Passive sell vs HYP income

[hiriskpaul]

I think a huge driver for long-term investment success is simply finding a 'good enough' approach that closely suits an individuals investment personality in such a matched way that they are able to continue and stick with it through thick and thin, using simple and repeatable processes, and allow time in the market to do the heavy lifting over many, many years, with the minimum of fuss...

Someone trying to adopt a long-term investment strategy that's fundamentally at odds with their investment-personality is less likely to succeed in that quest, in my view.

As such, much of the discussions around 'alternative technical outcomes' with these types of threads will always have to assume that any adoption of an alternative approach can be taken on by an individual investor in a way that still delivers on the same 'ease and length of adoption' of the previous strategy.

That's never a given, and in my view, such issues are rarely given the weight of consideration that they deserve in these types of discussions...

Cheers,

Itsallaguess

I agree that having a strategy that you can live with is very important and taking an income by selling units in index funds is not without its difficulties. Selling investments for income is for many people hard to do and it takes some practice to be comfortable with it. People are naturally emotional and emotions kick in when selling. If the market is down the issues might be anything from "The market is down and I don't want to sell at a low price" to "The market is down, so I want to sell in case it goes even lower". If the market is up we might get "The market has been going up, if I wait longer I will make even more money" to "The market is up, better sell before it goes down again". An advantage of just taking passive income is not having to confront these emotional difficulties, income/capital reduction decisions are taken out of our hands by company director's and/or fund managers. Dividends just arrive in our accounts, no hard decisions required. What is not to like about that?

My brother has enormous difficulty in selling anything. His shares portfolio consists of a rag bag rump of privatisation shares that have not otherwise been taken over. Most of his money is in property which suits his temperament perfectly. OTOH I could not think of an investment I would like less than having to maintain and let property.

To start with at least, at lot of people also have trouble buying investments, with fear of buying at the wrong time or buying the wrong investments and consequently losing money. My parents in law were extreme examples and never bought shares at any time. I would run through all the arguments about better long term returns, inflation, etc. but it made no difference. Shares could go down and that was it. We know from history (Academic theory?) that most people are as bad at making buying decisions as selling decisions. The best time to buy is often when markets have crashed and sentiment is low, but most people don't do that for fear of the market going even lower.

Eventually though, a lot of people take their first steps and buy investments. They see some success and some failures, but gradually grow in confidence as (hopefully) the value of their investments grow and eventually they have few qualms about investing. Most of us on here have probably forgotten how difficult a decision it might have been to get started. So we get used to investing and typically do it for decades, but many of us do not get used to disinvesting, which of course is what you need to do once other sources of income dry up. One way of mitigating the difficulties of disinvesting is to do it systematically, as xxd09 does. Once per year sell units regardless of price to fund the following year. In his case he has both a bond fund and an equities fund, so if equities are down at the time compared with bonds he sells more bonds. He may even buy more equities when they are down a lot. As with starting out investing, after a few years it is possible to get the hang of selling and all those fears of selling at the wrong time, etc. evaporate.

[kempiejon]

Eventually though, a lot of people take their first steps and buy investments. They see some success and some failures, but gradually grow in confidence as (hopefully) the value of their investments grow and eventually they have few qualms about investing. Most of us on here have probably forgotten how difficult a decision it might have been to get started. So we get used to investing and typically do it for decades, but many of us do not get used to disinvesting, which of course is what you need to do once other sources of income dry up. One way of mitigating the difficulties of disinvesting is to do it systematically, as xxd09 does. Once per year sell units regardless of price to fund the following year. In his case he has both a bond fund and an equities fund, so if equities are down at the time compared with bonds he sells more bonds. He may even buy more equities when they are down a lot. As with starting out investing, after a few years it is possible to get the hang of selling and all those fears of selling at the wrong time, etc. evaporate.

I've been wondering about how to change from accumulator to de-accumulator. Accumulating is easy I put money in every month and occasional lump sums as the money becomes available and buy each month. Selling every month does add extra frictional costs but has the part right or part wrong idea of pound cost averaging. I know though that pound cost averaging on the way in isn't the best system and all in is best. For a withdrawal strategy monthly/quarterly would be better leaving as much on the market as possible. I didn't think I'd want to sell annually but I'm warming to the simplicity and lack of regularly fretting over what to do.

I have stock market investment that throw off dividends but these are short of what I want to spend. I have cash for income hiccups but I also have un-sheltered growth, well non-income focused, investments. I think I'll be selling these first to supplement my income. There's a tax advantage but if they're supposed to be growthy investments the only way to extract that money is sales.
Hopefully it won't be long before this stops being theoretical and I'll give up full time permanent employment and have to be dealing with the practical problem of reaping what capital I have sown.

[hiriskpaul]

Eventually though, a lot of people take their first steps and buy investments. They see some success and some failures, but gradually grow in confidence as (hopefully) the value of their investments grow and eventually they have few qualms about investing. Most of us on here have probably forgotten how difficult a decision it might have been to get started. So we get used to investing and typically do it for decades, but many of us do not get used to disinvesting, which of course is what you need to do once other sources of income dry up. One way of mitigating the difficulties of disinvesting is to do it systematically, as xxd09 does. Once per year sell units regardless of price to fund the following year. In his case he has both a bond fund and an equities fund, so if equities are down at the time compared with bonds he sells more bonds. He may even buy more equities when they are down a lot. As with starting out investing, after a few years it is possible to get the hang of selling and all those fears of selling at the wrong time, etc. evaporate.

I've been wondering about how to change from accumulator to de-accumulator. Accumulating is easy I put money in every month and occasional lump sums as the money becomes available and buy each month. Selling every month does add extra frictional costs but has the part right or part wrong idea of pound cost averaging. I know though that pound cost averaging on the way in isn't the best system and all in is best. For a withdrawal strategy monthly/quarterly would be better leaving as much on the market as possible. I didn't think I'd want to sell annually but I'm warming to the simplicity and lack of regularly fretting over what to do.

I have stock market investment that throw off dividends but these are short of what I want to spend. I have cash for income hiccups but I also have un-sheltered growth, well non-income focused, investments. I think I'll be selling these first to supplement my income. There's a tax advantage but if they're supposed to be growthy investments the only way to extract that money is sales.
Hopefully it won't be long before this stops being theoretical and I'll give up full time permanent employment and have to be dealing with the practical problem of reaping what capital I have sown.

I think it depends. xxd09 has both a bond and equity fund and it is very unusual for both to be down when he chooses to sell, so selling once per year is not really that risky. OTOH if the investment was 100% equities, such as VWRL or its accumulating equivalent, then I would say selling once per year was unnecessarily scary. I would sell an accumulating fund quarterly, or with something like VWRL that pays dividends, scoop up the quarterly dividends but top-up with semi-annual disposals at different times to VWRL XD dates. More disposal and XD dates increases the likelihood of disposal following a brief fall, but lessens the impact of these inopportune events. It may end up being a wash, but it is psychologically less painful to have a small amount of money impacted by an unfortunate event than a large amount!

And yes, it means being more fully invested in the market if you are selling more frequently.

[Dod101]

IAAG has I think hit the nail on the head.

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

Dod

What "Academic theories" are you on about? I just cannot see in the context of this discussion what you are referring to.

I don't get your opposition to academic theories any way. If you had to have surgery would you really prefer a surgeon who got by on non-academic theory? Just hacked bits off he didn't like the look of, but it's all fine because by luck or otherwise he has ended up with a low fatality rate?

I cannot understand why you would compare a surgeon's necessary training with finance theory (which is usually put up by academics, hence academic theory. Get it?)

Dod

[Lootman]

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

There is an obvious sense in which it is "better" to live off just the natural yield. Because that signifies that you have a substantial sum of capital underlying your retirement. And with such a substantial sum, you would probably be OK no matter what drawdown approach you took.

As an extreme example, if you were worth 5 million, then you would barely need to invest at all. You would still be fine just leaving it all in a bank account earning nothing, paying no tax, and just withdrawing it as you need it.

Now say you have 1 million and spend 40K a year. Again it should be fairly straightforward to build a portfolio with dividends equal to 4% and you'd be fine. You might as a result lack exposure to higher-growth and overseas shares, and you would do worse in TR terms than a portfolio that yielded less. But maybe that doesn't matter to you as long as you have the income that you need.

But what about those who don't have a million? Do they push up the yield on the portfolio, hoping that they get away with the extra risk that involves? Or instead decide that it is OK to drawdown some capital each year from a more balanced portfolio. There must be a set of people whose net worth is sufficient to retire with a TR/drawdown approach, but not sufficient from a HY-like "never sell" approach.

[hiriskpaul]

IAAG has I think hit the nail on the head.

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

Dod

What "Academic theories" are you on about? I just cannot see in the context of this discussion what you are referring to.

I don't get your opposition to academic theories any way. If you had to have surgery would you really prefer a surgeon who got by on non-academic theory? Just hacked bits off he didn't like the look of, but it's all fine because by luck or otherwise he has ended up with a low fatality rate?

I cannot understand why you would compare a surgeon's necessary training with finance theory (which is usually put up by academics, hence academic theory. Get it?)

Dod

No, I don't see the difference. Nor do I understand what finance "theory" you are opposed to, or why.

[Dod101]

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

There is an obvious sense in which it is "better" to live off just the natural yield. Because that signifies that you have a substantial sum of capital underlying your retirement. And with such a substantial sum, you would probably be OK no matter what drawdown approach you took.

As an extreme example, if you were worth 5 million, then you would barely need to invest at all. You would still be fine just leaving it all in a bank account earning nothing, paying no tax, and just withdrawing it as you need it.

Now say you have 1 million and spend 40K a year. Again it should be fairly straightforward to build a portfolio with dividends equal to 4% and you'd be fine. You might as a result lack exposure to higher-growth and overseas shares, and you would do worse in TR terms than a portfolio that yielded less. But maybe that doesn't matter to you as long as you have the income that you need.

But what about those who don't have a million? Do they push up the yield on the portfolio, hoping that they get away with the extra risk that involves? Or instead decide that it is OK to drawdown some capital each year from a more balanced portfolio. There must be a set of people whose net worth is sufficient to retire with a TR/drawdown approach, but not sufficient from a HY-like "never sell" approach.

Without going into numbers, those who embrace a HYP approach are very likely to be getting a higher yield than I am. I find it difficult to put a finger on it but when I was much more recently retired I think I was probably investing for a much higher yield than now because today I do not need to. It is difficult to say though because the economy was very different then. I never had a strategy of taking capital out to live off because I saw it as eating the seedcorn. There is no need for us to go back over that ground again. I know people disagree with that. Ironically I would not be so avers to doing so now that I have a bit more capital.

Dod

[Itsallaguess]

I always come away from these types of really quite regular discussions with a very real sense that there's a great deal more 'shared middle ground' in all of this, but that 'shared middle ground' is almost always blown away by what I'd describe as 'sub-topic entrenchment', which often leaves a much longer lasting sense of disagreement than the shared middle-ground on the original topic actually justifies...

I wonder if we can collectively come up with a personal-finance equivalent of 'two bald men fighting over a comb', describing a bunch of fortunate, well-off men arguing over the best way that they've accumulated their wealth...

Cheers,

Itsallaguess

[xxd09]

That doesn’t sound nearly so much fun!
Seriously constant adversarial debate albeit politely is a tried and tested successful way of finding the right way ahead in a constantly changing world
Adversarial debate is the method used by our parliament and our law courts -two of the arguably the best systems of their type in the world-so far
It is an uncomfortable-non female type( can I say that?-of approach but other systems seemed not to be so successful over time
xxd09

[Itsallaguess]

That doesn’t sound nearly so much fun!

Seriously constant adversarial debate albeit politely is a tried and tested successful way of finding the right way ahead in a constantly changing world

Adversarial debate is the method used by our parliament and our law courts -two of the arguably the best systems of their type in the world-so far

It is an uncomfortable-non female type (can I say that?) of approach but other systems seemed not to be so successful over time

I agree, of course, but I just wanted to highlight that there's much that we all have in common here, and I really don't think people are that far away from each other in a broad investment sense, even though some of the more granular sub-topics often might allow people to think otherwise...

Cheers,

Itsallaguess

[Hariseldon58]

Here is my simple strategy for drawdown.

The essence of my decumulation strategy going forward is;

Global Index All Caps Equity 83%
(Small underweight Emerging Mkts and small overweight US Total Equity Index) Reinvest all income.

Short £ & $ Bonds 5%
US TIPs 12%

Live off the bonds.

Equity portfolio rises a real 20% rebalance. (IE restores original portfolio, plus the residual bonds )

Increase income by inflation when the portfolio is higher at year end. Inflation rise capped at 5%, collar at 0%

Drawdown rate as % of portfolio changes by 20% from the initial rate take a 10% pay rise /pay cut.

Bonds provide 7-10 years living expenses. Drawdown starts at 2.7% (no pension's apart from state 2 & 10 years away)

The object is to provide income, undershooting is bad, exceeding the target is good clearly but not that important.

5/6 of the portfolio is equity, it’s left alone entirely until it grows by 20%. Clearly if it fails to do so before the bonds run out…..

This is a reset of policy after 15 years of FIRE.

[dealtn]

IAAG has I think hit the nail on the head.

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

Dod

What "Academic theories" are you on about? I just cannot see in the context of this discussion what you are referring to.

I don't get your opposition to academic theories any way. If you had to have surgery would you really prefer a surgeon who got by on non-academic theory? Just hacked bits off he didn't like the look of, but it's all fine because by luck or otherwise he has ended up with a low fatality rate?

I cannot understand why you would compare a surgeon's necessary training with finance theory (which is usually put up by academics, hence academic theory. Get it?)

Dod

No, I don't see the difference. Nor do I understand what finance "theory" you are opposed to, or why.

I suspect he thinks all finance theory exists purely in the world of academia and is never "applied" and used in the real world and with real money. If he doesn't do it it doesn't exist and what's more it's always been fine for him.

[DrFfybes]

But what about those who don't have a million? Do they push up the yield on the portfolio, hoping that they get away with the extra risk that involves? Or instead decide that it is OK to drawdown some capital each year from a more balanced portfolio.

Or by an annuity and let someone else take the risk

[tjh290633]

But what about those who don't have a million? Do they push up the yield on the portfolio, hoping that they get away with the extra risk that involves? Or instead decide that it is OK to drawdown some capital each year from a more balanced portfolio.

Or by an annuity and let someone else take the risk

Most people will also have a state pension, which is likely to give them something approaching £10k a year. That helps a bit and many people survive on the state pension alone, but they may be half a couple and get at least 50% more.

That begs the question of how much someone needs. £40,000 a year is probably on the high side for needs, but may be realistic for "wants".

What can one expect if one does buy an annuity? It needs to be index linked to avoid the risk of penury in old age. I guess that they are based on average life expectancy at retirement age, now 67. Probably a 20 year average length, so 5% withdrawal with zero income would be realistic for a level annuity, but somewhat less for index linked. Someone may wish to look up current annuity rates, and judge how much better or worse taking 4% from a fund would be.

TJH

[Lootman]

But what about those who don't have a million? Do they push up the yield on the portfolio, hoping that they get away with the extra risk that involves? Or instead decide that it is OK to drawdown some capital each year from a more balanced portfolio.

Or buy an annuity and let someone else take the risk

Most people will also have a state pension, which is likely to give them something approaching £10k a year. That helps a bit and many people survive on the state pension alone, but they may be half a couple and get at least 50% more.

That begs the question of how much someone needs. £40,000 a year is probably on the high side for needs, but may be realistic for "wants".

What can one expect if one does buy an annuity? It needs to be index linked to avoid the risk of penury in old age. I guess that they are based on average life expectancy at retirement age, now 67. Probably a 20 year average length, so 5% withdrawal with zero income would be realistic for a level annuity, but somewhat less for index linked. Someone may wish to look up current annuity rates, and judge how much better or worse taking 4% from a fund would be.

An annuity is a non-starter for me, since that money is gone immediately. If I drop dead the next day it has all gone. I would deem it unfair to my beneficiaries.

Besides, since you mentioned a state pension, that is effectively an annuity only one that keeps up with inflation and which carries zero credit risk.

[kempiejon]

But what about those who don't have a million? Do they push up the yield on the portfolio, hoping that they get away with the extra risk that involves? Or instead decide that it is OK to drawdown some capital each year from a more balanced portfolio.

Or by an annuity and let someone else take the risk

Indeed it does remove the risk and work of running investments. Hopefully many of us here would find an annuity a poor return. At 65 a level term might offer up to 5% annual income. Inflation adjusting and 3% is on offer. A FTSE100 index would yield around 3.5% income but you get to keep your stake and that could hopefully grow.
I know I don't know which works best but those with longevity in their genes or survivors of life shortening illness that can get enhanced rates might do well from annuities, probably those wanting to retire early not so much

[ReformedCharacter]

Although I don't doubt the wisdom of those who can draw down by passive selling I would find it difficult to do personally. I remember my father's experiences sometime in the 70's when - IIRC - UK equities fell by as much as 70% at one point. My father had been made redundant and relied on his portfolio to pay the bills and, although relatively wealthy, had to see his bank manager to arrange an overdraft to avoid selling down to make ends meet. He was the son of a bank manager and it very much went against the grain to borrow money. In time, values recovered and my father found another job so things turned out OK, financially.

As a consequence, I've always been somewhat allergic to the idea of being a forced seller to raise income. Of course, a reasonable cash reserve would remove the 'forced' part of the problem - which is the element my father was lacking - so I don't doubt that it can be a good strategy and the simplicity is definitely attractive. FWIW, my plan is to invest for both income and growth, the growth element includes an accumulating World Index Tracker (Fidelity). Itsallaguess is right, I think, in pointing out that we're all different and have to find a strategy that we feel comfortable with.

RC

[Dod101]

I always come away from these types of really quite regular discussions with a very real sense that there's a great deal more 'shared middle ground' in all of this, but that 'shared middle ground' is almost always blown away by what I'd describe as 'sub-topic entrenchment', which often leaves a much longer lasting sense of disagreement than the shared middle-ground on the original topic actually justifies...

I wonder if we can collectively come up with a personal-finance equivalent of 'two bald men fighting over a comb', describing a bunch of fortunate, well-off men arguing over the best way that they've accumulated their wealth...

Cheers,

Itsallaguess

You have a great way with words!

Dod

[Dod101]

Although I don't doubt the wisdom of those who can draw down by passive selling I would find it difficult to do personally. I remember my father's experiences sometime in the 70's when - IIRC - UK equities fell by as much as 70% at one point. My father had been made redundant and relied on his portfolio to pay the bills and, although relatively wealthy, had to see his bank manager to arrange an overdraft to avoid selling down to make ends meet. He was the son of a bank manager and it very much went against the grain to borrow money. In time, values recovered and my father found another job so things turned out OK, financially.

As a consequence, I've always been somewhat allergic to the idea of being a forced seller to raise income. Of course, a reasonable cash reserve would remove the 'forced' part of the problem - which is the element my father was lacking - so I don't doubt that it can be a good strategy and the simplicity is definitely attractive. FWIW, my plan is to invest for both income and growth, the growth element includes an accumulating World Index Tracker (Fidelity). Itsallaguess is right, I think, in pointing out that we're all different and have to find a strategy that we feel comfortable with.

RC

Not surprisingly I agree with most of this. I have in addition a cash reserve, actually in NS & I index linked certs, of about 3 years expenses. I know a couple of people who literally ran out of money at the age of maybe their early 60s by living off their capital. One was an accountant who one might have thought would have known better.

Dod

[hiriskpaul]

Although I don't doubt the wisdom of those who can draw down by passive selling I would find it difficult to do personally. I remember my father's experiences sometime in the 70's when - IIRC - UK equities fell by as much as 70% at one point. My father had been made redundant and relied on his portfolio to pay the bills and, although relatively wealthy, had to see his bank manager to arrange an overdraft to avoid selling down to make ends meet. He was the son of a bank manager and it very much went against the grain to borrow money. In time, values recovered and my father found another job so things turned out OK, financially.

As a consequence, I've always been somewhat allergic to the idea of being a forced seller to raise income. Of course, a reasonable cash reserve would remove the 'forced' part of the problem - which is the element my father was lacking - so I don't doubt that it can be a good strategy and the simplicity is definitely attractive. FWIW, my plan is to invest for both income and growth, the growth element includes an accumulating World Index Tracker (Fidelity). Itsallaguess is right, I think, in pointing out that we're all different and have to find a strategy that we feel comfortable with.

RC

Yes having a cash buffer is a good thing to do because at some point, probably more than once, during retirement you will see significant market falls and this will not a good time to sell. However, if your alternative is to say I will not sell but it is ok to spend the dividends, that is delusional because mathematically they are equivalent. Selling shares reduces the number of shares, taking dividends reduces the value of the shares. In both instances selling and not reinvesting dividends, your portfolio value will be reduced at a time you really do not want to be doing that.