I know Colm Fagan is currently on a mission to persuade folk like this to be 100% equity and his arguments are powerful - I just don't have sufficient faith myself to promulgate that message.
The Duke is right: I am on a mission to persuade people to invest far more in equities than is currently the norm for ARF’s. I've been struggling to understand why I am so much of an outlier in my views; I think I have finally found the answer.
Most people think of equities as numbers that bounce around, sometimes going up, sometimes going down, often for no apparent reason. They take those numbers seriously. I don't. For me, equities are companies that I have researched and that I think represent good value in the long term. I don't particularly worry about share prices bouncing up and down; I just look at the fundamentals of the business, generally every half year after results announcements, and if things are going broadly as I had expected, then I don't give a fig for what the market says is the current value of the share.
Most people in Ireland live outside the rarefied world of finance and a significant number of intelligent, well-to-do people don't go near investment advisers, ARF’s or PRSA’s when planning their retirement . Their pension savings consist of a house or an apartment or two (or more if they’re lucky), the rental income from which they hope will generate a good income for them in retirement. I feel more akin to one of those people than to my fellow finance professionals.
My wife and I own our own home; we don't have any investment properties, but the eight shares that account for 94% of my ARF are my equivalent of rented out apartments. Those eight shares (think apartments) generate a rental income (sorry, dividend income) of between 0 (for just one of the eight, because it reinvests all the income from “tenants” into “refurbishments”, which increase the value of the “property”) and 6.5% a year. I keep only a small amount in cash (currently 4%, which is a higher than normal proportion, because one of the companies will be having a rights issue soon and I want to take up at least some of my rights).
I am obliged by law to take an income of 6% every year, but there has always been sufficient cash in the ARF to generate the required income. (I am now in my eighth year of drawdown). I don’t recall ever having to sell a portion of any of my holdings to generate the required cash. Most of the 6% comes from dividends, some from the cash balance in the account, and the remainder of the required 6% from occasional minor adjustments to the holdings; such minor adjustments are normal for an actively managed portfolio and are not done for the purposes of generating cash for the compulsory "income". In this regard, it's important to remember that shares have one big advantage over apartments: I can sell a portion of my holding in a share at any time, and at a low cost; that would not be possible for a portfolio consisting of eight apartments. My eight "apartments" are also in different "cities" (i.e. different businesses, different countries), some are up-market (low dividend yields), some are down-market (high dividend yields).
I think of quoted share prices as the equivalent of estate agents dropping notes in my letterbox every day telling me what price they would buy or sell one of my apartments for on that particular day. Most of the time, I just throw their notes in the bin; sometimes, if they quote a price that is markedly different from the one they quoted yesterday or last week, I may do the equivalent of calling around to the apartment to see if the tenants have smashed it up since I last saw it. Normally they haven't so I just go back to sleep. Occasionally, of course, there is a problem, but they are few and far between, and are more than compensated for by the attractive rental income and the growth in income as years go by.
Against that background, statements such as
100% equities is a sub optimal strategy due to volatility drag
are double Dutch, and references to
my current plan on retirement is to have roughly 15 years' worth of residual expenses in cash and fixed-income investments, with the balance (if there is a balance!) in equities.
make no sense whatsoever, nor does
It all comes down to sequencing of returns; basically, if you’re 100% invested in equities and you start drawing down from your ARF at 4% or 6% and markets tank, you have a problem, because you’re taking money out whilst the capital value of your ARF is falling and that capital never has the chance to recover.
If the property market tanks (remember that my investments are in different "countries", so we should think in terms of property markets rather than a single market) and my tenants in the eight apartments are still paying their rents on time, I don't care a whit about the market tanking; in fact, I may see it as a good opportunity to buy another apartment.