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Reducing the Risk level of my Retirement Portfolio

Including Financial Independence and Retiring Early (FIRE)
Stanley117
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Reducing the Risk level of my Retirement Portfolio

#133712

Postby Stanley117 » April 21st, 2018, 11:01 am

I am just retiring with the following pension and investment portfolio :-
Age : 64
Pension – Occupational DB pension £18K pa (index linked with Widow pension) plus the state pension to come in 2 years time.
S&S ISA - £500K - 90% Equity Etf (VWRL) / 10% Investment Trust NYCF
SIPP - £250K - 90% Equity Etf (VWRL) / 10% Investment Trust IPE
Cash ISA – £ 40K
Emergency Cash – 20K
House Value - £440K (no mortgage)

My Wife is Age 57 – She currently has no ISA or SIPP and is carrying on working part-time earning about £10 K pa. She does have several small DC pension amounting to about £80K .

My question is what is the best way to reduce the risk level of my portfolio. (I assume means holding more bonds)
The platform I use has a capped charging structure for shares, ETFs, ITs (£50 pa max) and a 0.45 % uncapped % fee on funds.
I feel my ISA and SIPP portfolio which are almost all equity (90% in Global Equity Etfs) are quite high risk for my age.
My question is – can I effectively introduce Bonds into my portfolio to reduce the risk using just Bond ETFs or ITs. I could easily use Bond Funds (like Fidelity Money builder or M&G Strategic Corp Bond) but I would have to pay the 0.45 % uncapped platform fee on these aswell
My platform does not have any individual Bonds but all of the most common Bond ETFs – (ERNS, IS15, ISXF, SLXX, IGLS, VGov, etc) as well as most investment trusts.

My question is – Can I de-risk my ISA portfolio using a selection of ETFs and ITs ?
Is it better to continue building my SIPP and live off my pension and ISA Dividends for the new few years while my wife is still working or is it better to crystallise the SIPP now?
(We don't have any expensive retirement plans and my wife will probably carry on working part-time for the next few years while I do DIY projects on the house and garden with the occasional holiday etc.

Alaric
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Re: Reducing the Risk level of my Retirement Portfolio

#133759

Postby Alaric » April 21st, 2018, 4:41 pm

ap8889 wrote: What kind of emergency are you anticipating that requires 60k to resolve?


Investment considerations aside, you could also finance emergency spending if you have credit cards with high enough credit limits. Given that you can sell investments with the click of a mouse and transfer the proceeds with another click, you refinance your current account in enough time to pay off the resulting credit card bills.

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Re: Reducing the Risk level of my Retirement Portfolio

#133778

Postby GeoffF100 » April 21st, 2018, 6:12 pm

Your cheapest option appears to be Lyxor FTSE Actuaries UK Gilts (GILS) OCF 0.07%:

http://www.lyxoretf.co.uk/en/retail/pro ... 943090/gbp

Lyxor also does short dated gilt and index linked gilt ETFs, with the same OCF. I am using the Vanguard Global Bond fund, which is hedged into GBP, but that is an OEIC, and would be far too expensive with your fees.

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Re: Reducing the Risk level of my Retirement Portfolio

#133804

Postby TUK020 » April 21st, 2018, 8:54 pm

Your cash buffer is your 'de-risk''strategy
You want to avoid selling assets in a market downturn, but the cash gives you that insurance.

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Re: Reducing the Risk level of my Retirement Portfolio

#133811

Postby GeoffF100 » April 21st, 2018, 9:18 pm

It is worth pointing out that VEVE plus about 10% VFEM is equivalent to VWRL, and cheaper. Buying the appropriate weights for individual regions is cheaper still, but more cumbersome.

Stanley117
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Re: Reducing the Risk level of my Retirement Portfolio

#133814

Postby Stanley117 » April 21st, 2018, 9:32 pm

TUK020 wrote:Your cash buffer is your 'de-risk''strategy
You want to avoid selling assets in a market downturn, but the cash gives you that insurance.


Thank you for all the replies.

Yes I have been holding £40K in a Cash ISA plus £20K emergency cash as a sort of cash buffer instead of holding high grade bonds. I agree that with my £18K pa pension income this cash buffer should get me through a downturn.

But I was thinking that at the age of 64 then I should have 64% of my investments in safe Bond like assets and 36% in risk assets.

Excluding my wife's income - if I capitalise the value of my pension (20 x £18K) = 360K + Cash savings £60K = £420K

The total of my ISA and SIPP = £750 K in equities / high yield bonds ITs (Risk assets)

So (assuming I have valued my pension correctly) I am only have about 37 % of my investments in safe Bond like assets. This is why I was looking at adding more safer Bond like assets to my ISA and SIPP in place of some of the equities.

Stanley117
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Re: Reducing the Risk level of my Retirement Portfolio

#133817

Postby Stanley117 » April 21st, 2018, 9:51 pm

GeoffF100 wrote:Your cheapest option appears to be Lyxor FTSE Actuaries UK Gilts (GILS) OCF 0.07%:

http://www.lyxoretf.co.uk/en/retail/pro ... 943090/gbp

Lyxor also does short dated gilt and index linked gilt ETFs, with the same OCF. I am using the Vanguard Global Bond fund, which is hedged into GBP, but that is an OEIC, and would be far too expensive with your fees.


Thanks for the reply.
I could add the above Lyxor Gilt etfs along with a slug of corporate bond etfs (IS15, SLXX) to replicate a sort of proxy bond fund on my existing ISA/SIPP platform.

Another alternative is to open another ISA on an OEIC friendly platform and put this years allowance in a Vanguard Bond fund. Do you know of any platforms that don't charge a high % fee for OEICs

Alaric
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Re: Reducing the Risk level of my Retirement Portfolio

#133826

Postby Alaric » April 21st, 2018, 10:36 pm

Stanley117 wrote:Do you know of any platforms that don't charge a high % fee for OEICs


As far as I am aware the Interactive Investor platform treats OEICs the same way as directly quoted investments. It will charge a commission for purchase and sale and also a regular quarterly charge, offset against commissions. What it doesn't do is make a % levy on asset value. So from a charges viewpoint, OIECs, ITs, ETFs and individual shares are all treated the same way.

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Re: Reducing the Risk level of my Retirement Portfolio

#133841

Postby Itsallaguess » April 22nd, 2018, 5:59 am

ap8889 wrote:
The large cash buffer is probably pointless in this case where sufficient DB and State provision is in place to meet the daily cost of living.

The OP will probably not be a forced seller of assets, because the bills are covered without reliance on equity returns.


If a cash-buffer 'isn't 'required' because the daily cost of living is covered by two pension provisions, then that's almost like saying that the equity investment 'isn't required' either, and it's at that point that this particular view starts to look a little shaky....

If we accept that the equity investment 'might' be required, either planned or un-planned, for 'something' at 'some point in time' (the 'something' details here are less important than the actual view that this might actually be the case...), then it's fair to say that the timing of the requirement of that equity-release to pay for that 'something' might well align poorly with market-conditions at the time, and hence the potential need for a suitable cash-buffer....

I'm really not sure that the daily cost of living being covered by the two pension provisions sufficiently releases the cash buffer requirement....

Cheers,

Itsallaguess

Stanley117
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Re: Reducing the Risk level of my Retirement Portfolio

#133858

Postby Stanley117 » April 22nd, 2018, 8:21 am

ap8889 wrote: The CAPE is high in the S&P because a great many investors agree that conditions are quite favourable for the economy.
So I feel confident to drip feed my money into equities rather than stay in cash. Cash ISAs are just about the poorest way to deploy your ISA allowance.


My cash ISA is earning a low return <1%. - The only reason continued holding the Cash ISA was because I felt it was acting like a safe bond (without any chance of a loss off capital) to compliment my Stocks ISA + SIPP which is invested in more risky Equities / HY. Furthermore many investment Guru's on TV advise on having a diversified portfolio.

I have been looking at Bond ETfs such as - IS15, SLXX and VGov but the returns have been low over the past year and many US Bond ETfs have lost Capital value with no currency hedging.
Other alternatives for the Cash ISA funds include - Defensive Investment Trusts, Income Investment Trusts, Infrastructure Inv Trusts, Ratesetter ISA, a separate Global Bond OEIC, property ETFs, another equity ETF, etc ?

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Re: Reducing the Risk level of my Retirement Portfolio

#133870

Postby tjh290633 » April 22nd, 2018, 9:33 am

ap8889 wrote:Peak to trough the Wall Street crash in 1929 was 89%. Cash would have been great over that worst case period. In the vast majority of other periods cash was a poor choice.

What are the chances of both a similar big crash and the individual becoming a forced seller coinciding exactly in time? Here, I submit, pretty slim due to the secure income he has combined with his wife's earning plans. The chance of a similar crash seems low as energy is currently abundant, peace is largely prevalent, and the Western populace free to indulge in consumption. The CAPE is high in the S&P because a great many investors agree that conditions are quite favourable for the economy.

So I feel confident to drip feed my money into equities rather than stay in cash. Cash ISAs are just about the poorest way to deploy your ISA allowance.

1974-5 was a similar sharp fall, although the cause was different from 1929. The oil crisis in fact. Apart from the fall in share price, most companies sailed through unaffected and panic selling did no good. Recovery from the low point was fairly rapid.

Income flow is the key, not the value of capital.

TJH

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Re: Reducing the Risk level of my Retirement Portfolio

#133877

Postby Alaric » April 22nd, 2018, 10:01 am

tjh290633 wrote:1974-5 was a similar sharp fall, although the cause was different from 1929. The oil crisis in fact. Apart from the fall in share price, most companies sailed through unaffected and panic selling did no good. Recovery from the low point was fairly rapid.


Had they existed then with their current rule set, I wonder how the regulators of today would have coped with the financial reporting at 31st December 1974 for insurance companies. There was no "mark to market" so it remained possible to report assets at book cost rather than the then much lower market values. Such was the rebound in the early months of 1975 that a Company, forced to report as insolvent at the year end, would have made a rapid recovery by the end of March. Fortunately there were no mass withdrawals, so the depressed assets didn't have to be sold.

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Re: Reducing the Risk level of my Retirement Portfolio

#133903

Postby mickeypops » April 22nd, 2018, 1:20 pm

Hi Stanley117

There are some quite startling similarities between our situations - and a couple of differences. I'm also retiring very soon (end of this coming week!) - Mrs MP is also retiring at the same time though, so no part time income from her. We have a little more DB income than you. Our mortgage free house is worth about the same. Our SIPP / Isas / Cash add up to about the same as yours, but ours is more heavily in SIPPs and less in ISAs. I'm one year younger than you. As well as our SIPP/ISAs, we've saved up a separate cash account to "pay" ourselves our expected net state pension amount until we qualify to receive it.

I'm guessing by your account fees that you're with Hargreaves Lansdown, as are we. Our main investments within our SIPPs is a portfolio of dividend producing ITs, not dissimilar in concept from John Baron's Autumn / Winter portfolios. Some of Baron's work is free to see in the Investment Chronicle web site. The rest is behind a paywall, but you can get a week's preview for free. The ITs I hold are a mix of UK/Global equity funds, Property, and some Alternatives, which Baron refers to as "themes." I've been getting a blended yield of around 4.75% and I'm happy to live on the dividends and let the capital look after itself. An almost HYP-ish approach but with ITs instead of individual company equities.

I too wanted some Fixed Interest investments - about 20% of the portfolio value - but preferred to hold these in OEICS instead of ITs because many of the ITs I'd be interested are at a premium to NAV, there's a bid/offer spread and stamp duty to contend with, and the capital value is somewhat at the whim of Mr Market. I'm happy to accept these factors in equity ITs etc. but for the de-risking attributes I'm looking for in bond/debt funds I'd rather not contend with this. Also, dividends from FI funds are classed as Interest and not Dividends and so are subject to standard rates of income tax after the £1K allowance, and not the reduced 7.5% tax on divis. So, I decided to use up our ISAs allowances for our FI funds.

My solution to the fee issue with HL, whereby the costs for ITs is fixed but open ended with OEICs/UTs was to transfer our ISAs to iWeb and hold the FI funds in there. There's a £25 account opening charge, and a £5 fee to buy funds, but then there's no charge at all to hold the funds in the ISA thereafter.

So, in a nutshell, 80% of our investment "pot" (aside from a bit of cash reserves) is in ITs within HL SIPPs, and 20% in fixed interest OEICs within our iWeb ISAs.

I hope this is of interest. Happy retirement!

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Re: Reducing the Risk level of my Retirement Portfolio

#133915

Postby mickeypops » April 22nd, 2018, 2:06 pm

ap8889 wrote:Great post mickeypops, good practical stuff.
It seems you have a higher equity allocation than Stanley currently.


Thanks ap8889. I'm happy at 80/20 - I don't intend to "glidepath" more heavily into bonds as I get older. I'm happy to live off the dividends and our other income. The 20% in bonds is purely for insurance in case something unforeseen occurs - my natural instinct would be to go 100/0, but I haven't quite got the nerve for that!

MP

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Re: Reducing the Risk level of my Retirement Portfolio

#133916

Postby Alaric » April 22nd, 2018, 2:19 pm

mickeypops wrote: Also, dividends from FI funds are classed as Interest and not Dividends and so are subject to standard rates of income tax after the £1K allowance, and not the reduced 7.5% tax on divis.


Whilst there are numerous fixed interest ETFs and OEICs, fixed interest ITs are few. There was a thread a little while back which tried to identify some.

Property funds (REITs) are a different animal again with their dividends (PID) outside the £ 1k allowance.

REIT = Real Estate Investment Trust
PID = Property Income Distribution

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Re: Reducing the Risk level of my Retirement Portfolio

#133919

Postby mickeypops » April 22nd, 2018, 2:37 pm

According to Trustnet, there are 37 Fixed Interest Investment Trusts, but some of them are rather specialised and best left to experts I think!

John Baron, in his portfolios, includes the likes of:

New City High Yield
Invesco Perpetual Enhanced Income
TwentyFour Select Monthly Income
Henderson Diversified Income;

All have yields north of 5%, but the buyer has to accept the vagaries of the bid/offer spread, Stamp Duty, NAV premia, and market prices, which is why I decided to use OEICs/UTs for my fixe interest allocation.

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Re: Reducing the Risk level of my Retirement Portfolio

#133943

Postby Stanley117 » April 22nd, 2018, 5:48 pm

mickeypops wrote:According to Trustnet, there are 37 Fixed Interest Investment Trusts, but some of them are rather specialised and best left to experts I think!

John Baron, in his portfolios, includes the likes of:

New City High Yield
Invesco Perpetual Enhanced Income
TwentyFour Select Monthly Income
Henderson Diversified Income;



Thankyou all for your excellent replies !

@mickeypops
Like you have done in the past -I am now thinking that if I transfer my Cash ISA to iweb I could then put my fixed income in there in the form of OEICs. This would also reduce the amount of cash I have earning < 1% as my instant Cash ISA rate is very low. I was wondering what fixed income OEICs do you and other readers use - Geoff100 said he uses Vanguard Global Bond Fund which is hedged to GBP - I will take a look at this ?

With regard to John Baron portfolio Fixed Income choices above - I assume most of these would be classed as 'High Yield' and could behave a bit like equities in an stock market downturn - Do any readers have any experience of these fixed income ITs. ?

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Re: Reducing the Risk level of my Retirement Portfolio

#133959

Postby mickeypops » April 22nd, 2018, 7:15 pm

Hi Stanley

I still look to earn a bit of income from my bond OEICs in my ISA. I invest mostly in Strategic Bond funds in the hope that the managers can steer their funds through the risk of higher interest rates. I’ve got GAM star credit opps, Royal London Sterling Extra Yield, Henderson Fixed Interest Monthly income and TwentyFour Dynamic Bond.

The capital can still see some volatility of course, but I don’t intend to have to sell - only if something unexpected occurs.

MP

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Re: Reducing the Risk level of my Retirement Portfolio

#133989

Postby vrdiver » April 22nd, 2018, 10:35 pm

Hi Stanley,

Mrs VRD and I retired, aged 50, four years ago (ish). We currently have no fixed interest, preference shares or bonds. Our income comes from HYP type portfolios, with a cash buffer, The HYP dividends are more than we spend, so the HYP investment continues to grow.

The plan is that the HYP will (with 25% of the dividends reinvested) grow its yield faster than inflation. The cash buffer (3x annual spend) earns a little bit of interest (or premium bond prize money) but its purpose is to ensure a hiccup in the dividend flow doesn't become a catastrophe.

Since we live off the dividends, we don't really care about the capital values on a day-to-day basis. Provided the dividends meet our income requirements, the capital value fluctuations are just noise. The real enemy is inflation. It's fear of inflation that keeps me in equities and out of fixed interest type investments. If inflation rises, I expect dividends to keep pace, albeit in a rather lumpy progression.

When you look at derisking your investments, ask what the risk is that you want to mitigate? Also ask, what cost is acceptable? I.e. if you were to invest in bonds today, would 30% of your portfolio in bonds provide the protection you want, or would it still be a disaster if your risk materialised? If the risk doesn't, would 30% in bonds be such a large drag on your overall performance that you would consider them "too expensive"?

On the HYP board, there are discussions from time to time about what sort of risks and mitigations a HYP investor should think about. Needless to say, these usually involve a market "crash" in terms of dividend payout, so the mitigation is to have an excess dividend income (so that if it shrinks for a while, you will still have enough income) and a cash buffer (so that if the dividend income shrinks to less than your needs, the cash buffer can be drawn on so as to avoid being a forced seller in a depressed market).
Typical values discussed might be a 25 - 33% excess dividend stream (i.e. spend £3 and save £1, or spend £2 and save £1) and a couple of years of planned expenditure ("salary") held as cash or near-cash.

With your equity portfolio invested in ITs, if the IT is holding back some of its earnings in order to smooth payments through good times and bad, you have a duplication of the mitigations talked about in the previous paragraph. You may like the belt-and-braces, or you may choose to reduce the cash buffer / increase the % of dividend income available to spend (as opposed to reinvest).

Other investors will have different defensive strategies, but with your early retirement and mix of DB and equity exposure, I'd be more worried about inflation than market crashes, as markets recover, inflation rarely reverses.

VRD

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Re: Reducing the Risk level of my Retirement Portfolio

#134050

Postby GeoffF100 » April 23rd, 2018, 9:40 am

Stanley117 wrote:Do you know of any platforms that don't charge a high % fee for OEICs

iWeb does not have any platform fee for holding OEICs. Vanguard charges 1.5% capped at £375, but that is not competitive with iWeb, except for small accounts.


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