dealtn wrote:moorfield wrote:Not really, if you think about my endgame (ie. an income). I am aiming for a future income of ~£50k (today's money) on a yield of 5%, or a pot of £1m. Equally that could be a pot of £850k yielding 5.9%, or a pot of £1.25m yielding 4%. That's quite a variation in pot size (£400k) but my focus is on growing (a sustainable and diversified) income size. Much easier to track and make selling/retinkering decisions accordingly.
IF you had the choice of a bank account with a £200k balance earning 1% pa. and one with £100k balance earning 2.5% which would you rather, and why?
I would prefer the former. I can redeploy (or spend) the capital at any time. I can't envisage a scenario where I would prefer the lower capital option. That's my universe, which may be different to yours and others.
But we're talking about equity portfolios (or at least we should be on this board), not about bank accounts! And the "
IF" I've capitalised and emboldened is a very big one...
If I had a choice of the two bank accounts you mention, then yes, I'd very likely (*) also go for the £200k bank account earning 1%. And since I already have entirely adequate cash reserves, I would withdraw the cash from the bank account asap and invest it in something more productive than cash. So the interest rates would be unlikely to be relevant for all that long, and so capital considerations easily outweigh interest rate considerations.
What about the question e.g. of having a £200k equity portfolio with a 5% dividend yield or a £250k equity portfolio with a 3.5% dividend yield? There's an unrealistic version of that question and a realistic version of it.
The unrealistic version goes: your fairy godmother appears one night and says she'll give you one of the two portfolios - you get to choose which, and she lets you do a quick inspection of the two to check that there's nothing dreadfully wrong with either of them. I would unhesitatingly choose the £250k portfolio with the 3.5% yield - even if I liked the prospects for the £200k portfolio with the 5% yield better, because if that were the case, I could easily sell the £250k portfolio and buy the £200k portfolio as soon as the markets opened the next morning, and end up with my preferred £200k portfolio plus maybe £48k cash (allowing for stamp duty on £200k worth of purchases, broker commission on say 50 trades, and a bit of bid/offer spread).
The realistic version might go something like: you currently have a £150k equity portfolio with a 4% dividend yield, and you're contemplating how you're going to run it. By going for dividend-led portfolio growth (high yields, lots of dividends reinvested, but quite possibly somewhat poor growth of the dividend-per-share figures of the individual holdings) you think it plausible (but by no means guaranteed) that your portfolio will grow to a £200k equity portfolio with a 5% dividend yield. Alternatively, by going more for good growth of the individual holdings, at the cost of their yields being somewhat lower (**) you think it plausible (but also by no means guaranteed) that your portfolio will grow to a £250k equity portfolio with a 3.5% dividend yield over the same period. Which approach do you go for?
Whichever you go for, you're probably going to overshoot or undershoot the portfolio you're aiming for rather than hitting it precisely, and it doesn't take much looking at past market performance to tell you that you might end up undershooting or overshooting by quite a lot. So when deciding on your approach, you're going to be making judgement calls about questions like "just how plausible?", "what happens if things go less well than expected?", etc, rather than clear-cut numerical decisions. And personal factors like "just how good am I at making this sort of judgement call?" are likely to come into it - e.g. judging whether a CEO's remarks on the company outlook display confidence or arrogance requires rather different skills than judging how strong a company's balance sheet is.
The point of all of this is: once you've decided how much of your wealth you want in equities (***) you
don't get to make significant "an equity portfolio worth £X or an equity portfolio worth £Y?" investment decisions. Any question asking which of them you prefer (other than with X and Y only slightly different e.g. due to trading costs) is not actually an investment decision you'll face in practice. The decision you will face in practice is which equity portfolio you want to
aim to achieve - and due to differences of personal skills, circumstances, levels of confidence, etc, I find it entirely unsurprising that different people come to different decisions about that.
dealtn wrote:As I say, in my universe an alternative is eccentric. I guess I am different to others.
If your universe offers you a free choice (****) of a bank account with a £200k balance earning 1% pa. and one with a £100k balance earning 2.5%, I can see where the eccentricity comes from! ;
-)
(*) Extreme terms & conditions could alter that. For instance, if the bank accounts earned compound interest and matured in 50 years' time with
absolutely no withdrawals (either of capital or of interest) permitted before maturity, even on the death of the holder, the £100k bank account would be mildly preferable - though it might be arguable that
both should be declined on the basis of too much potential complexity in testamentary matters! ;
-)
(**) Though given we're on this board with its requirement about natural yields being high, just "somewhat lower" and not "low".
(***) Which is a question for the Investment Strategies board, not this one.
(****) To be clear, that means a "free choice"
both in terms of being completely at liberty to choose either account
and in terms of not paying anything to acquire either account.
Gengulphus