BEGS 2021

[OhNoNotimAgain]

The 2021 Barclays Equity Gilt study says this:

Figure 9 and Figure 10 show how reinvestment of income affects the performance of the various
asset classes. Figure 9 shows £100 invested at the end of 1899 without reinvesting income; the
second is with reinvestment. £100 invested in equities at the end of 1899 would be worth just
£167 in real terms without the reinvestment of dividend income; however, with reinvestment,
the portfolio would have grown to £32,025. T

[Lootman]

So your big point is that if you invest more money then you end up with more money?

Who could have known that?

[dealtn]

No, the point is not about investing any old new money, it is specifically concerned with dividend reinvestment because that's what the shares generate. The other point is the massive difference between reinvesting divs and not doing so over the period stated.

The really questionable thing imo is that nobody has such a lengthy period available to them in a lifetime. All we have is an investing window that's unlikely to be more than say 50 years in the best case, far less in general I'd guess.

The more interesting thing, but hypothetical in practice, would be to compare the effect of companies not paying out dividends and shareholders recycling through reinvestment (and the potential tax consequences) but retaining and reinvesting those funds internally.

[1nvest]

Referencing the 2016 version Figure 7 on document page 74 indicates that for 1920 both inflation adjusted price and income indexes being down at 29% and 26% respectively of their 1899 start date level. 70%+ haircuts in both cases.

Imagine starting with £1M and receiving/spending perhaps a £40,000 dividend and 20 years later in inflation adjusted terms having seen that decline to £290,000 portfolio value paying £10,400 dividends. How would your retirement be when the income being provided dropped to around a quarter of former amounts?

This is where SWR comes in, Trinity Study inspection of US historic bad case outcomes identified that starting by drawing 4% of the portfolio value, and then uplifting that £££ amount by inflation each year, so a nice inflation pacing regular income, sustained through 30 years of retirement, more than likely outliving a 65 year old retiree. UK 1900 start of retirement date was such a 'bad' case outcome.

If we take the yearly price gain, create a running total return of those gains, and apply the dividend yield to each year we can identify the dividend value for each year. From those we can calculate a total return, ( current price index + dividend value - prior years price index ) / prior years price index. That yearly total return can then be compounded for a total return index. Adjusting that for inflation (dividing by the Cost of Living index) and we have a real (after inflation) total return index. We can then simply discount that by 4% (the SWR) each year. In the following I assumed that the 4% SWR was drawn at the start of each year, and roll that on for 30 years and the money just about lasted (as per the Real Portfolio Value After 4% SWR final column).


If that was one if not the worst cases, more often (on average) outcomes were (much) better. Often leaving the same or multiples of the inflation adjusted start date portfolio value still available for heirs (or longevity).

For many that regular inflation adjusted income is superior to 'spending dividends' - that in that particular case saw a dilemma of substantially reduced portfolio value and dividend income.

Note that for 1920 even the accumulator, reinvesting all of dividends, saw their portfolio value down at 64.4% of the inflation adjusted 1900 start date level. But if they continued accumulating then a couple of years later, end of 1922 and they were back up again at 20% above the inflation adjusted start date level, and if held for 30 years their portfolio had more than doubled in real terms. Big dips are more a greater risk for those in drawdown, more so if they arise in earlier years. Commonly called a bad sequence of returns risk (SORR). For accumulators, those still adding new money, big dips can actually be a (very) good thing.

The common way to reduce SORR is to hold some bonds and spend from those when stocks are down, spend stocks (and top up bonds) when stocks are doing well. Stocks are leveraged, of the order $30T stock cap, $9T corporate bond cap i.e. firms borrow by issuing corporate bonds to 'invest'. Leverage just broadly scales up volatility, not rewards, so its reasonable to de-leverage stocks, which could be via buying £30 of stock, £9 of corporate bonds. Corporate bonds however whilst tending to pay higher yields those premiums reflect default risks, so Gilt might be held to similar/equal effect. £30/£9 stock/bonds = 77/23 stock/bond ratio. Comparing (US data) 77/23 to 100/0 (all stock) since 1972 and the expectancy is that the 100/0 total return progression line might zigzag around the 77/23 line, provide similar overall broad total return but with less volatility, that many consider to be better risk-adjusted reward and that the likes of the Sharpe Ratio (higher = better) measure is intended to reflect (relative risk-adjusted-reward indicator).

In practice 77/23 stock/bond wont be much different to 75/25 or even 67/33 or 80/20. If you start with 75/25 likely within a relatively short period of time that will have deviated, might have become 80/20 or 70/30.

Also in practice investors don't tend to actually use SWR withdrawal amounts, rather they just draw what/when needed. It's more of a guideline i.e. suggests that once you've accumulated 25 times yearly spending (inverse of 4%) that you probably have enough to retire and likely will have enough to see the portfolio value outlive you.

[1nvest]

Looking at that data and 1906 peak value in real terms with the 1920 subsequent low was a even worse case start of retirement date. 4% SWR only lasted 21 years (but a relatively high probability that a 65 year old retiree might have died before reaching 86 back then). 3.5% was more the SWR figure for that start year. Averaging into retirement, half at the start of year, half at the end of year, would have improved things i.e. avoided having 'lumped in' (started retirement/drawdown) at the worst possible time.