Whoa! ISA plummets

[Ozzie Osmond]

walm said:

I just don't believe that - and I know that you of all people should know - so it's a little worrying.

So if you have retirees who saw a good 18 months up to March and adjusted their spending habits as a result then they are getting BAD advice.

You shouldn't be seeing short term performance (18 months) and banking on it.
That's madness.

I'm kinda with you. "Reality" has volatility in it and trying to remove that volatility has a significant "cost". So I prefer to take the ride.

Over the past 10 years I think the markets have shown that "playing safe" can be an expensive strategy. As I mentioned earlier, the FTSE 100 was at 4000 in 2009 and is much higher today at 6000.

Sure, if you think the market's going down then by all means sell and put your money somewhere safe with a modest return. But if faced with a 25 year future in retirement that leaves a massive problem - when are you going to get back into the market? Because if you don't, inflation will eventually eat you alive. Look at all the savers who have been stuck with returns negative to inflation since, guess when? - 2009. Once you've run for safety it's very difficult to take the mental step of "It's safe to get back in the water".

I don't believe in an income/capital distinction, it's all just money. What matters is whether its coming in or going out!

[CarlosFandango11]

Ginge R said:

walm said:

The point you made was that the recent drop entailed people having to change their spending habits.
It seemed like a real world comment - I thought. Talking about real people making life-changing decisions. Not a hypothetical. (I may have that wrong, in which case sorry.)

I replied that we had a big run-up ahead of this recent drop so for someone to have to materially change their spending plans NOW implies that they ramped them up during the "good times" of the preceding 18 months.

i.e. We are essentially back where we were 18 months ago - ish. Therefore whatever plan was in place THEN is surely still relevant NOW. So unless they ramped up (which they shouldn't) there is no need to change???

Of course if we had slow steady 5-6% growth and suddenly a 30% drop then YES you need to change but that isn't what happened here is it?!

Folk underestimate their longevity. I saw an actuarial report last night which showed that despite the shifting to the right, 50% of people will still live 1.5 years longer than their estimated page at death. You cannot avoid that, to subordinate people's contentment in old age to satisfy investing theory is wrong.

If a new client came to me and told me that he had lost 22% in a geared tracker in the course of three days, then that WILL have an effect on his future plans and thinking. He may have to go back to work, rely on less to avoid further depletion. Theoretical maybe, but a fact nonetheless. 18 month snapshots aside, market turbulence can kill a fund's objectives.

This sort of blog is everywhere these days, but the maths is indisputable. Go to the end bit where the sequence of return is flipped on its head, the guy runs out (I think) four years early. In essence, if you lose 10% in a week, and it takes you a further three weeks to recover 10%, you are still much worse off. http://triblive.com/business/headlines/8974860-74/...

That is why some savers run out of time and/or money if they fail to heed sequential risk.

I'm sure that walm is aware of sequential risk, but he seems to have considered investment returns over the past 18 months and as is obvious, this risk has not materialised over this period - markets have risen and the fallen - hence this recent crash is only going to affect those who have entered the market very recently, a small minority of people.

If you lose 10% in a week and it takes you three weeks to recover 10% you're in just about the same position as you started in. If you had said years instead of weeks, then you are worse off, but what has happened in reality is the reverse, you have gained 10% and then lost 10%.

[Ginge R]

CarlosFandango11 said:

I'm sure that walm is aware of sequential risk, but he seems to have considered investment returns over the past 18 months and as is obvious, this risk has not materialised over this period - markets have risen and the fallen - hence this recent crash is only going to affect those who have entered the market very recently, a small minority of people.

If you lose 10% in a week and it takes you three weeks to recover 10% you're in just about the same position as you started in. If you had said years instead of weeks, then you are worse off, but what has happened in reality is the reverse, you have gained 10% and then lost 10%.

You're not really, because you've lost the benefit to be gained by four weeks/months/years of otherwise earned compounded growth. Added to that, the fact that you're now decumulating and it's like trying to tread water with heavy weights around your ankles. You have to work harder, for longer, just to stay afloat.

In a larger sense too, the point I was trying to raise related to risk and not just loss. If you're in retirement, and unless you have intergenerational matters to contend with, why on earth would you want to take needless risk? Just because you can take risk, just because it may or may not have paid off.. it's not a reason to do it unless you have to. And the issue is, why do you have to? Partly because too many people fail to prepare properly.

Advisers try not to talk about risk; more these days, loss. To say 'Ah, well, I'm only back where I was 10 months ago' is missing the point. If you have to regain that lost 7% and if it take a further 10 months, you, in effect, have spent 20 months doing nothing and suffering inflation. You, in real terms, also have a smaller sum from which you need to create some measure of investing critical mass, and so the problem is compounded.

[walm]

Ginge R said:

To say 'Ah, well, I'm only back where I was 10 months ago' is missing the point. If you have to regain that lost 7% and if it take a further 10 months, you, in effect, have spent 20 months doing nothing and suffering inflation.

I think I get it now. The problem is precisely that TIME taken. Even if you are nominally back to 18 months ago, you are off-track by a good margin because you were expecting to be up a good amount by now (say (1 + 5 or 6%)^1.5).
Fair enough.

I also LOVE the word "decumulate".
I will be using that from now on...
"How's performance?"
"Oh not bad, thanks. Decumulating nicely..."

[Ozzie Osmond]

Over time markets have always risen more than they've fallen - hence the growth in the index over time. So there's no point worrying about the falls. If you don't believe the subsequent increases will make up for what you're spending in between then equities aren't for you!

Over a 25 year timeframe I wouldn't want to be out of equities. For example, in August 1990 the index was at 2000, so since then your capital has still tripled to 6000 (i.e. risen more than inflation) and you've enjoyed an income stream along the way.

[Ginge R]

walm said:

I think I get it now. The problem is precisely that TIME taken. Even if you are nominally back to 18 months ago, you are off-track by a good margin because you were expecting to be up a good amount by now (say (1 + 5 or 6%)^1.5).
Fair enough.

I also LOVE the word "decumulate".
I will be using that from now on...
"How's performance?"
"Oh not bad, thanks. Decumulating nicely..."

That's it, well expressed.

Well, as opposites to accumulation go..

[bad company]

I am retired and already using income drawdown for my pension. I increased my annual drawing to 3.6% of the fund value (drawn monthly) at the start of this year. I checked the value again today and because of the losses my drawings now equate to 3.8% of the fund value.

My shares have also taken a hit but as long as the dividends keep coming that does not worry me too much.

All in all not too bad then but like everybody else I hope everything settles soon. I'm just glad that I have been IMO fairly conservative with drawings.

Edited by bad company on Wednesday 26th August 23:45

[blindswelledrat]

bad company said:

I am retired and already using income drawdown for my pension. I increased my monthly drawing to 3.6% of the fund value at the start of this year. I checked the value again today and because of the losses my drawings now equate to 3.8% of the fund value.

My shares have also taken a hit but as long as the dividends keep coming that does not worry me too much.

All in all not too bad then but like everybody else I hope everything settles soon. I'm just glad that I have been IMO fairly conservative with drawings.

Sorry, just to clarify. When you say you draw down 3.8% per month is that correct I.e 40% per year?
I take it I am missing something there

[bad company]

blindswelledrat said:

bad company said:

I am retired and already using income drawdown for my pension. I increased my monthly drawing to 3.6% of the fund value at the start of this year. I checked the value again today and because of the losses my drawings now equate to 3.8% of the fund value.

My shares have also taken a hit but as long as the dividends keep coming that does not worry me too much.

All in all not too bad then but like everybody else I hope everything settles soon. I'm just glad that I have been IMO fairly conservative with drawings.

Sorry, just to clarify. When you say you draw down 3.8% per month is that correct I.e 40% per year?
I take it I am missing something there

Sorry if that was not clear. I now draw 3.8% of the fund per year paid monthly.

Have edited the post.

Edited by bad company on Wednesday 26th August 23:47

[Ginge R]

On the plus side, I wonder how many have used the falls as the perfect opportunity to crystallise a pension under the lifetime allowance..?

[blindswelledrat]

bad company said:

Sorry if that was not clear. I now draw 3.8% of the fund per year paid monthly.

Have edited the post.

]

OUt of curiosity, (I know nothing about pensions) - is that normal or particularly frugal of you? Is there are standard percentage that the average person would draw at a given age or to people just make an arbitrary choice based on their own guess?

[Ginge R]

If you search for Monte Carlo simulation, you'll come across one relating to income in retirement, supporting the drawing of 4%. The 4% rule states that retirees with a diversified portfolio can safely withdraw 4% of their initial balance at retirement, adjusting for inflation each year thereafter. In this day and age, I'm inclined to think it could be a little lower for *most* retirees.

https://en.m.wikipedia.org/wiki/Monte_Carlo_method

[blindswelledrat]

Cheers, interesting.

Would this 4% recommendation theoretically leave your pension scheme intact (i.e. equate to the gains the fund makes) or is the theory that it will slowly diminish your fund over time?

[Mr Trophy]

Ginge R said:

On the plus side, I wonder how many have used the falls as the perfect opportunity to crystallise a pension under the lifetime allowance..?

And also capital gains

[bad company]

blindswelledrat said:

Cheers, interesting.

Would this 4% recommendation theoretically leave your pension scheme intact (i.e. equate to the gains the fund makes) or is the theory that it will slowly diminish your fund over time?

I read an article on the Hargreaves Landown web site (can't find it this morning) recommending restricting income to the 'natural yield' of 3.5 - 4.5%. So as I said I went for 3.6%, glad I kept to a modes percentage now.

[Zigster]

When I do my retirement income projections I tend to use a factor of 25:1 for income - i.e. 4%. It feels like a sensible balance - sustainable, should be able to keep up with inflation, etc.

I'd guess (GingeR probably better placed than me to confirm this) that many equity income funds have yields around that level so you could invest in those but tick the box to say pay our dividends every month rather than reinvest so the capital stays invested and increases in line with share price increases.

I also factor in the State pension kicking in at some point and smooth the income projections for that. That is, we (my wife and I) plan on retiring at about 60 but our State pensions won't kick in until 67/68 (I forget which). So for those first 7/8 years we need to take about £15k pa more from our private pensions than we will once the State pensions kick in.

[Ginge R]

Mr Trophy said:

And also capital gains

Indeed.

[Ginge R]

bad company said:

I read an article on the Hargreaves Landown web site (can't find it this morning) recommending restricting income to the 'natural yield' of 3.5 - 4.5%. So as I said I went for 3.6%, glad I kept to a modes percentage now.

For some people, especially those retiring early, it's nice to target 3.3/3.3%. You're certainly being sensible. Make sure too, your funds remain suitable.

Worth mentioning too, being the richest man in the graveyard isn't much to write home about.

[Ginge R]

Zigster said:

When I do my retirement income projections I tend to use a factor of 25:1 for income - i.e. 4%. It feels like a sensible balance - sustainable, should be able to keep up with inflation, etc.

I'd guess (GingeR probably better placed than me to confirm this) that many equity income funds have yields around that level so you could invest in those but tick the box to say pay our dividends every month rather than reinvest so the capital stays invested and increases in line with share price increases.

I also factor in the State pension kicking in at some point and smooth the income projections for that. That is, we (my wife and I) plan on retiring at about 60 but our State pensions won't kick in until 67/68 (I forget which). So for those first 7/8 years we need to take about £15k pa more from our private pensions than we will once the State pensions kick in.

The good thing for clients who provide income via dividends is that they tend not to have to worry too much about the ups and downs of share prices or what the FTSE and other markets are doing. If you have income funds you need to make sure that the dividend history and outlook is good though, most equity income fund investors reinvest income, as you're doing, so you're reliant on that curve growing. Dividend compounding can help, what's the ratio of divi v acc, and what are you targeting.. 7/8%?

[bad company]

FTSE up 225 now. WTF is going on?