Yes I agree that would not be good. When last did markets drop 50% and take 5 years to recover?
Nicely put, Steven.Don't use growth projections to fit the income you want. Adjust your income to the volatility you can handle and afford.
The key point is that average long-term returns are only part of the picture - the sequence of returns is also critically important when you're drawing down your savings. Average long-term returns hide some pretty wild short-term swings.
I agree. That's why I wrote:Or is the reason because the market bottomed out completely in 2008
And has been recovering since in one of the longest bull runs in history
but I added thatYes, I've been lucky that the last nine years have generally seen good equity returns
Despite my advancing age, it is still the right strategy. There's been a lot of talk about the need to have a different investment strategy in the drawdown stage e.g.I still think it's reasonable to expect an average return of more than 5% a year in future by investing 100% in equities - provided you can handle the volatility
In my experience, those fears are exaggerated. In any 12-month period, only 6% (or 4%) of the fund is withdrawn; the other 94% (or 96%) remains untouched. Dividend receipts further reduce the risk of having to sell when prices are on the floor.When accumalating funds you can take the hits or ride out "mistakes" but in the drawdown stage these can put too much pressure on the pot and can in some cases lead to critical mistakes.
This is where I get back to Steven's excellent advice, which I quoted at the start of my first contribution on this topic, namely to adjust your income to the volatility you can handle and afford. I would simply have adjusted my income expectations from the fund. I would still have done better than leaving my money in bonds or cash (see below for my comment on bonds).What if you hadn't been so lucky with your timing?
Do you realise how misleading this statement is? Do you realise that government bonds have delivered good returns since 2000 for precisely the same reason that they'll deliver lousy returns in future? To explain to people not well-versed in finance, in 2000 the yield on a German 30-year bond was around 5.25%. A bond with a coupon of 5.25 a year would be priced at 100. Now, yields on 30-year bonds have fallen to zero, so you would now have to pay 257.50 (30*5.25+100) for a bond delivering a coupon of 5.25 for 30 years. Someone who invested 100 in a 30-year German government bond in 2000 would have got 5.25 every year, and could now sell the bond for 157.75 (11*5.25 +100). They would have a capital gain of 57.75% in addition to their running yield of 5.25% a year for the last 19 years. But someone starting off now can expect to earn precisely zero from that bond - and that's before paying their financial adviser for telling them that government bonds have delivered excellent returns over the last 19 years.Incidentally, a balanced portfolio of equities and government bonds would have outperformed a 100% equity portfolio over this time period - with far less volatility.
The problem is that nobody has an infinite investment horizon - hence the sequence of returns issue.So somebody sitting in equities in perpetuity
Exactly. Remember the "taper tantrum" a few years ago? There's a strong relationship between low yields and high equity valuations.But this totally unreal interest rate environment must be spilling over into other asset valuations...
The problem is that nobody has an infinite investment horizon - hence the sequence of returns issue
@Gordon Gekko
A retiree drawing down from an ARF doesn't have anything remotely like a 60 year investment horizon.
Back-testing suggests that adding an allocation to government bonds actually improves the amount that can be safely drawn down from a portfolio on an annual basis. That's important even if you view your ARF as a possible vehicle for passing wealth to the next generation because of imputed distributions.
What’s a straw-man argument?!
Your personal investment horizon has nothing to do with the appropriate strategy for an ARF, which is what we’re talking about on this thread.
At what again?!
We’re talking about managing ARFs and you start talking about investing in perpetuity!
Totally irrelevant to the topic under discussion.
I find it gas that you’re forever trying to talk about shorter investment time horizons when, in reality, most people’s are far longer than they think. A typical retiree at at 65 probably has a least a 25 year time horizon. You are a little to quick to frighten other contributors who generally have too little equity content in their portfolios to start with.
I probably have a 60 year time horizon in respect of my pension monies.
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