Performance Update for Colm Fagan's ARF

[Louisval]

Is Colm trying to help Joe & Josephine make an investment decision? I'm not so sure.

I sincerely doubt anyone can be sure on that one!

If you are making a constant percentage withdrawal the sequence of returns does affect your cash flow, which of course matters, but it makes no difference to the final fund value.

I know. I wasn't intending to do a 4% constant withdrawal. I was intending to do a 4% withdrawal of the value at the beginning of the relevant 5 or 10 year period (as in replicate something Joe & Josephine might actually need!) This would impact the figures but I suspect not to any material degree in this sample!


@GSheehy - thanks for the clarification!

 

[Fortune]

The only reason the Managed fund outperformed the Index tracker was the huge difference in performance in 2020 (14.72% Vs 3.87%), a difference so large that I would ask to double check that original information).

My first thoughts on looking at the original table were "What index had that return for 2020?" filled by "Maybe it's a typo"

 

[Louisval]

If you are investing in an ARF and drawing down money, the sequence of returns does indeed matter. If I get a chance later, I'll model, say a 4% annual withdrawal. However, I wouldn't expect much of a difference in the key takeaway here.

@Johnny apples

I promised to try to get back to you. Over the 10 years, the impact of a fixed withdrawal of 4% of the starting sum is to increase marginally the previously stated underperformance of Colm's fund. (The increase is marginal not the underperformance - the cumulative revised under-performance over the 10 years is over 25%).

Over the 5 years, the relative impact is more significant increasing the cumulative underperformance in those 5 years from just over 26% to just under 29% (or circa 0.45% of an additional under-performance on an annualised basis).

I hope that helps with your query.

 

[Gordon Gekko]

Well Colm was actually beating both the other funds right up until 2024 (albiet with more risk).
My point is that Colm overall approach is correct, but for the average investor you can optimize it to be even better.
Paraphrasing, but I think Gordons point is that Colm is a "Fool" for even trying to pick himself. But the reality is that Colm is far better off than the vast majority of ARF investors.

Colm is in the right forest and Gordon is saying he's stupidly picked the wrong trees. But most everyone else is not even in the forest.

Possibly, but that isn’t really the point (i.e. comparing other approaches, e.g. being 100% in cash with Colm’s approach). It’s really about the time cost, the increased risk, and the ‘proof of the pudding’ in terms of the real world outcome. Colm is wasting his time and setting a bad example for others because stock-picking in your own ARF in a concentrated manner is madness. He’d be better off lying on a beach with his ARF 100% invested in Zurich’s International Equity fund at 0.5%.

 

[Duke of Marmalade]

I don't really follow my own ('umble) ARF that closely but seeing that I have missed some juicy returns has unsettled me. So I did a check against Colm's ARF and what I would assume to be the more typical popular choices in practice. Cumulative over the 5 years to end 2024 I get:

Colm's ARF (DIY) 42.5%
Duke's ARF (Irish Life) 44.5%
Zurich Prisma 3 19.9%
Zurich Prisma 4 40.9%
Zurich Prisma 5 66.3%

My slight edge over Colm is within the margin of error and is due to Colm's relatively poor 2024. For avoidance of doubt I wouldn't have the stomach or the patience, skill or luck to do DIY. The thought of a major component of my investments falling by 20% in one day (when markets are otherwise calm) makes me shudder. So whatever the reaction of Joe and Josephine, Colm's frank and informative diary has convinced this 'umble duke not to go there.

 

[Duke of Marmalade]

@Johnny apples

I promised to try to get back to you. Over the 10 years, the impact of a fixed withdrawal of 4% of the starting sum is to increase marginally the previously stated underperformance of Colm's fund. (The increase is marginal not the underperformance - the cumulative revised under-performance over the 10 years is over 25%).

Over the 5 years, the relative impact is more significant increasing the cumulative underperformance in those 5 years from just over 26% to just under 29% (or circa 0.45% of an additional under-performance on an annualised basis).

I hope that helps with your query.

I don't doubt your conclusions but do you mind sketching the methodology you used. @Gordon Gekko need not bother to read any technical stuff.

 

[jasdpace@gmail.]

Can't quite remember why I chose a High Dividend fund. I suppose it is down to my three rules for choosing investments: Tax, Tax and you guessed it. High Dividend shares should stand at a small discount because in general they are subject to higher taxation and so that should be a free lunch in an ARF. Seems to have cost me about 10% in 2024

Can you explain why you think this should be the lunch on the house please? I would have thought that High Dividend funds within pensions were generally tax inefficient especially for US shares.

 

[Duke of Marmalade]

Can you explain why you think this should be the lunch on the house please? I would have thought that High Dividend funds within pensions were generally tax inefficient especially for US shares.

I haven't thought it through to any great extent and was just wondering why I went for High Dividend. In general dividends are treated more unfavourably than capital gains for tax purposes. But in a ARF wrapper there is no difference so if there is a discount because of general taxation it is a "free" discount in the ARF. For example, if I were to DIY my ARF I would fill it with high yield stocks like Phoenix with double digit yields. I certainly did not develop this hunch to the detail of how US shares would be impacted. Or maybe I was just persuaded by the term "High".

 

[jasdpace@gmail.]

I thought that I read/heard somewhere that the concept that income and growth from pension funds is tax free needs to be qualified somewhat.

Specifically, Dividend Withholding Tax (DWT) applies in certain countries. In some of these countries, it is possible for the pension fund to reclaim the withheld tax but in other countries (like the US), there's an amount of the retained tax which cannot be reclaimed. That's why I was wondering about tax-saving element of your strategy. (Others may be more qualified than I to comment on the merits of high dividend strategy more generally). If you hadn't been so nasty to Gordon there, he'd probably take the time to explain the implications of DWT within pensions in more detail!

 

[Gordon Gekko]

Another reason for publishing is to expose the price gouging in this market. My ARF provider does an excellent job. Nevertheless, I think they grossly overcharge for what is essentially basic bookkeeping and payroll.

This is oversimplisitic and ignores the regulatory landscape. Qualifying Fund Managers aren’t two men and a dog doing ‘basic bookkeeping and payroll’.

The two biggest risks you’re ignoring are:

1) The risk of the lowest cost provider collapsing or perpetrating some sort of fraud against you; people should view the regulatory ‘home’ for their pension or ARF as very serious stuff; cost shouldn’t be the main driver.
2) Your investment approach is, best case, costing you money and, worst case, will blow-up your ARF. My sense is that you’ve been lucky to have ARF’d right when the world started to recover after the GFC.

For the avoidance of doubt, I enjoy your contributions and you’re clearly an extremely intelligent person. I just disagree, fundamentally, with your views on certain matters.

 

[ClubMan]

and, worst case, will blow-up your ARF.

Have to admit that I misread that first time...

 

[Duke of Marmalade]

I thought that I read/heard somewhere that the concept that income and growth from pension funds is tax free needs to be qualified somewhat.

Specifically, Dividend Withholding Tax (DWT) applies in certain countries. In some of these countries, it is possible for the pension fund to reclaim the withheld tax but in other countries (like the US), there's an amount of the retained tax which cannot be reclaimed. That's why I was wondering about tax-saving element of your strategy. (Others may be more qualified than I to comment on the merits of high dividend strategy more generally). If you hadn't been so nasty to Gordon there, he'd probably take the time to explain the implications of DWT within pensions in more detail!

So I was wondering were you trolling me. It turns out you were. I thought you were better than that.
I haven't a clue about DWT. GG is pleased.

 

[jasdpace@gmail.]

I don't understand your problem, Duke. No matter. Maybe go for a walk around the block?! Your choice of vocab seems a bit offensive also.

I just rang my mate in the pensions world who explained all things DWT in the context of Irish pension funds to me! He was surprised that you didn't take this into account when modelling the AE scheme or that you don't remember so doing? Seems like a fair observation to me.

 

[Brendan Burgess]

temporarily closed for review by mods