What next......

[zharrt]

I have been managing my SIPP since 2012, and at the end of each year I try to work out if I am still doing the right thing.

I am 40 year old, self employed with a SIPP in the low six figures, according to my figures (which might not be the same way everyone else does them but it's how I have done them each year so I can compare like for like) my total pot grew 12.55%, and this includes 6.07% dividends and the rest in growth. I have also been adding capital equal to about 10% off the fund value at the start of the year (however this has been an unusual year where I have been able to put in more than normal this year so is not sustainable long term).

At the start of the year I was 100% focus on individual shares, about 30 in total but I have started to move most of the new capital into three funds (HICL, HFEL, MYI) and my aim is each of these will get to 11% of my holding (33% in total) all dividends are reinvested unless the holding exceeds my target which are then added to the new capital and used to increase the holdings of the three funds.



My calculations are taken as following:

Yield = average dividend value of the last three years divided by total purchase price of the holdings
Value = current price / average purchase prices
Income = (current price * shares) / (purchase price - total dividends)

So, other than my ramblings I suppose I should be asking a question, and the big question (am I doing the right thing) probably can't be answered.

My main rule of thumb has always been, don't sell anything, loses are only realised when I do (which is why I am still holding onto Centrica and De La Rue) but I know that equal logic could also be if I moved those small holdings into something else I could recoup the losses quicker. I also know that PLUS500 is an outlier, I am enjoying that while it lasts, total dividends are just about to overtake the original purchase price so when that bubble bursts I will not be too unhappy.

I want to keep upping my holdings in the three funds as that gives me at least a little but of diversification away from the UK. And I have twenty years before I start needing an income from the SIPP so anything I do will be focused on the long term.

Any advice, comments or observations as to what I could be doing in 2022 will be welcomed!

[TUK020]

From your age, I am guessing that you are looking to accumulate for >10 years prior to drawing down.
On this basis, looking to diversify internationally is a good idea, and doing so via ITs is a low risk way of doing it.
HFEL & MYI are solid, and very yield oriented I.T.s (I hold both)
I would suggest you also balance this with a sample of growth oriented international ITs - perhaps something like FCIT, SMT or RIT Capital Partners

[dealtn]

My main rule of thumb has always been, don't sell anything, loses are only realised when I do

I would stop anchoring and accept losses (and gains) are real.

[moorfield]

So, other than my ramblings I suppose I should be asking a question, and the big question (am I doing the right thing) probably can't be answered.

Any advice, comments or observations as to what I could be doing in 2022 will be welcomed!

Hi zharrt, Happy New Year to you.

When I was a few years younger than you are it took me a while to figure out by myself what the Big Question really was. Now it seems blindingly obvious, and it certainly can be answered and regularly checked that you are doing the right thing:

How much income do I want ?

The subsidiary questions investors in their 30s or 40s should also ask themselves, again blindingly obvious ones, are:

When ? and How much capital do I have now ?

You have answered the latter two already - "twenty years" and "the low six figures", let's say 2042 and £100,000 - but perhaps not the first. I would suggest here that the maximum income one wants to be drawing from a SIPP, tax-efficiently, is at the higher rate income tax threshold, ie. £50,270 today. Any income higher than that (and capital producing it) will be dogged by heavy taxation one way or another. Let's roll that forward twenty years using the Government's inflation target of 2%, ie. £75,000. Not a bad retirement income to be aiming for at all.

So the Big Question is answered - one has savings of £100,000 now and one wants to be drawing an income from a SIPP of £75,000 in 2042 (note here that by income I mean natural yield income).

The next step is to plot a course from departure point (£100,000 savings) to destination (£75,000 income). I'll write up more on this for you tomorrow, in the meantime more wine, cheese and visitors are imminent here...

[moorfield]

So, other than my ramblings I suppose I should be asking a question, and the big question (am I doing the right thing) probably can't be answered.

Any advice, comments or observations as to what I could be doing in 2022 will be welcomed!

The next step is to plot a course from departure point (£100,000 savings) to destination (£75,000 income). I'll write up more on this for you tomorrow, in the meantime more wine, cheese and visitors are imminent here...

Over the last decade I have developed a habit of using an income curve to check annually whether I am "doing the right thing", ie. a schedule of the income I want my portfolio to generate next year, and the year after that, and so on... I took the view that it is easier to make long term projections by income rather than capital because dividends tend to be less volatile than share prices, thus one can accommodate wide fluctuations in capital value without the fingers jittering too much and unforced trading mistakes being made.

Two more numbers are needed to plot an income curve. Firstly, the yield that can be bought with capital, here I will take your 4.72% as fixed (in practice this will vary over time of course), which as it happens is just about the same as City of London IT (CTY). The second is more interesting, the rate at which income grows through the combined effects of dividend increases, cuts and reinvestment. This thread is well worth a read, and shows that the income produced by an "Accumulation" model of HYP1 has grown by ~9.8% pa over twenty years. I have opted for a more conservative 7.2% pa, which neatly doubles income in a decade. See also viewtopic.php?p=469409#p469409.

Plugging those numbers together shows that without further capital contributions, £100,000 should yield £4,720 this year, £5,060 next year with income reinvested and so on, reaching £18,960 in 2042 - guesstimated £12,700 in today's money adjusting for that Government inflation target.

Well short of an ideal £75,000 - so a third number can be added, the capital contribution each year which buys more income. The maths is fiddly, to reach £75,000 in 2042 would need an additional contribution of £28,500 each year (£4,720 this year, £5,060 + 4.72%*£28,500 = £6,405 next year, £6,866 + 4.72%*£28,500 = £8,211 the following year and so on, reaching £75,327 in 2042).

Perhaps too unrealistic, given the additional contributions needed. You mentioned that you have been adding about 10% of the fund value each year. Let's call this £10,000 and rerun the numbers - £100,000 should yield £4,720 this year, £5,060 + 4.72%*£10,000 = £5,532 next year, £5,930 + 4.72%*£10,000 = £6,402 the following year and so on, reaching £38,738 in 2042 - guesstimated £26,000 in today's money.

So finally here's my advice - find a ballpark answer to the Big Question, how much income do I want?, and plot a curve for checking annually if you are on track to get there. A kind of "financial satnav" which also serves as a useful "hands-off/hands-on" switch. In years of surplus income you can remain "hands-off", there is no need to tinker, and that surplus can be reinvested to accelerate income growth or alternatively used to build a cash reserve. In years of shortfall you might choose to be "hands-on" and recycle poor performers, reinvest any cash reserve or make additional capital contributions.

Whatever mix of shares or funds you pick then doesn't really matter provided that collectively they produce the forecast income. In short, if they don't, change them for ones that do.

[BullDog]

Unfortunately, posted in the sub forum where it is, nobody can give the answer that would be in the OP's best interest regarding "what's next".

[88V8]

....all dividends are reinvested unless the holding exceeds my target which are then added to the new capital and used to increase the holdings of the three funds.

I want to keep upping my holdings in the three funds as that gives me at least a little but of diversification away from the UK. I have twenty years before I start needing an income ....

Perhaps Bulldog is hinting that you're on the wrong path.

I am an income investor, with a seven-figure pot. I didn't really start investing in any orderly fashion until after I'd retired, so I never had to bother about growing the pot, it was just... there.

You need to focus on building the pot. Growth.
Maximise the pot to maximise the eventual income.
Dividend stocks only if they are also and mainly growth stocks.
Dividends are nice to have, but this is not the time to be slanting your choices according to divi.
Focus on growth.

Once you have the big pot, a couple of years before you retire make the switch to income stocks. Twenty years time, who knows what they will be.

HFEL btw... I hold. Nice divi but the capital performance is carp. Not really one for you at present.

Not being a Growth investor I won't presume to suggest which ITs &/or or stocks you should be holding, but I have to agree that at this phase of your investing life you're on the wrong path and hence the wrong board.

V8

[zharrt]

Unfortunately, posted in the sub forum where it is, nobody can give the answer that would be in the OP's best interest regarding "what's next".

Apologies if I have posted in the wrong place, when I first started investing I assumed I needed to focus on income rather than growth so have considered myself a HYP where in hindsight I probably don't have a single strategy which might be my undoing.

[zharrt]

....all dividends are reinvested unless the holding exceeds my target which are then added to the new capital and used to increase the holdings of the three funds.

I want to keep upping my holdings in the three funds as that gives me at least a little but of diversification away from the UK. I have twenty years before I start needing an income ....

Perhaps Bulldog is hinting that you're on the wrong path.

I am an income investor, with a seven-figure pot. I didn't really start investing in any orderly fashion until after I'd retired, so I never had to bother about growing the pot, it was just... there.

You need to focus on building the pot. Growth.
Maximise the pot to maximise the eventual income.
Dividend stocks only if they are also and mainly growth stocks.
Dividends are nice to have, but this is not the time to be slanting your choices according to divi.
Focus on growth.

Once you have the big pot, a couple of years before you retire make the switch to income stocks. Twenty years time, who knows what they will be.

HFEL btw... I hold. Nice divi but the capital performance is carp. Not really one for you at present.

Not being a Growth investor I won't presume to suggest which ITs &/or or stocks you should be holding, but I have to agree that at this phase of your investing life you're on the wrong path and hence the wrong board.

V8

Thank you for that, it sounds so simple but so clear. Grow now, income later?

[BullDog]

....all dividends are reinvested unless the holding exceeds my target which are then added to the new capital and used to increase the holdings of the three funds.

I want to keep upping my holdings in the three funds as that gives me at least a little but of diversification away from the UK. I have twenty years before I start needing an income ....

Perhaps Bulldog is hinting that you're on the wrong path.

I am an income investor, with a seven-figure pot. I didn't really start investing in any orderly fashion until after I'd retired, so I never had to bother about growing the pot, it was just... there.

You need to focus on building the pot. Growth.
Maximise the pot to maximise the eventual income.
Dividend stocks only if they are also and mainly growth stocks.
Dividends are nice to have, but this is not the time to be slanting your choices according to divi.
Focus on growth.

Once you have the big pot, a couple of years before you retire make the switch to income stocks. Twenty years time, who knows what they will be.

HFEL btw... I hold. Nice divi but the capital performance is carp. Not really one for you at present.

Not being a Growth investor I won't presume to suggest which ITs &/or or stocks you should be holding, but I have to agree that at this phase of your investing life you're on the wrong path and hence the wrong board.

V8

Thank you for that, it sounds so simple but so clear. Grow now, income later?

Yes. I suggest you start a new thread on another sub forum if you wish to explore alternative strategies.

[Urbandreamer]

Apologies if I have posted in the wrong place, when I first started investing I assumed I needed to focus on income rather than growth so have considered myself a HYP where in hindsight I probably don't have a single strategy which might be my undoing.

To be honest, you need to do a lot of navel gazing. I would agree that investing for growth while you have a decent income would be a good theoretical stratergy, but is it one that you can be happy with. Likewise when work income stops then investment income can become more important, but are you happy with high yield shares? If you have a good state pension and DB scheme you could invest for growth as both are bond proxies, but do you want to accept the inevitable setbacks.

Changing your nature can be difficult. As for not having a "single stratergy", does that mean that you don't have a stratergy or that it's difficult to name your stratergy? For example my "current" stratergy is "growth & income". However I am trying to move from that to a more risk averse stratergy. Something that I am finding very difficult because of my nature.

Ps I hold HFEL, MYI and SMT for very different reasons. However you can see that they can be part of a "growth & income" stratergy.

[88V8]

Focus on growth.
Once you have the big pot, a couple of years before you retire make the switch to income stocks. .....I have to agree that at this phase of your investing life you're on the wrong path and hence the wrong board.

Thank you for that, it sounds so simple but so clear. Grow now, income later?

Hehheh, yes that's the idea, easy for me to say, not always so easy to do.

One nice thing about income stocks is that as a rule they do produce an income. So one sees something positive.
Whereas growth stocks may or not produce growth. Not as comforting.

But yes, I think you should focus on growing your pot, and switch to an Income strategy later.
This https://www.lemonfool.co.uk/viewforum.php?f=96 is the Growth board, see what ideas people have there.

As boards go it's not very busy, is it..... where's the best place for him to post, folks?

V8

[zharrt]

Focus on growth.
Once you have the big pot, a couple of years before you retire make the switch to income stocks. .....I have to agree that at this phase of your investing life you're on the wrong path and hence the wrong board.

Thank you for that, it sounds so simple but so clear. Grow now, income later?

Hehheh, yes that's the idea, easy for me to say, not always so easy to do.

One nice thing about income stocks is that as a rule they do produce an income. So one sees something positive.
Whereas growth stocks may or not produce growth. Not as comforting.

But yes, I think you should focus on growing your pot, and switch to an Income strategy later.
This https://www.lemonfool.co.uk/viewforum.php?f=96 is the Growth board, see what ideas people have there.

As boards go it's not very busy, is it..... where's the best place for him to post, folks?

V8

I've reframed the question here...

viewtopic.php?f=56&t=32762