBs/5% gold. I can see many issues with this and wouldn't recommend it to others but I cannot trust myself to hold bonds let alone bitcoin or pay fees to clever asset managers. I am already struggling with my 5% nominal loss on gold but don't want to start over trading and will stick with having some downside protection.

[jonesa1]

Diversifying assets that are uncorrelated and able to deliver a return are increasingly exotic and tend to come with dubious histories or unpleasant characteristics. People are arguing the case for REITS, absolute return (cough), alternative assets, etc. as an alternative to holding bonds but the reality is that we are in uncharted territory.

I think that's a key problem. The last few decades have benefitted from a progressive decline in interest rates that have driven up the prices of both equities and bonds. With real interest rates lower than inflation and real returns on government bonds negative, it would seem unlikely this trend can simply continue. Working out how to diversify is a lot harder than it was a few years ago. I've concluded it's too hard for me, so about a quarter of my pot is now with CGT & RCP.

[88V8]

.., about a quarter of my pot is now with CGT & RCP.

I'm sure you wouldn't make such a significant allocation without considerable thought, but RCP's five-year chart is uninspiring to say the least?

In terms of growth, CGT looks to have done a good job over the same period, and they currently have no gearing.
If I were looking for a growth vehicle, they would seem worth short-listing.

How did you pick these two from the plethora of ITs on offer?

V8

[mc2fool]

.., about a quarter of my pot is now with CGT & RCP.

I'm sure you wouldn't make such a significant allocation without considerable thought, but RCP's five-year chart is uninspiring to say the least?

Uh?


https://uk.advfn.com/stock-market/london/rit-capital-partners-RCP/share-price

In terms of growth, CGT looks to have done a good job over the same period, and they currently have no gearing.
If I were looking for a growth vehicle, they would seem worth short-listing.

CGT isn't a "growth vehicle", it's a "capital preserver". Same chart with CGT added:

[AWOL]

Diversifying assets that are uncorrelated and able to deliver a return are increasingly exotic and tend to come with dubious histories or unpleasant characteristics. People are arguing the case for REITS, absolute return (cough), alternative assets, etc. as an alternative to holding bonds but the reality is that we are in uncharted territory.

I think that's a key problem. The last few decades have benefitted from a progressive decline in interest rates that have driven up the prices of both equities and bonds. With real interest rates lower than inflation and real returns on government bonds negative, it would seem unlikely this trend can simply continue. Working out how to diversify is a lot harder than it was a few years ago. I've concluded it's too hard for me, so about a quarter of my pot is now with CGT & RCP.

I considered putting 8% in RICA, 8% in CGT, and 8% in Lifeguard 60% but I couldn't bring myself to do it. I guess equities are relatively fair valued although in absolute terms they are extremely overvalued. I wish you the best of luck. We all need to find a balance that we can sleep at night with. I suspect there will be another upward leg before a correction but I have no crystal ball. I am left concerned but recognizing that "safe" assets just bring another type of worry for me.

[tjh290633]

Diversifying assets that are uncorrelated and able to deliver a return are increasingly exotic and tend to come with dubious histories or unpleasant characteristics. People are arguing the case for REITS, absolute return (cough), alternative assets, etc. as an alternative to holding bonds but the reality is that we are in uncharted territory.

Exotic? Are you talking about mines in Kazakhstan or US Companies?

Nothing wrong with REITs, but there is a wide variey of them, like LAND, SGRO, PHP, DIGS to name a few totally different ones.

Bonds that promise a negative real return are not much of an attraction.

I will grant you that 10 of my 35 shares provide 50% of the dividend income at the moment. The top 6 provide one third:

Rank   EPIC   % Income   Cum Inc
   1   RIO       9.09%     9.09%
   2   ADM       5.77%    14.86%
   3   LGEN      4.78%    19.64%
   4   IMB       4.59%    24.23%
   5   BATS      4.43%    28.66%
   6   AV.       4.32%    32.98%
   7   GSK       3.88%    36.86%
   8   VOD       3.87%    40.73%
   9   NG.       3.85%    44.58%
  10   SSE       3.64%    48.21%

That is more a reflection of the other 25's performance. Noticeable that the insurers feature in that top 6. Other than RIO, I can't see much exoticism there.

TJH

[jonesa1]

I'm sure you wouldn't make such a significant allocation without considerable thought, but RCP's five-year chart is uninspiring to say the least?

In terms of growth, CGT looks to have done a good job over the same period, and they currently have no gearing.
If I were looking for a growth vehicle, they would seem worth short-listing.

How did you pick these two from the plethora of ITs on offer?

V8

CGT is held in the hope it will continue doing what it has for many years, i.e. maintaining and hopefully growing capital in all market conditions (which they have done over several decades). The idea is to give me something to sell that won't (hopefully) have done as badly as the 100% equity funds in any prolonged down-turn. It's an insurance policy, rather than a growth vehicle and it may or may not work!

RCP's job is also to grow capital in a variety of market conditions. Like CGT it hasn't kept up with funds invested in growth stocks during the growth bull market, but hopefully it will keep growing in less favourable market conditions. I expect it will continue to be a lot more volatile than CGT.

Both funds hold a mix of asset classes. I'm banking on the fund managers being smarter than me about adjusting asset allocations in response to changing market conditions. 75% of the portfolio is in equities, private equity and property (plus large chunks of equities & PE in RCP & CGT), so hopefully I should do OK if the relentless equity march continues, while also having some diversification to improve my odds if things turn sour. I also have cash outside the portfolio (about 10%) and my essentials are covered by a DB pension. I may prove to have been too cautious, but with potentially several decades left, inflation looking like it might kick off (I suspect a lot of the soothing words from central banks are rather disingenuous) and my DB pension having only statutory indexation (about half has no guaranteed indexation, the rest is capped at 5 or 2.5% CPI), I'd rather exercise a degree of caution.

[AWOL]

Diversifying assets that are uncorrelated and able to deliver a return are increasingly exotic and tend to come with dubious histories or unpleasant characteristics. People are arguing the case for REITS, absolute return (cough), alternative assets, etc. as an alternative to holding bonds but the reality is that we are in uncharted territory.

Exotic? Are you talking about mines in Kazakhstan or US Companies?

Nothing wrong with REITs, but there is a wide variety of them, like LAND, SGRO, PHP, DIGS to name a few totally different ones.

Bonds that promise a negative real return are not much of an attraction.

I will grant you that 10 of my 35 shares provide 50% of the dividend income at the moment. The top 6 provide one third:

Rank   EPIC   % Income   Cum Inc
   1   RIO       9.09%     9.09%
   2   ADM       5.77%    14.86%
   3   LGEN      4.78%    19.64%
   4   IMB       4.59%    24.23%
   5   BATS      4.43%    28.66%
   6   AV.       4.32%    32.98%
   7   GSK       3.88%    36.86%
   8   VOD       3.87%    40.73%
   9   NG.       3.85%    44.58%
  10   SSE       3.64%    48.21%

That is more a reflection of the other 25's performance. Noticeable that the insurers feature in that top 6. Other than RIO, I can't see much exoticism there.

TJH

Not only are many managers advocating heavily overweight allocations to REITs but these include commercial properties in emerging markets in their portfolios. I am not completely against REITs but I think fund managers running to them as a tactical allocation is a bet with a lot of assumptions. Similarily overweighting junk bonds is another anti-inflationary bet I have seen and both REITs and Junk Bonds are not a dead cert to keep up with high inflation.

Personally I am market weight REITs and have toyed with a small overweight but I am not convinced that the managers who intend to hide from future market shocks in REITs, high yield bonds, linkers, bitcoin, commodities, or anything else that makes up a multiasset strategy that is sold as a safer bet than 60:40 are indeed any safer.

Personally my favourite ballast in this situation is cash not because it's immune to inflationary shocks but because it confers optionality which is invaluable when their is a bloodbath on Wall Street. Of course, there are major weaknesses in my approach. It's just the one I take comfort from.

I continue to hold no bonds even though I don't think it's impossible that central banks will be successful in gently unwinding QE. They will certainly try to as it will do nobody any good if their is a bloodbath in the bond market.

[1nvest]

I don't see much about SoR on these boards, and I get the impression elsewhere that it's more spoken about by financial advisors keen to present themselves as experts than something we should worry (too much) about.

Is that an accurate view, or is SoR something that people pay attention to (at least initially in retirement)? If so, I assume you have done something differently in the last 12 months than you did in the preceding years?

SoR risk is predominately a risk for those just entering into retirement/drawdown so a relatively specific risk. For accumulators a 'bad' sequence of returns, price declines, isn't a risk and is more inclined to benefit the investor as new money buys more shares than might otherwise have been the case. For those established into drawdown/retirement a bad sequence of returns might only reduce/give back some of gains already achieved, +50% up and then seeing a -33% decline isn't so bad/critical as seeing a -33% decline immediately after starting retirement/drawdown.

A bucket approach combined with averaging can substantially reduce SoR risk.

Consider a bad first decade where portfolio total accumulation rewards yield -5% annualised real (after inflation) decline. Assuming a 4% SWR is also being drawn then we can model that with
V = ( V - 0.04 ) * 0.95 ... repeated 10 times and were V initially = 1.0

1
0.912
0.828
0.749
0.674
0.602
0.534
0.469
0.408
0.349
0.294

... i.e. ends up with less than 30% of the inflation start date amount remaining at the end of 10 years of repeated -5% real annualised declines compounded with 4% SWR.

Compared to if no withdrawals, just the -5% annualised

1
0.950
0.903
0.857
0.815
0.774
0.735
0.698
0.663
0.630
0.599

that ends up with around 60% of the inflation adjusted start date value.

If instead we dropped 40% initially into bonds to draw that down over 10 years, and had the remainder 60% initial amount enduring that latter case outcome, then after 10 years with all of bonds spent we're left with 0.6 x 0.6 = 0.36, 36% of the inflation adjusted start date amount, which is better than the first case above that ended with 29.4% remaining.

Starting with 60/40 stock/bonds, spending the bonds such that it transitions to 100/0 stock/bonds, averages 80/20 stock/bonds. And is a form of time-averaging more into stocks that tends to do OK across a period when stocks declined. Somewhat like being both in drawdown and still accumulating at the same time that reduces SoR risk.

Combined with averaging the start date, not migrating all-in into the retirement asset allocation at day one, but instead averaging in half at day 1 and half after a year, helps to avoid having lumped all-in at the worst possible time. To facilitate that you might have a separate cash pot to cover the 6 months of spending whilst 'averaging into' the full retirement asset allocation.

The combination of both buckets and averaging has the effect of shifting the likes of Trinity Study data risk more towards the left, de-risks.



The 4% SWR rate becomes more like the 3% SWR rate type outcome. Shifts more into a 100% success rate type probability. At the expense of potentially/likely yielding slightly less overall upside rewards. Subjectively that 'cost' might be nothing, or could be 1% annualised i.e. comparing the difference between 100% stock and 80/20 average stock/cash and it depends upon which time period you might compare as to whether there was near no difference or a larger difference.

Negative real yields do have influence upon the 'bond' holdings. 40% in cash deposits to cover 10 years of 4% withdrawals/drawdown might see that not last the full 10 years due to cash deposit interest lagging inflation. But that can swing the other way around, former negative real yields transition to being positive real yields that balance out/wash. Whilst the next five years for instance might see cash interest lagging inflation by say 2%/year, if years 6 to 10 see cash earning +2% real then overall that all balanced out.

[Hariseldon58]

I experienced Sequence of Returns Risk when I retired early in November 2007 ( age 49) my portfolio had a substantial Equity Income bias, both Investment Trusts and an HYP. I was relying on a 4% SWR, with an actual yield of 3.2%

By early 2008 I was having concerns, I made a decision in April 2008 to bail out of the HYP and as the crisis developed I changed direction on the whole portfolio. I was too gung ho and had very little cash reserves and no bonds. It was uncomfortable and spending had to be watched but it worked out, opportunities are there when markets fall and I traded the portfolio. By 2011/2012 I had moved into largely passive ETFs and the balance in Investment Trusts.

I had a bias to income producing equities but I am indifferent now, I am happy with finding income from selling assets or dividends.

The main takeaway was that having cash/bonds, despite a lack of returns is a good idea when bad times come, it’s insurance.

It may be of interest to show my 35 share HYP performance from April 2007 to April 2008 when the HYP was dissolved. It declined from £214,831 to £177,637, the income in April 2007 was £8,586.

In 2016 I revisited this portfolio and the value was £191,164 and the income in 2016 on the portfolio was £8,901. Not great.

Out of interest I worked what would have happened if I had switched the portfolio to City Of London Investment Trust in 2008, the income on purchase would have been £7,447 and in 2016 would have been £9,723 with a final value of £231,505


The final calculation was reality, I scaled my actual portfolio to a starting amount of £177,637 and the initial income would have been £6,316 in April 2008 and in 2016 the capital value was £393,433 with an income of £11,803

Lower starting incomes ended in higher income later, the yield as a % was lower but the higher capital value more than made up for it.

The figure as of 2021 for the actual portfolio is £640,172 ( based on the 2008 value of £177,637) and income is £11,586, a little lower than in 2016 despite the higher capital value.)

Of course the HYP was only part of the portfolio, but these figures allowed me to ask the What If question of had I stuck with portfolio, it’s unlikely that I would not have tinkered but its the ballpark figures that are interesting. I did similar sums with the FTSE, it was between the HYP and City of London.

I am not knocking HYP but it did not work out well for me and that’s probably because I created a poor HYP portfolio, I took losses in 2008 of around 17% in closing the HYP portfolio, but by March 2009 it would have been really bad, too many financials !!!

Sequence of returns could be very harmful, but only if you take no action re the actual portfolio and your spending in the event of bad markets.

[Gengulphus]

I am not knocking HYP but it did not work out well for me and that’s probably because I created a poor HYP portfolio, I took losses in 2008 of around 17% in closing the HYP portfolio, but by March 2009 it would have been really bad, too many financials !!!

Sequence of returns could be very harmful, but only if you take no action re the actual portfolio and your spending in the event of bad markets.

Two points about that:

* When do you decide that you've encountered a "bad market" that needs action taken about it? Do it too reluctantly and you've already taken major losses before you take any action; do it too readily and you're liable to lose a lot in dribs and drabs due to trading costs over the years because you get a lot of false alarms... Personally, I've found that my attempts to call a "bad market" are better as indications that I should pile into the market with my cash reserves than as indications that I should get out of my existing investments! Though I've only encountered two cases of that happening in the last 20-odd years when I've actually had the courage to act on it, and both are long ago - the winter of 1999, when the prices of 'old economy' shares were unduly suppressed by people selling them to release funds to pile into the tech boom, and the spring of 2003 just before the second Gulf War started. (There might have been a third case in March of last year, but I was distracted by the imminent lockdown and the practicalities of living under it at the time, and the really good opportunity was over by the time that I got around to thinking about what to do about my finances...)

* Once you have decided that you need to take action, what action do you take? You basically took the 'nuclear option' with regard to your HYP, closing it down entirely, and your comparison says that the 'nuclear option' worked out better than the 'do nothing at all option' would have done. But clearly there were other options besides those two... I recognise the 'too many financials' issue from my own HYP at the time (though obviously I cannot tell whether I had it more or less severely than you - to give an idea how severely, my HYP's income had been around a third from financials before the cuts started), and the option I took was to tighten up the control I kept over its diversification. Basically, I'd had a personal guideline that a major group of sectors such as financials shouldn't be allowed to account for more than 20% of the portfolio's capital or income, but had allowed myself to make too many exceptions to that guideline for 'this bargain is just too tempting' reasons... Anyway, I tightened it up to the point of making it a rigorous rule that purchases must not push financials over 20%, and that if share price and/or dividend rises push them over 20%, that's only acceptable for a few percentage points before I find something financial to sell.

Anyway, I'm not knocking what you did any more than you're knocking HYP - just saying that a successful "what I actually did" vs "do nothing at all" comparison only shows that one was right to take action, not that one took the best action. And I'm not claiming to have taken a better action than you took, nor that you took a better action than I did - I simply don't know which of us took the better action, and cannot determine the answer (basically because I have no record of exactly when I took my action, and indeed, as far as I remember it was a growing realisation that I'd behaved rather unwisely and growing resolve to stop it rather than something that could be pinned down to a specific time even in principle).

But to sum up my above thoughts, I find it more productive to try to decide whether (and to what extent) I've encountered a "bad portfolio" than whether I've encountered a "bad market".

Gengulphus

[LooseCannon101]

As has been mentioned 'Sequence of Returns Risk' is something that a financial advisor would say. They are answerable to clients who may panic when their equity holdings halve in value. The advisor would prefer their client to make a steady 5% per year, rather than an unsteady 10% per year. This way the advisor can say that they are beating the returns in a building society whilst retaining a client and his/her fees. 'Sequence of Returns Risk' sounds to me something that an advisor needs to consider to keep his/her fees rolling in.

I have never considered this risk as I am a long-term buy and hold investor of global equities and currently spend about 1.5% of portfolio value each year, whilst averaging about 9% per year in total returns.

[Itsallaguess]

'Sequence of Returns Risk' sounds to me something that an advisor needs to consider to keep his/her fees rolling in.

I have never considered this risk as I am a long-term buy and hold investor of global equities and currently spend about 1.5% of portfolio value each year, whilst averaging about 9% per year in total returns.

I don't think it's so much 'something an advisor would say', as much as something that investors do need to properly consider who perhaps aren't in the enviable position that you're in, and I suspect there's a lot of them about...

Cheers,

Itsallaguess

[Hariseldon58]

I am not knocking HYP but it did not work out well for me and that’s probably because I created a poor HYP portfolio, I took losses in 2008 of around 17% in closing the HYP portfolio, but by March 2009 it would have been really bad, too many financials !!!

Sequence of returns could be very harmful, but only if you take no action re the actual portfolio and your spending in the event of bad markets.

Two points about that:

* When do you decide that you've encountered a "bad market" that needs action taken about it? Do it too reluctantly and you've already taken major losses before you take any action; do it too readily and you're liable to lose a lot in dribs and drabs due to trading costs over the years because you get a lot of false alarms... Personally, I've found that my attempts to call a "bad market" are better as indications that I should pile into the market with my cash reserves than as indications that I should get out of my existing investments!

* Once you have decided that you need to take action, what action do you take? You basically took the 'nuclear option' with regard to your HYP, closing it down entirely, and your comparison says that the 'nuclear option' worked out better than the 'do nothing at all option' would have done.

But to sum up my above thoughts, I find it more productive to try to decide whether (and to what extent) I've encountered a "bad portfolio" than whether I've encountered a "bad market".

Gengulphus

The bad market was becoming clear in the spring of 2008 and was a definite in spring 2009. The action taken was first to watch spending, I take the point about a bad portfolio and my second action was to change the portfolio, it was not a move to safety but a strategic movement away from being overly reliant on equity income ( which had worked splendidly from 1990 to the early 2000’s)

I realised that HYP was cheaper than investment trusts but I was an inferior portfolio manager, despite a lot of work put in.

There was a lot of opportunities to purchase bargains in 2009/2012 I traded a fair bit, but did well compared to doing nothing.

Looking forward I endeavour to have the right portfolio in place at all times, in late March 2020 for example I had enough fixed interest to last me 10 years plus at normal spending without any income. I invested ¾ of the bond holdings in equity during 2020 and now I am rebuilding the bond portfolio to more defensive levels.

The lesson I learnt was that I retired with insufficient reserves alongside an equity heavy portfolio. I now endeavour to maintain sufficient reserves !

[hiriskpaul]

As has been mentioned 'Sequence of Returns Risk' is something that a financial advisor would say. They are answerable to clients who may panic when their equity holdings halve in value. The advisor would prefer their client to make a steady 5% per year, rather than an unsteady 10% per year. This way the advisor can say that they are beating the returns in a building society whilst retaining a client and his/her fees. 'Sequence of Returns Risk' sounds to me something that an advisor needs to consider to keep his/her fees rolling in.

I have never considered this risk as I am a long-term buy and hold investor of global equities and currently spend about 1.5% of portfolio value each year, whilst averaging about 9% per year in total returns.

Just as well then you did not retire in 1968 wanting 4% from a 100% equity portfolio. You would soon have discovered the joys of sequence of return risk.

Sequence of return risk is real. Nothing to do with advisors or panicking.

[kempiejon]

The lesson I learnt was that I retired with insufficient reserves alongside an equity heavy portfolio. I now endeavour to maintain sufficient reserves !

Cash reserves or something else and what do you reckon is sufficient reserves - as a multiple of annual drawdown or spending or perhaps %age portfolio?
I'm just about employed for now and have been thinking about 2 or 3 years or normal spending.

[Hariseldon58]

The lesson I learnt was that I retired with insufficient reserves alongside an equity heavy portfolio. I now endeavour to maintain sufficient reserves !

Cash reserves or something else and what do you reckon is sufficient reserves - as a multiple of annual drawdown or spending or perhaps %age portfolio?
I'm just about employed for now and have been thinking about 2 or 3 years or normal spending.

My personal view is that the income you need/want can be graded as the minimum ( Covid lockdown gave us an idea of this essential minimum ) comfortable and luxurious. I have found that the yearly amounts are in a ratio of 1:2:3

I’d suggest that the equity portfolio should be a multiple of comfortable, I’d favour 33x whilst 25x has worked out well most of the times in the past, but we may have experienced some of the future returns ahead of schedule over the last few years. I don’t know, but a degree of caution would be reasonable.

I’d personally advocate enough cash over and above the equity portfolio to support the minimal living standard for 6+ years, personally that’s around 3+ years of comfortable.

I retired on 25x comfortable and 1 ½ years minimum of cash, that was sufficient.

I have been fortunate that I am in a position to have 7+ years of ‘comfortable’ spending standard in cash/bonds and an equity portfolio of around 50 x ‘comfortable’.

I have gone through quite a few market downturns in the past, that have all recovered fairly quickly but one day it may go down and take a long, long time to go back up again, prudent to have a plan as to how you would manage.