The Lemon Fool

Itsallaguess wrote:I think it's probably worth highlighting that a long thread discussed this issue almost a year ago -

https://www.lemonfool.co.uk/viewtopic.php?f=30&t=24823

I see I started that thread (albeit with a different but related question). I'd totally forgotten

Thanks to Gengulphus who as usual takes more care in his responses than I do and also to Gilgongo (like the name!) for his succinct explanation. As I said it has never bothered me.

Dod

Gilgongo wrote:As somebody on Bogleheads said, it can be summarised as:
1) start with £100
.....
5) end with £70
The effect of step 2 is bigger at the start of your retirement rule of thumb being 10-15 years) than afterwards. It's the reverse of pound cost averaging, if you like.

And a nice succinct illustration of the folly of 'TR' in a falling market.
It's been so long since we had a sustained bear - not just a dip as per covid - that all sorts of comforting folklore and fallacies have taken root.

I imagine the Fed is very anxious in its rate setting to avoid triggering a bear.
Fingers crossed.

Btw... 10-15 years... is that a current average? I would have said more, amongst the moneyed Lemonish classes.

V8 (has the 25 x )

88V8 wrote:And a nice succinct illustration of the folly of 'TR' in a falling market.

Or the folly of expecting a single asset class (equities) to perform in all economic conditions.

88V8 wrote:Btw... 10-15 years... is that a current average? I would have said more, amongst the moneyed Lemonish classes.

I think I read that was the researched estimate against some form of Monte Carlo analysis on a "standard" 25x (or some such) initial portfolio.

88V8 wrote:And a nice succinct illustration of the folly of 'TR' in a falling market.

That is a surprising comment from one who is usually quite balanced in his views. 'TR' is after all,m by definition the total return, that is income from dividends plus the return from capital whether that be a positive or negative return) I do not therefore see the 'folly' of 'TR' in a falling market or otherwise.

Dod

I put a SoR section into my retirement planning spreadsheet, and demonstrated to myself my pot was robust enough. But I always thought it was one of those things that people drag out to persuade themselves to keep working One More Year, and that dynamic expenditure control could cope with it. I don't have cash buffers, and CV19 did not encourage me to get one. And of course if you have a cash buffer, you need to be prepared to drain it in lean years, and I suspect many just tighten their belts, so they have its fiscal drag for no effect.

So if your numbers are tight, you need to worry about it, but if your numbers are tight you'd be worrying anyway.

jonesa1 wrote:

88V8 wrote:And a nice succinct illustration of the folly of 'TR' in a falling market.

Or the folly of expecting a single asset class (equities) to perform in all economic conditions.

Barclays Equity Gilt Study indicates UK stock dividend income declines to 14% of former inflation adjusted levels and deep drawdowns that persisted for decades. Dividend values can and have declined deeply and stayed down. The TR, SoR, SWR approach references all of available history to identity historic worst case outcomes of where a constant inflation adjusted (stable) income was drawn. Whilst the future is unknown, it might rhyme and if circumstances fall within historic extremes then so also might rewards.

Dividends are just part of total return and its a folly is to assume that they're stable/reliable and if reliant upon dividends that see a bad SoR then the capital value will also tend to be deeply down. Creepage risk, where by the time its become evident dividend income is unable to sustain required spending capital value is also substantially down.

The safest is to only require a low SWR, 2% or 3% for instance. 33x to 50x yearly spending available capital/investments value. Which has the tendency to leave more than enough for heirs, money that you might otherwise have spent/enjoyed during your own lifetime. And/or having worked longer than necessary where 25x (4% SWR) might otherwise have been enough.

SWR accounts for the worst case historic SoR. A identified 4% SWR for instance reflects the absolute worst case historic case, all other cases were better. It can also provide a indicator of appropriate asset allocations, for instance between 50/50 stock/bonds and 75/25 stock/bonds being safer than 100% stock for some choices of SWR rate and time periods.

Dod101 wrote:

88V8 wrote:And a nice succinct illustration of the folly of 'TR' in a falling market.

That is a surprising comment from one who is usually quite balanced in his views. 'TR' is after all,m by definition the total return, that is income from dividends plus the return from capital whether that be a positive or negative return) I do not therefore see the 'folly' of 'TR' in a falling market or otherwise.

Well, it may be OK selling shares in a rising market when one has profits to realise, but if the profits aren't there, one has to sell more shares. So the golden goose upon which one depends will soon have a leg deficiency and fall over.

V8 (never been called 'balanced' before)

Gilgongo wrote:

88V8 wrote:Btw... 10-15 years... is that a current average? I would have said more, amongst the moneyed Lemonish classes.

I think I read that was the researched estimate against some form of Monte Carlo analysis on a "standard" 25x (or some such) initial portfolio.

The "Start Here" scenario on https://www.firecalc.com/ is a 25x initial portfolio, and its results are an analysis of the 30-year periods contained within the last century and a half. There are sufficiently few of those periods that it's a full analysis of those actual historical periods rather than a Monte Carlo analysis, but one might think of those actual historical periods as a fairly random sample of all the 30-year periods that one might realistically encounter, so some sort of Monte Carlo analysis of them. Just how well that sample approximates an actual random sample is open to question, of course, as 30-year periods that overlap are clearly not independent of each other...

Edit: There is a flip side to that lack of independence of the sample, which is that one does know that each period is realistic, because it has actually happened in reality. And attempting at creating random periods that really are independent of each other need to create periods that haven't actually happened in reality, and they're fraught with difficulties about ensuring that they could realistically happen despite not actually having happened in reality. Failures to do that could easily result in things like sequence of returns risk being worse than they could realistically be.

Gengulphus

88V8 wrote:I imagine the Fed is very anxious in its rate setting to avoid triggering a bear.
Fingers crossed.

In 2017 I went to see Janet Yellen, the then Chair of the Federal Reserve, talk at the British Academy, and in the Q&A she was asked if the Fed worried that the then recent rise in interest rates might pop the QE induced financial asset bubble, in particularly in tech stocks, and cause a crash.

She gave a long and detailed answer but at the end of it she made clear, "We don't target asset prices, we're focussed on employment and inflation ... asset prices can move and they can cause losses to individuals ... those kinds of repercussions are not top of my list."

https://soundcloud.com/britishacademy/janet-yellen-in-conversation-with-nicholas-stern-at-the-british-academy-june-2017/s-C6pJI if you want to listen to the event, start at 1:06:30 for the above question and her answer.

Edit: BTW, the person asking that question, I discovered afterwards when I went to talk to him, was an 18 year old young man, still at school!

88V8 wrote:

Dod101 wrote:

88V8 wrote:And a nice succinct illustration of the folly of 'TR' in a falling market.

That is a surprising comment from one who is usually quite balanced in his views. 'TR' is after all,m by definition the total return, that is income from dividends plus the return from capital whether that be a positive or negative return) I do not therefore see the 'folly' of 'TR' in a falling market or otherwise.

Well, it may be OK selling shares in a rising market when one has profits to realise, but if the profits aren't there, one has to sell more shares. So the golden goose upon which one depends will soon have a leg deficiency and fall over.

Whether you take a dividend or sell the equivalent £££ amount of the stock you’ll end up with the same amount invested in the stock. Total return is total return. With the dividend you own more shares but at a lower share price, while with DIY dividends (sell some shares) you own fewer shares but at a higher price (because no dividend was paid by the company).

With self dividend other investors fund your dividend, perhaps paying two times book value for the shares. With regular dividends the stock pays them out of its own capital, or may even borrow to pay the dividend. Regular dividends can generate a tax/cost event for investors, DIY dividends are to the amount and times of each individual investors own specific choosing.

SoR is something that is on my mind a lot as a new and early retiree in a time of near zero bond yields, extreme CAPE, and with good reasons to leave a sizeable bequest. In short I need to be lucky as I have little scope for flexibility given my conflicting needs.

SoR is usually thought to be of most concern in the first decade of drawdown. In reality when time is finite and scarce, mortals, we would rather not have to live frugally and for those whose SWR provides their desired income with little excess the SoR is especially concerning. COVID data shows that households can cut spending when they aren't able to (although in this case it was through forced inactivity). Who wants forced inactivity!

The idea of having a bridge, or glide path, whereby one has a cash/bond allocation that is ran down over the first decade works well and it is worth sacrificing some return rather than facing defeat in extra time when the game was already in the bag. Once you have won the game a bit of safe play makes more sense than going for maximum growth.

3 years of cash (like I hold) while enough for our recent corrections, would not have been anywhere near enough for some of the horrible examples history can show at us. Also when looking at bear markets try considering not how long it took to recover in nominal terms but in real terms. The answers can be shocking. Then look at the scenario that you are drawing down and see what that does for your returns. It can be devestating.

Now... a note of caution. The "first 10 years being the major risk" argument only works if you set your withdrawal £ amount and index it each year, if you reset your withdrawal to a new SWR or say take a variable pound amount based on an SWR percentage each year, then your SoR window effectively resets. The reality is that SoR never goes away but if you have indexed income against portfolio growth you will probably outgrow it.

Most people in most times don't encounter SoR as an issue (as markets have tended to rise much more than fall) however prolonged equity bear markets can be crushing, 1990s in Japan, or even better 1803-1857 in the US saw bonds return 3x equities but if that 1803 equity investor hung in and reinvested dividends they would break even in 1871, or 1929-1949 where bonds beat equities. Bear markets have been much longer than articles that focus on more recent history suggest or our own recency bias.

For more on bear markets to give some historic perspective read one of my favourite finance papers: https://www.etf.com/sections/features/9 ... nance.html

Decided my living standards on amount saved at retirement
All index funds-now down to 3 funds only
Used to take about 4% now 3% does the job-(aged 75 retd 18 years )
Set my Asset Allocation -currently 30/65/5 equities bonds cash-cash 2 years living expenses
Sell units -retaining Asset Allocation -once a year -sometimes equities ,sometimes bonds, sometimes a bit of both to top up living expenses pot
Portfolio a lot bigger than when I started
Seemed to work but very personal to each investor on how they want to live
However the amount you have saved preretirement is always the key and should be the investors main priority
Watch costs-index funds investments only-save as much as you can and live frugally!
xxd09

88V8 wrote:

Dod101 wrote:

88V8 wrote:And a nice succinct illustration of the folly of 'TR' in a falling market.

That is a surprising comment from one who is usually quite balanced in his views. 'TR' is after all,m by definition the total return, that is income from dividends plus the return from capital whether that be a positive or negative return) I do not therefore see the 'folly' of 'TR' in a falling market or otherwise.

Well, it may be OK selling shares in a rising market when one has profits to realise, but if the profits aren't there, one has to sell more shares. So the golden goose upon which one depends will soon have a leg deficiency and fall over.

V8 (never been called 'balanced' before)

Yes I agree with what you have said, but that was not quite how it came across in the earlier post. It is not the folly of 'TR', it is possibly the folly of relying on selling shares in order to generate income because sooner or later you will have to be selling into a falling market, never a good idea. That is why I generate my income from the 'natural yield' from dividends paid. It is painless, hassle free and leaves the capital untouched. I also have about three years income invested in Index Linked National Savings Bonds, which in 27 years of retirement I have not had to touch. Someone talked about that being a drag on my investment returns. It is but so what? I regard it as a sleepeasy fund and part of my asset allocation plan.

Dod

88V8 wrote:

Gilgongo wrote:As somebody on Bogleheads said, it can be summarised as:
1) start with £100
.....
5) end with £70
The effect of step 2 is bigger at the start of your retirement rule of thumb being 10-15 years) than afterwards. It's the reverse of pound cost averaging, if you like.

And a nice succinct illustration of the folly of 'TR' in a falling market.

Can you explain please, as this has nothing to do with any description of TR I am aware of (assuming TR stands for Total Return)?

In practice I have mostly sold equities as they have been the asset that has increased out with the Asset Allocation boundaries as I come to generate each yearly withdrawal
Occasionally with a bond component
Total return is practiced with all funds in Acc units
Very simple cheap and say to follow system
Have the past 20-30 years been unique ?
xxd09

xxd09 wrote:In practice I have mostly sold equities as they have been the asset that has increased out with the Asset Allocation boundaries as I come to generate each yearly withdrawal
Occasionally with a bond component
Total return is practiced with all funds in Acc units
Very simple cheap and say to follow system
Have the past 20-30 years been unique ?
xxd09

Yes but I cannot say what will change or when it will change but it will change. It will make much less of a difference to those who have been retired for some time than those that are new retirees.

https://www.currentmarketvaluation.com/

My problem is that I cannot bring myself to allocate to bonds (other than premium bonds) as I fear that they are return free risk. The question is how likely is it that equities will deliver meaningful returns?

I love the idea of 60:40 and would happily buy lifestrategy 60 if I wasn't approaching the end of an exceedingly long bond bull market. Of course, we could find ourselves stuck in this low return world for a very long time.

Like yourself I am going increasingly passive. Partly because holding a diversified chunk of the investible universe saves me from tinkering. Partly because I am finding it difficult to find anything that i have more confidence in. I do wonder if my intellectual decline has quickened!

Gilgongo wrote: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?

Sequence of returns risk is something an accumulator moving to a decumulator needs to understand, appreciate and be prepared for in my opinion. Others earlier in the thread have outlined the issue. For those intending to live off the natural yield of their portfolio or those who have a significant percentage of their retirement income coming from a guaranteed income source (eg, DB pensions and/or state pensions) then it’s much less of an issue. For those individuals focused on total return and planning to sell down a percentage of their portfolio every year, it’s an important aspect of determining their decumulation strategy.

Is it only financial advisors who talk about it? No. Do they talk about it just to appear to be experts? I can’t speak to the motivation of all financial advisors however, if I engaged a financial advisor to help me plan for retirement and I was less than 5 years away from retirement and they didn’t talk to me about it, I’d dump them straight away.

It’s a legitimate risk. Decumulation strategies tend to try to address it either explicitly or implicitly. It goes hand in glove with asset allocation strategies in retirement.

Do people pay attention to it? Maybe not as much as they should. Do I pay attention to it? Yes, absolutely. A lot of my self education in advance of retirement over the past 2 to 3 years has, with hindsight, focused on it.

What have I done differently since becoming more aware of it? I shifted my asset allocation in the run up to retirement from 70/30 in favour of equities to an initial revised position of 50/50. This put me in a position where I had secured my desired level of fixed income assets around 2 years away from my target retirement date. Since then I’ve allowed my equity allocation to move upwards and I’m in the process of building a larger cash buffer. At the point of retirement I’m aiming to be something like 60 / 30 / 10 (equities, fixed income, cash). In the early years of retirement I’ll be spending down cash and fixed income to give me a rising equity glidepath. Plan is to move to 70 / 25 / 5 over time (5 to 10 years, depending on markets). The past 12 months has had no impact on this strategy other than to underline the volatility of markets and the importance of having a sensible approach to decumulation which gives better chances at weathering the storms whenever they hit.

Should you worry about SoR? Worrying isn’t productive use of time and energy. Use the time & energy to educate and determine a path to address it.

Degsy

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.