Reducing the Risk level of my Retirement Portfolio

[GeoffF100]

It seems to me that you end up paying a high price for, in effect, insuring against a repeat of the Great Depression.

Yes, if times are good in the future, you will have paid for insurance that you do not need. If times are bad, however, you will be glad that you bought at least some insurance. Nasty stock market accidents have been common historically, and there is no reason to believe that the future will be any rosier. At the present time, with assets prices so inflated, particularly for the riskier assets like equities, we ignore caution at our peril.

[bluedonkey]

And what was the effect on the distributions in those years?

Those numbers are harder to find, because nobody cares very much. Total return is all that matters to most people.

Terry and I must be unlike most people then! Could be right.

[GeoffF100]

In the US, the majority of the money returned to shareholders is used to buy back shares rather than pay dividends. It is not surprising that they focus on total return. The same is true of most other countries.

[tjh290633]

And what was the effect on the distributions in those years?

Those numbers are harder to find, because nobody cares very much. Total return is all that matters to most people.

On the contrary, it matters very much to those investors whose objective is to obtain income. That includes individuals and institutions like pension funds or income oriented funds.

Total return is an obsession of commentators and analysts, but in the short term can be totally misleading.

TJH

[Quint]

And what was the effect on the distributions in those years?

Those numbers are harder to find, because nobody cares very much. Total return is all that matters to most people.

Apart from those who choose to live off the dividends, of which there are a fair few on here.

[GeoffF100]

Apart from those who choose to live off the dividends, of which there are a fair few on here.

What will you all do if UK companies follow the US precedent, now that we have a dividend tax, and sharply cut their dividends and buy back their shares with money instead? Cut your standard of living? Nothing will have changed. You will be getting the same return, but you will need to sell some shares to draw the same income.

[OZYU]

Here we go, more nonsense posted against TR.

In my opinion it is much sounder to be mindful of Total Return, because, as an investor, TR is what you actually get as an investor, like it or not
.
The investor with the better TR has more options open to him/her, it is an inescapable mathematical fact.
For the young investor building his pot, a higher TR is the only thing which will matter 30-40 years down the road. The size of that pot will determine the sensible income which can be taken, if needed, in retirement.

I would say that in fact on this site too many are so HYP oriented, that they forget, or chose to forget this. Only the retiree who takes natural portfolio income and does not care to leave capital for future generations can sensibly take the view that TR does not matter.

Consider this: Investor A has had good returns and takes £50k of income, on a 5% portfolio yield. Not bad. But investor B, having had much better TR, can take the same £50k income from a 4% portfolio yield. I would contend, (having been an investor since the early 70s and running a few different profile portfolios gives me confidence in saying this, and IMHO you can only say this if you have been active doing parallel strategies, as we have been, with proper performance measurement, for decades), that investor B holds all the aces. In fact, he has got a much better chance/opportunities of serious divi growth on a portfolio overall yield of 4% than his colleague making do with increasingly dodgy stuff to maintain his 5%. He does not have to hold the possie of so called UK stalwarts who have been of late struggling to even maintain their divis (and to be honest should have cut their divis to stop harming their business in the long run, and would have done so if borrowing was not so incredibly cheap, thus making financial engineering possibe), and in my book are in fact cutters(yes RDSB, GSK, HSBA, BP, etc.. are in fact cutters of late, forget temporary FX factors), since RPI needs to be taken into account too, any divi barely maintained is a cutter IMHO.

As has been mentioned above in the thread, The UK is pretty isolated in this cult of the divi. And we are increasingly seeing our FTSE outfits adopting other approaches, such as buy backs. In the long run I think this divi culture will weaken.

I don’t believe, looking at their lifestyles, that our many retiree friends across the Globe are in the slightest difficulty using their TR inspired portfolios for income without relying on divis.

Looking back, the best investments by far that we have held have been in outfits which are mindful of leaving plenty in the pot to develop their business, if they pay a divi(and quite a few don’t) it is usually relatively modest, but often increases at a very good rate indeed. These we hold outside our HY portfolios(so we have a proper way of comparing), particularly in small Cos and in US shares, and relatively more recently technology/disruptors, and the TR has been better than the HY UK listed efforts for decades.

Ozyu

[tjh290633]

Ozyu, it has been possible to get a very good total return, up to the point where income has to be drawn, by using the high yield principles but reinvesting the dividends. In fact, for much of the time, the return has been as good as or better than following a growth model.

The point is that you build a flow of income, which is what you ultimately need, and do not have to worry about how the capital is performing. There is no need to have to preserve the capital, in order to switch into an income producing set of investments.

TJH

[Alaric]

There is no need to have to preserve the capital, in order to switch into an income producing set of investments.

It has its points in terms of planning. If you have income producing assets where you reinvest the income, you know what your income is likely to be when you cease reinvesting and spend the proceeds instead. It doesn't have to be dividend income either, the same approach could be used with Gilts or Corporate Bonds.

[xxd09]

Hi
I am with OZYU
Dividends have long been a red herring-causing more confusion for punters no doubt then exploited by members of the financial community to their own ends
Total Return is what counts-it’s an absolute truth
However for those that don’t want to run money in their old age and want to be sure-get an Annuity(very good article on Annuities on the Monevator board just now)
Retired 15 years now -made my pile-sell chunks as required and replenish float(1years income)
Withdrawals are tax free from ISAs and taxed from SIPPS (reclaim tax with HMRC P55 if required)
Works for me
xxd09

[bluedonkey]

How do you live off the total return of a property portfolio of say 4 properties?

[Quint]

How do you live off the total return of a property portfolio of say 4 properties?

Sell bits of the house each year

[Quint]

Regular income is a (tax) risk factor. If when inflation is into double digits 8% dividend yields are being hit with a 50% basic rate taxpayer tax! Ignore such historical tax rates and the gross total return illusion is that higher dividend yield apparently yielded better overall total return. However factor in even just basic rate tax and that flips around.

Total return/portfolio value does matter. More so when for whatever geopolitical reasons dividends + dividend taxation fails to provide enough income for requirements and capital has to be used - as typically capital values at such times will also be significantly down.

If it is in a SIPP you get taxed when you take the money out be it dividends or by selling units, to the tax man it is income.

[Stanley117]

I have heard many commentators on Bloomberg, TV state that the value of all assets have been increased, particularly income producing assets such as Income shares, property and Bonds due to years of low interest rates and QE.

If this is true then higher income Shares, ITs, Funds and Bonds must be particularly overvalued and will be more affected by the normalisation of interest rates and withdrawal of QE. (hopefully this will be a slow process )

This would suggest to me that a Total Return approach may be better overall as you would be holding fewer overvalued assets in your portfolio ?

[tjh290633]

I have heard many commentators on Bloomberg, TV state that the value of all assets have been increased, particularly income producing assets such as Income shares, property and Bonds due to years of low interest rates and QE.

If this is true then higher income Shares, ITs, Funds and Bonds must be particularly overvalued and will be more affected by the normalisation of interest rates and withdrawal of QE. (hopefully this will be a slow process )

This would suggest to me that a Total Return approach may be better overall as you would be holding fewer overvalued assets in your portfolio ?

So how do you identify undervalued assets?

One way is by looking at the yield, which is often higher in unloved and hence undervalued shares.

TJH

[kempiejon]

I have heard many commentators on Bloomberg, TV state that the value of all assets have been increased, particularly income producing assets such as Income shares, property and Bonds due to years of low interest rates and QE.

If this is true then higher income Shares, ITs, Funds and Bonds must be particularly overvalued and will be more affected by the normalisation of interest rates and withdrawal of QE. (hopefully this will be a slow process )

This would suggest to me that a Total Return approach may be better overall as you would be holding fewer overvalued assets in your portfolio ?

Or go one better by avoiding income producing assets until you feel interest rates have normalised and QE been withdrawn and in the meantime look for high growth non income, undervalued assets?
I have plenty of income investments and I don't mind them being under or over valued provided the income is increased. I also invest predominately for capital and for those investments I sell when I think they are overvalued, their income contribution, if any, is only of minor interest while I hold.

[Quint]

Have we not reached the stage where we can agree that there are multiple ways of reaching the same goal. At a point in time some will look to perform better than others, one strategy will suit somebody better than another depending on their investing style and attitude to risk, age, financial liabilities etc.

What is wrong with using two or more strategies to achieve your goal, often easier if you have a larger portfolio and lower living expenses.

Life would be boring if there were only one strategy to investing and everybody did the same thing. It would make forums like this redundant (as well as lots of fund managers and people who write investing books and blogs).

[OZYU]

Have we not reached the stage where we can agree that there are multiple ways of reaching the same goal. At a point in time some will look to perform better than others, one strategy will suit somebody better than another depending on their investing style and attitude to risk, age, financial liabilities etc.

What is wrong with using two or more strategies to achieve your goal, often easier if you have a larger portfolio and lower living expenses.

Life would be boring if there were only one strategy to investing and everybody did the same thing. It would make forums like this redundant (as well as lots of fund managers and people who write investing books and blogs).

I think you make very good points. Strategies success fluctuates.

We use, and have gradually increased the range as our knowledge and resources improved in the past four decades, a few strategies for various reasons. I like to pit my wits against the market(and Simon on the IC, although some of his stuff is too illiquid for me), which I do mostly in my small caps dominated trading account(second best performing of our portfolios), but we also like the steadiness of our HY ISAs, which have two strategies, hers (collectives mostly ITs) and mine(individual Cos, but lower yield than HYP, much better diversified across the market cap, because safety in the 'elephants' is a crock imho, as we have amply witnessed) . Our joint trading account is our US flavour portfolio, the best performing for a long time, but is in the process if being 'transferred' to the grandchildren. This is complemented by business investments, which are being sold too as I am reducing my load post recent bypass surgery.

What we do find out of all that is that the volatility of our overall returns(TR) is low, which we like. a fraction of the markets.

OK, I do have the time, I enjoy it, and it has not been a crime to both have studied hard and have specialisms in demand, and resulting good jobs to get us where we are having started with nothing but a fat overdraft, yes youngsters of today, us too all these years ago.

But it does get me down to keep reading on these boards about UK dominated income as the only way to skin that cat, for today's youngsters, a massive mistake looking to the next 30-40 years IMHO.

An exampe of strategies, or part strategies adapting: We read, often from TJH for example(and I have a great deal of time for TJ, we both re balance our HY efforts systematically for example, which I think is an essential way to play the in and out random nature of share popularity in an HY portfolio, and we have both kept proper performance unitised records for decades so that we can properly judge where we are at, but of course I do not agree with his HYP takes all view, the world of investing is way wider imho), that fixed interest is no good because your income does not increase, but you can make income, a lot of it if needed, out of gains. Well indeed I have little in fixed interest today, but boy in the middle of the financial crisis one could carefully pick magical yields, which on top gradually where topped up by massive capital gains, so the game was there to be played and I did. Would not touch it much now, wrong current environment, but just recently picked up a few bits of prefs for quick trading in the recent panic(just enough to cover ALL our trading and platforms costs for the last five years, I have just looked it up), but did dive into RUSP (being very familiar with the underlying Co essential role to that economy, hence probably safe from 'tit for tat' political games) at very near par at the height of the Ukraine crisis, IRR in the pink, of course. Likewise most HYPers would not have touched MGHI when it was being offered at sale price on a near 12% (increasing divis to boot) yield, but that is another story which required knowledge of splits....

Having many approaches, if you have the inclination, resources enough to make investment cost effective, and the time does work imho. It makes your returns less volatile, and does have the potential to increase them if properly handled.

Ozyu

[Itsallaguess]

OK, I do have the time, I enjoy it, and it has not been a crime to both have studied hard and have specialisms in demand, and resulting good jobs to get us where we are having started with nothing but a fat overdraft, yes youngsters of today, us too all these years ago.

But it does get me down to keep reading on these boards about UK dominated income as the only way to skin that cat, for today's youngsters, a massive mistake looking to the next 30-40 years IMHO.

But other people might not 'have the time', and are quite happy with the returns being generated with their HYP-like income.

The suggestion that these are often 'UK-dominated' returns doesn't give enough credit to the wider global reach of many of the larger FTSE HYP incumbents.

I think we see quite often that people point at the relatively simple strategy being employed by HYP-like approaches, and highlight that people could 'do better', but then fail to suggest a method by which to do so that is as simple to both start and maintain through many years and market-cycles.

When you suggest that people think this is 'the only way to skin a cat' it's quite interesting, as I really don't see that argument being made.

What might be seen to be suggested, is that the returns are adequate for the effort put in, and to suggest that better returns could be made by making more effort is like suggesting to a fell-walker that they might get back to their car quicker if only they were to start jogging....

Cheers,

Itsallaguess

[GeoffF100]

I think we see quite often that people point at the relatively simple strategy being employed by HYP-like approaches, and highlight that people could 'do better', but then fail to suggest a method by which to do so that is as simple to both start and maintain through many years and market-cycles.

Buy Vanguard Lifestrategy and go to sleep is one suggestion that people have made. Much easier than running a HYP.