How To Stop Worrying

[uryjm]

I just wondered how people approach looking into the future without worrying? One of my main pensions is all sitting in a Vanguard LS 80/20 fund, but I fret that I should take a more conservative approach. A lot of the fund is sitting in US equities and surely that market is going to tank at some point? Mind you, I thought that when Trump was elected, consequently sold out of a lot of US Index trackers I had, and wept as the Dow subsequently took off.
I tell myself that over the years a "do nothing" strategy has worked really well for me (Trump bet excepted) and that I should continue with it. Therefore I should not put 20% of my pension into gold, despite a lot of advice I see saying that this could be a sensible move.
The other main mental strategy I adopt is to tell myself that I will never need my whole pension at one go. I lived through 2008 without having to cash any investments, and could do so again. But should I keep a year's expenses in cash just incase we go through that kind of bust again?
So how do other Fools hedge against an uncertain future and sleep peacefully at night?

[Itsallaguess]

I lived through 2008 without having to cash any investments, and could do so again.

But should I keep a year's expenses in cash just in case we go through that kind of bust again?

I'm still working, so have yet to really implement any real-world retirement strategy, but I certainly can't contemplate a future strategy that doesn't have at least two years worth of cash, or near-cash equivalent, to help get through what are probably quite inevitable periods of heavy, and possibly prolonged, market turbulence.

Without doing something like that, you're relying on luck, and that's where the worry comes in. Taking the vast majority of that luck-based worry away by taking better control of that potential situation via the use of a cash back-up is a key part of my own plans.

It might seem like a relatively 'expensive' use of cash or near-cash, in terms of the potential loss of investment return on that cash, but that's because it's an insurance, and insurance costs money....

Cheers,

Itsallaguess

[Dod101]

I have about 3 months or so of living expenses in hand most of the time but I also have more than three years in N S & I Index Linked Bonds. I live entirely off my income from my investments but even in 2008 never touched any of these reserves. Dividends did not stop in 2008. In some cases individual companies cancelled their dividends; others reduced them but I have sufficient discretionary spending that I can reduce it by at least one third if I have to and that will normally see me through.

My concern is not the actual investments my concern is the platform(s) on which they are held. I currently have two and am debating about introducing a third.

Dod

[vrdiver]

Unlike IAAG, (but like Dod) I have retired.

We live off of the natural yield of our portfolio, but keep three years of income in cash or near cash. Unlike Dod, I don't have index-linked bonds, so I am well aware that cash gets burned by inflation.

Mrs VRD and I use a mix of savings accounts and premium bonds to minimise the impact of inflation on cash (including a number of regular saver accounts that pay higher rates to existing customers - e.g. HSBC, Santander etc) but there is still an opportunity cost compared to investing in say, City (CTY), but it means we don't expect to be forced sellers in a market crash, and that helps me sleep at night.

The three years cash also doubles as a savings scheme for specific planned purchases. E.g. I will want to change the car shortly and have always paid in cash rather than borrow. I'll use the cash-on-hand to finance the car, assuming I see no imminent crash (which would be a valuable skill if I had it!) with a view to replenishing the cash asap from dividend receipts (we only plan to spend 3/4 of received dividends, the other 1/4 being reinvested or used to replenish cash).

As a relatively unsophisticated investor who lives off of dividends, I don't worry about capital value overmuch, as I won't be selling shares to provide income. History shows that dividends are much less volatile than share prices, which again reduces stress (especially compared to the TR investor who may increase their return, but has to work harder/make better decisions).

As Dod mentioned, there is also discretionary spending in the budget that could be reduced in a real economic downturn, should it be required.

There is always a slew of tipsters telling me "gold is good", or "America is Great" and now is the time to fill yer boots, but I just try to keep a diversified portfolio. Following fashion in finance has never worked for me, so I ignore it.

It also helps that I play with spreadsheets to walk through such events as a 50% dividend cut, followed by x years to recover so that I can see how the numbers might play out.

VRD

[Dod101]

Actually we must be doing something right because VRD and I have settled on very much the same pattern for living off our income from our investments. My Indexed Linkers go back a very long way and you know even at RPI plus 0.1% per annum, it mounts up. They must be the bargain of the century (no wonder they were withdrawn) because you get a guarantee of more or less keeping pace with inflation and there is no income tax on any of the interest. Like VRD I buy a new car every few years and also pay cash sometimes using an index linker for at least some of the payment.

I may say that I retired before (well before) 65 and so when my State Pension was paid I was well used to living without it. I opened a separate savings account and the SP goes there to be used as my travel fund.

Dod

[xxd09]

73-16 years retd- you never stop worrying-it’s the human condition that keeps you alert and alive BUT Stress is a killer
If losses trouble you then your Asset Allocation is too equity based
80/20 is going to take a big hit in a downturn
If you are young -that’s OK cos time will restore and improve your returns
If you are nearing retirement then not such a great Asset Allocation unless you have not made the amount you need
A rule of thumb -age in Bonds is a guide-helps you sleep at night
Once retired-most would keep a year or two,s expenses in cash or other liquid assets
You do not want to be selling Capital in a downturn
Currently I am 30% Equities /65% Bonds/5% Cash-having made my pile
xxd09

[Dod101]

I suspect that everyone's definition of 'having made their pile' is different. To my parents I probably have but I must say I do not feel very well off. Comfortable and able to spend pretty much what I want but my needs are modest. Anyhow whether 'made my pile' or not I am happy to stay mostly in equities.

Dod

[tjh290633]

I think the missing word here is "diversify". I would be most unhappy having it all in a single security, even if it is managed by the world's largest fund manager.

As has been said many times before, it is the adequacy, security and growth of income that matters in retirement. Nowadays cash brings in virtually nothing, many fixed interest securities are on negative redemption returns, which leaves property and equities.

You need a cash reserve, which is solely a safety net. Your income needs to grow faster than inflation. Foreign income is affected by exchange rates, which may or may not be an advantage. Many a widow, whose husband left her with a fixed pension to last 30 years, possibly, found that inflation robbed her of most of it.

I say again, DIVERSIFY.

TJH

[77ss]

I suspect that everyone's definition of 'having made their pile' is different. To my parents I probably have but I must say I do not feel very well off. Comfortable and able to spend pretty much what I want but my needs are modest. Anyhow whether 'made my pile' or not I am happy to stay mostly in equities.

Dod

Yes. I remain almost fully invested in equities - just 4% in cash/cash equivalent. A lot depends on your other sources of income (if any). Along with the state pension I have final salary pensions which would see me through a down-turn. At the very worst, I might have to curtail my taste for foreign travel - and having done a great deal of that since retirement a few UK holidays would do me no harm. As another poster has said, look at the effects of a serious cut in your dividend income. A couple of years ago I decided that I could ride out a 30% fall for 3 years without needing to do anything other than moderate my expenditure.

Things could go pear-shaped of course, but there is a limit to how much provision one can or should make for armageddon!

[AsleepInYorkshire]

I just wondered how people approach looking into the future without worrying? One of my main pensions is all sitting in a Vanguard LS 80/20 fund, but I fret that I should take a more conservative approach. A lot of the fund is sitting in US equities and surely that market is going to tank at some point? Mind you, I thought that when Trump was elected, consequently sold out of a lot of US Index trackers I had, and wept as the Dow subsequently took off.
I tell myself that over the years a "do nothing" strategy has worked really well for me (Trump bet excepted) and that I should continue with it. Therefore I should not put 20% of my pension into gold, despite a lot of advice I see saying that this could be a sensible move.
The other main mental strategy I adopt is to tell myself that I will never need my whole pension at one go. I lived through 2008 without having to cash any investments, and could do so again. But should I keep a year's expenses in cash just incase we go through that kind of bust again?
So how do other Fools hedge against an uncertain future and sleep peacefully at night?

I can't convince myself that I am about to be of any help.

I've had serious [mental] health issues for four decades. They became more debilitating with time. There wasn't a part of my world that didn't completely collapse but in particular and focusing on your comments I was unable to devote enough funds to my pension. However in 2016 I was correctly diagnosed with severe obstructive sleep apnea and my life has slowly but surely turned around.

And I worry. I don't have sufficient funds to support an active retirement. It's correct to worry. But not to the point that it impacts upon my every day life. I have control over that now. If I find myself worrying I employ coping strategies.

1. I box the thoughts. Yup I put 'em in a box and put the lid on it
2. Sometimes if the box doesn't hold them shut I sit with my spreadsheet for 30 minutes and remind myself of my pension recovery plan
3. If that doesn't work I find something to do to occupy my mind
4. And on the odd occasion I will remonstrate with those thoughts and argue with them out loud

There are two things I know beyond any reasonable doubt

1. I have no control over the markets
2. I cannot accurately predict a market fall

So I box those thoughts. I put a lid on them. They remain boxed and I never have to argue with them.

However, before buying a stock I need to steady my nerves and that often means employing a raft of coping strategies.

I am among some people who share similar methods of coping

1. Stephen Gerard
2. Victoria Pendleton
3. The 2012 UK Olympic Cycling Team

The above received one on one support from Steve Peters. I bought his book. It's not a cure all. It helps me still.

It's called The Chimp Paradox.

AiY

[Wuffle]

Having had to wear my black suit more than I wanted this year, always be aware that you may be looking in the wrong place!

Wuffle.

[vrdiver]

I think the missing word here is "diversify".

Actually, I think you're missing two other words:

Diversify, diversify, DIVERSIFY!

VRD

[James]

I think the missing word here is "diversify".

Actually, I think you're missing two other words:

Diversify, diversify, DIVERSIFY!

The lack of arithmetical skills among a community of purported financial experts is appalling.
That is three other words.

[AsleepInYorkshire]

I think the missing word here is "diversify".

Actually, I think you're missing two other words:

Diversify, diversify, DIVERSIFY!

The lack of arithmetical skills among a community of purported financial experts is appalling.
That is three other words.

Hi James,

Breathe in as this is going to sting

The first "diversify" is the original "diversify. The following two are the additional "two".

You may of course choose your penance but I recommend you wear your camel hair shirt tomorrow

AiY (Or should that be SiY -Smug Stupid in Yorkshire )

[James]

Actually, I think you're missing two other words:

Diversify, diversify, DIVERSIFY!

The lack of arithmetical skills among a community of purported financial experts is appalling.
That is three other words.

Hi James,

Breathe in as this is going to sting

The first "diversify" is the original "diversify. The following two are the additional "two".

You may of course choose your penance but I recommend you wear your camel hair shirt tomorrow

AiY (Or should that be SiY -Smug Stupid in Yorkshire )

Look, I know they speak funny oop t'north, but where English is still spoke proper the modifier applies to everything after the colon. You have already indicated the first diversify by stating that the missing ones are "other". You then list not two, but three "other" words. We now have the original diversify, plus diversify,diversify, diversify, for a total of four diversifications. At that rate, you may as well just buy a tracker.

[Gan020]

Less risk = greater chance of capital preservation = lower returns.

So, to sleep well and night and not worry I am slowly having to come to terms with accepting lower returns.

[tikunetih]

Less risk = greater chance of capital preservation = lower returns.

So, to sleep well and night and not worry I am slowly having to come to terms with accepting lower returns.

eg.

Over the first decade of my RE when very pro-actively managing my portfolio for maximum return I achieved an XIRR of ~25.5% nominal.

"Job done" and "itch scratched", at that 10 year mark I transitioned to an "all-weather, sleep like a baby" regret-minimization portfolio requiring minimal-to-zero input from me for lengthy periods of time, returning ~9% XIRR nominal to-date (similar timescale).

[kempiejon]

Less risk = greater chance of capital preservation = lower returns.

So, to sleep well and night and not worry I am slowly having to come to terms with accepting lower returns.

Another plan is to accumulate more such that your income exceeds your needs and have discretionary expenditure that can be reduced. My plan like other have mentioned is to have a healthy buffer of several years' worth of expenses as cash to ride out a down turn. If I have 3 years of expenses in cash or cash like vehicles such as premium bonds then if my investment income takes a hit of say 50% and gradually recovers to pre hit level I'll hopefully be OK for at least 6 years.
Of course inflation becomes a big risk over long time spans and I'm not sure how best to mitigate this, certainly not cash, so equity investment or excess income.

[Joe45]

My policy is to allocate my investments 60:35:5 equity:bond:cash and re-balance periodically.

When equities are down, in all probability bonds will be up so in the event of a downturn, the system will require that I sell bonds.

In the unlikely event that both bonds and equities are down then this approach will automatically draw from the cash pot. The only real danger is if both bonds and equities are down for a prolonged period and the cash runs out. I don't see this scenario as very likely, but if it does occur, my cash pot will allow 3 years of non-discretionary spend.

This approach keeps my cash holding to a minimum.

[Pastcaring]

Very easy,aim for a high income.This gives a good margin of safety as the book says.

Don' t listen to people that say " I don' t want to move into the next tax bracket,I'll pay more tax"

I pay six figures a year in tax,a wonderful problem to have.If you ever want to have a problem that is the one you want.

Try to replace your income from either dividends or rent or a mix of both.Take pensions as the icing on the investment income cake.

Dividends have been remarkably stable and increasing since 2009,as well as the decades before that .

Excess income goes into DRP, automatically increasing income every year even if dividends are stable.

I run a very concentrated portfolio,always have ,always will.

Don' t worry about the capital component if it is large.Say the Walton's have 1.5 billion in WMT shares,a move of $1 means going up or down $1.5 billion daily,nothing to worry about,dividends keep coming.
I can go up or down by average annual income in a 10 day period,doesn't change dividends in the slightest.

As for rebalancing,ridiculous,sell shares that perform well to buy more of the shares that didn' t perform well.Mad as hatters.

Aim for the stars,if you hit the moon you'll still be happy.

If you want to follow the crowd and get average returns minus costs ,then get a well diversified portfolio.You'll need to spend £50K tomorrow and if you can average 8% p a for the next 27 years, after costs ,you' ll have £400K.

Should the crash happen in the 27th year,or close to that ,then you'll have a lot less than 400K.Then you'll realise how important reasonably stable dividends are.