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Do we have the right allocation for withdrawals of £50,000 a year?

These investors want the option of drawing up to £50,000 per year from their investments
March 18, 2021 and Robert Ward
  • These investors want the option of being able to draw up to £50,000 per year from their investments
  • They have a high weighting to cash, which offers very poor returns, but should potentially lose less than bonds or gold 
  • Shifting their portfolio in the hope of avoiding losses or netting gains could detract from its long-term performance
Reader Portfolio
Catherine and her husband 62 and 63
Description

Pensions invested in funds, cash, residential property.

Objectives

Option of taking up to £50,000 a year from investments, simplify investments by reducing number of holdings.

Portfolio type
Portfolio simplification

Catherine and her husband are ages 62 and 63, and her husband earns about £92,000 per year. Their children are financially independent, and their home is worth about £980,000 and mortgage free.

“We would like the option of accessing up to £50,000 per year from our investments," says Catherine. "My husband is undergoing medical treatment, although he hopes to work for another two to three years and to continue paying the maximum annual contribution into his workplace pension. He and I should start to receive state pensions in 2024 and 2025, respectively, and they will pay out just over £9,000 per year.

“We have self-invested personal pensions (Sipps) from which we have not yet drawn income.  

"I took some profits in February 2020 before Covid-19 had spread widely and increased the cash weighting in our Sipps. We are very cautious and want to maintain a significant cash level, because capital preservation is very important. My husband's workplace pension, meanwhile, is 40 per cent invested in equities.

"However, we accept that we have to take some risk to try to maintain the real value of our assets, especially as quantitative easing is increasing the risk of future inflation. So I wondered if our investments are sufficiently diversified? With a potential bubble in government bonds and continuing uncertainty, is an elevated cash position a safer counterbalance to equity risk?  Or should we have a higher equity allocation?

Also, should we alter our mix of government, index-linked and corporate bond funds, consider alternatives to these and/or add strategic bond funds?

"I assume our gold-related holdings are an adequate additional hedge.

“We wondered if we should increase our exposure to technology, healthcare, funds that take into account environmental, social and governance issues, and green energy? We are also considering increasing the infrastructure exposure, but the investment trusts focused on that sector are trading on high premiums to net asset value (NAV). And should we have a higher relative exposure to Asia and emerging markets for potentially higher growth?

"We hold too many funds, but this is partly due to the number of our pensions, and to spread risk across a number of passive and active managers with low or modest charges. But I would like to simplify our investments, and review and rebalance them just once a year."

 

Catherine and her husband's total portfolio
HoldingValue (£)% of the portfolio
Cash720,00058.64
Vanguard LifeStrategy 40% Equity (GB00B3ZHN960)88,6197.22
Vanguard Target Retirement 2030 (GB00BZ6VJD72)53,3604.35
Troy Trojan (GB00BZ6CNS31)52,2084.25
Husband's workplace pension307002.5
Vanguard Target Retirement 2040 (GB00BZ6VK781)21,1681.72
London Stock Exchange 4.75% NTS 02/11/21 (LSE1)20,5301.67
Standard Life Index Linked Bond (GB0008394974)19,9601.63
WisdomTree Physical Gold (PHGP) (£)13,1411.07
WisdomTree Physical Gold (PHAU) ($)13,1551.07
iShares $ TIPS UCITS ETF (ITPG)10,8360.88
RIT Capital Partners (RCP)10,4500.85
Vanguard UK Government Bond Index (IE00B1S75374)9,8210.80
Vanguard UK Inflation-Linked Gilt Index (GB00B45Q9038)9,7950.80
iShares $ TIPS UCITS ETF (ITPS)8,9670.73
Vanguard Emerging Markets Stock Index (IE00B50MZ724)8,1590.66
Vanguard FTSE UK All Share Index (GB00B3X7QG63)8,0690.66
Vanguard Japan Stock Index (IE00B50MZ948)8,0870.66
Vanguard FTSE Developed Europe ex-UKEquity Index (GB00B5B71H80)7,9740.65
Vanguard US Equity Index (GB00B5B71Q71)7,9470.65
Legal & General Future World Climate Change Equity Factors Index (GB00BF41Q726)6,4210.52
Legal & General Future World ESG Developed Index (GB00BMFXWS95)6,4060.52
Legal & General Global Health & Pharmaceuticals Index (GB00BJ2JPG83)6,1450.5
Caledonia Investments (CLDN)6,0300.49
Lindsell Train Global Equity (IE00BJSPMJ28)5,7210.47
Legal & General Global Technology Index (GB00BJLP1W53)5,4890.45
Greencoat UK Wind (UKW)5,3600.44
Rathbone Multi Asset Strategic Growth Portfolio (GB00B86QF242)5,3960.44
BNY Mellon Real Return (GB00BSPPWT88) 5,2500.43
BNY Mellon Sustainable Real Return (GB00BD6DRD55)5,2590.43
HSBC Global Strategy Conservative Portfolio (GB00BYVXBK29)5,2170.42
Rathbone Multi Asset Total Return Portfolio (GB00B8JBXD38)5,1910.42
Stewart Investors Asia Pacific Leaders Sustainability (GB0033874768)5,1070.42
ASI Asia Pacific Equity (GB00B0XWNG99)5,0390.41
iShares Pacific ex Japan Equity Index (GB00BJL5C004)5,0220.41
First Sentier Global Listed Infrastructure (GB00B24HJL45)4,8530.4
L&G Cyber Security UCITS ETF (ISPY)2,1810.18
iShares Digitalisation UCITS ETF (DGIT)2,2580.18
Legal & General Fixed Interest (GB00B0CNHD88)2,1280.17
Legal & General Global Inflation Linked Bond Index (GB00BG0QPQ07)2,0000.16
Legal & General Global Infrastructure Index (GB00BF0TZL74)1,9840.16
BMO Commercial Property Trust (BCPT)1,4030.11
iShares Physical Gold ETC (SGLN )1,3530.11
Schroder Real Estate Investment Trust (SREI)1,3380.11
Real Estate Investors (RLE)1,1220.09
Unicorn Mastertrust (GB0031218018)1,1530.09
Total1,227,772 

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

 

IC Chris Dillow

There’s nothing wrong with being cautious – especially if your portfolio is sufficient to meet your financial requirements. The question is, which assets best protect your capital?

The case for bonds – conventional or index-linked – is that they should do well if investors become more pessimistic about the economy. In this scenario, bonds should do well and offset losses on equities. This capital protection, however, comes at a risk as, in some scenarios, bonds could lose a lot.

One of these isn’t a great problem. Bonds would sell off if global economic growth appears to be exceeding expectations, but their losses would be offset by gains on equities. And what matters is your portfolio as a whole.

Instead, there’s a nastier risk for bonds. If investors start to fear higher inflation, bonds will lose and there will be no assurance of offsetting this with gains on equities.

Also, index-linked bonds will not necessarily protect you. The inflation adjusted bond yield should be equal to the path of expected real short-term rates over the lifetime of a bond. So if investors expect real short-term rates to rise, index-linked yields will rise, meaning capital losses on them. And, in theory, any inflation rate above the Bank of England’s target of 2 per cent should mean that investors expect rising real rates. This is because in order to reduce inflation, the Bank of England has to reduce demand, which requires it to raise real interest rates.

It’s quite likely, therefore, that serious inflation expectations would result in capital losses on index-linked gilts. These would do great if investors expect the Bank of England not to respond to rising inflation. But I don’t think they would maintain this expectation for very long in the face of a serious inflation threat.

Gold also wouldn't be a great hedge in this case. Its price tends to fall as bond yields rise, because gold pays no interest so becomes less attractive when yields on other assets rise.

The bottom line is that while bonds and gold protect investment portfolios from the risk of falling equity prices they are much less good at protecting against other risks. This is why there’s a strong case for cash. Your worst-case loss on cash is simply the real interest rate. This is a guaranteed loss at the moment, but it’s a much smaller loss than you could suffer on bonds or gold.

There is a case for allocating more to areas such as green energy – you might get into the next bubble early on. Equity bubbles tend to happen when there’s the possibility of some new technology transforming the economy, such as railways in the 1840s, radio stocks in the 1920s or tech stocks in the 1990s. Green energy might be the next in this line.

There’s also a case for emerging markets, although not because they offer long-term growth. Rather, they are cyclical, and do especially well in good times as compensation for doing very badly in bad times.

With both of these assets, however, you need to ride the good times and bail out before the bad ones. You can do this to some extent using the 10-month rule: hold assets when their prices are above their 10-month or 200-day average, and sell them when they fall below it. However, large holdings in green energy and emerging markets are not suitable for risk-averse investors who want to take a hands-off approach to investing.

 

Robert Ward, chartered wealth manager at Walker Crips

In terms of the overall strategy, you are both well on course to achieving your objectives. Using your husband's position as a higher-rate taxpayer to gain relief on pension contributions is a sensible strategy, and one to make use of while he can.

Although your portfolio is very well diversified, you hold many different investments and risk diluting it due to the lack of conviction in each holding. When running your own portfolio, you have a limited amount of time to review your investments. When this time is divided between 50 holdings as opposed to, say, 25, you are giving each holding half as much attention.

There is certainly a sense of cautiousness when investing within the fixed interest sector at the present time, following a multi-decade bull run that will come to an end at some point. A fund with a strategic and nimble approach, which has very actively managed content and doesn’t just track a benchmark, would be a sensible addition. Nomura Global Dynamic Bond (IE00BTL1GV74), for example, has a conscious focus on dynamic, downside risk control and a strong performance record. Personally, I would consolidate the multiple, fixed interest index tracker funds into a holding such as this with greater conviction.

You already invest in some strong alternative hedges for the portfolio so it would be prudent to consider building on existing holdings as opposed to adding new investments. The holdings that could benefit from further contributions are Troy Trojan (GB00BZ6CNS31) and BNY Mellon Real Return (GB00BSPPWT88). Both of these have strong track records and have provided healthy downside protection in previous volatile market conditions.

 

You hold some good listed infrastructure funds but also consider private infrastructure to complement this. Despite the majority of infrastructure investment trusts trading on premiums to NAV, these would provide a good balance and help to reduce the overall correlation of returns within your portfolio.

I would like to highlight is the importance of staying invested. You took profits before Covid-19 was declared a global pandemic, which may seem like a positive move. But this means that you now have more than half of your portfolio in cash. You have the problem of deciding when to deploy the cash, as markets have since recovered and many global markets have overtaken their previous highs.

Shifting your portfolio in the hope of avoiding a loss or netting a gain rarely works and could hurt long-term performance. For example, between 2000 and 2019, the S&P 500 Index made a compound annual return of 6.1 per cent. But if the 10 best days in that period had been missed, the index would have just made a 2.4 per cent compound annual return. By missing the 25 best days, the compound annual return would have been 1 per cent. Staying invested in the market is key, as the impact of missing just one of those single best days can be very damaging to your long-term returns.

All investments carry some degree of risk of capital loss and recent events have shown this can lead to short-term volatility in investment values. This demonstrates the importance of investing over the longer term.