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Retirement imminent - diversification dilemma

General discussions about equity high-yield income strategies
Makems
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Retirement imminent - diversification dilemma

#169137

Postby Makems » September 26th, 2018, 12:32 pm

I have a significant 25 share HYP split between my SIPP and ISA which currently is yielding a little over 5%.
Once I retire at the end of November my employer’s group personal pension will become available and my intention is to transfer it into my SIPP. The amount is a significant 6 figure sum and is equivalent to approx 20% of the current SIPP/ISA total.
I have calculated I need a yield of 4% to maintain my current level of income when also taking account of this additional money and my old age pension.
I therefore have a big decision to make - one option is just to add a few more shares to the HYP and/or top up existing shares. However, I am concerned that having all my eggs in a UK based HYP basket (well diversified though it may be) is just too much. I cover most sectors so additional shares will only limit individual share risk and not reduce sector risk or UK economy risk.
I am wondering therefore if I should consider deploying the additional money in income focussed ITs or ETFs that would give me exposure to the markets in Europe, America and the Far East.
What advice would the wise heads here have to share that would help me with this dilemma?

Ps I am not sure if this is the right board so if this thread should be elsewhere mods please feel free to move it.

Raptor
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Re: Retirement imminent - diversification dilemma

#169162

Postby Raptor » September 26th, 2018, 1:44 pm

I would look at diversification into IT's. Fare East, Asia, Nth America, Europe. Although saying that, most of the FTSE100 shares are diversified around the world already.

My IT's are HFEL, MCT, JETI and MYI (UK Global fund). I have no experience of ETF's myself but am sure that you will get feedback that will help.

Raptor.

daveh
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Re: Retirement imminent - diversification dilemma

#169169

Postby daveh » September 26th, 2018, 1:59 pm

I have high yield ETFs, IAPD or Asia/Pacific and IDVY for Europe (happy with both) and EMDV for emerging markets - this hasn't been so good as the dividend has not been growing. Income focused ITs for the relevant regions could be just as suitable.

richfool
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Re: Retirement imminent - diversification dilemma

#169201

Postby richfool » September 26th, 2018, 3:57 pm

I would tend to diversify into Global (G&I) IT's, with some Asia Pacific exposure and Healthcare REIT's.

E.g. Global: MYI or JPGI.

For further (geographical) sector exposure consider: (Asia Pacific: SOI, JAI or AAIF). (North America: MCT/NAIT). (Europe: HEFT/JETI).
Healthcare Prop Coy in UK: PHP.

Gengulphus
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Re: Retirement imminent - diversification dilemma

#169232

Postby Gengulphus » September 26th, 2018, 5:51 pm

Makems wrote:However, I am concerned that having all my eggs in a UK based HYP basket (well diversified though it may be) is just too much. I cover most sectors so additional shares will only limit individual share risk and not reduce sector risk or UK economy risk.

Well, UK economy risk is only loosely connected with a share's sector. For example, Lloyds and HSBC are both very large banks, but the proportion of their activities that are in the UK is much larger for Lloyds than for HSBC, and so Lloyds looks much more exposed to UK economy risk than HSBC. The same may well go for UK political risk - a company with fewer activities in the UK can move its headquarters away from the UK rather more easily than one with more, and certainly HSBC considered moving its headquarters away from the UK a few years back, whereas I don't think I've seen any such move contemplated for Lloyds in the 15 or so years I've owned its shares. UK custodian risk is a different issue again - if you own shares in a foreign company, but they're held by a UK-based custodian, you may not be in as non-UK-based control of them as you think... And there might be other sorts of UK-based risks that I haven't thought off offhand.

If you want to move away from having all your eggs in a UK-based HYP basket, you really need to make certain that all aspects of it are well diversified between being UK-based and non-UK-based, and that may be a rather bigger job than you think...

Gengulphus

Julian
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Re: Retirement imminent - diversification dilemma

#169389

Postby Julian » September 27th, 2018, 10:21 am

Personally I would go down the more internationally-oriented IT route. I also like (and hold) MYI, HFEL, JETI & SOI.

On ETFs one thing to be aware of is that, as far as I am aware, there are none that make any attempt to provide predictable (as in monotonically increasing) dividend streams. The dividends from an income-focussed ETF, while offering respectable yields if appropriately chosen, can and will in my experience bounce up and down year-on-year. That might not matter to you but personally, as someone who has very deliberately set up his retirement portfolio income to look as much like a regular paycheck as possible, I find the fluctuations in an ETF's dividend stream undesirable even if the general multi-year trend is upwards so I avoid them and instead stick to ITs where I can look at a candidate's dividend history and make a judgement on how likely I think it is to deliver monotonically increasing dividends in the future.

If you are not working your portfolio hard in terms of the percentage of income generated that you extract from it each year then some oscillation in the income stream is unlikely to trouble you and can simply be hidden by paying income into a buffer account and then drawing your fixed monthly "salary" out each month. This is in fact exactly what I do but I do monitor the total income each year that I expect to be paid into the collection account (in fact that is all that I monitor on my income portfolio) and it annoys me when one of my investments announces a dividend that is lower than the corresponding previous year's dividend so that when I enter the figure into my spreadsheet it results in a drop in my forecast annual dividend receipts even if my buffer is able to smooth out that dip. That's why I very much try to stick to investments likely to deliver monotonically increasing payouts.

For the record, I also have a growth portfolio where I do exactly the opposite. I monitor capital value and have the divis set to pay out to a separate collection account (not the same collection account as my income portfolio is paying into). For that portfolio I pay almost no attention at all to the payouts but am vaguely aware that some of them do bounce up and down quite a lot year-on-year. My growth portfolio does contain some ETFs.

- Julian

bluedonkey
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Re: Retirement imminent - diversification dilemma

#169430

Postby bluedonkey » September 27th, 2018, 12:13 pm

@OP I had a similar position with my investments nearly all being UK equities. I diversified by buying VAPX "Vanguard FTSE Dev Asiapac Xjpn ETF".

This invests in Developed Asia Pacific excluding Japan and China. Main countries by weight are South Korea, Hong Kong and Australia, those three totalling 90%. A bit of overlap with FTSE100 due to BHP in Australia but very little really. Very low charges 0.22%, yield is 3.4%. Quarterly dividends.

Makems
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Re: Retirement imminent - diversification dilemma

#169582

Postby Makems » September 27th, 2018, 5:38 pm

Thanks for all the replies so far.
I am increasingly drawn to the idea of income basd ITs which focus on specific regions (Asia, Europe Exc UK, and Americas) rather than increasing the investment in my shares based HYP.
ETFs as pointed out above are less consistent in their dividend payouts and consistency is what I need because I will no longer be re-investng dividends but actually having to live on them!
Its quite a scary prospect when retirement looms this close. Only two more paydays to go!

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Re: Retirement imminent - diversification dilemma

#169779

Postby bluedonkey » September 28th, 2018, 11:06 am

I'm afraid with equity income you have to plan for inconsistency in the income stream. Cash reserve is the answer.

Alaric
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Re: Retirement imminent - diversification dilemma

#169872

Postby Alaric » September 28th, 2018, 2:41 pm

bluedonkey wrote:I'm afraid with equity income you have to plan for inconsistency in the income stream. Cash reserve is the answer.


Investment Trusts can manage that for you if you are prepared to pay their costs. It's not a cash reserve, rather it's an accounting reserve. The net effect is the same, that they will attempt to avoid even a temporary reduction in the income being paid out.

There have been attempts to have the computer do it, by constructing income focused ETFs. I don't think they have been terribly successful at stabilising dividend payments though.

bluedonkey
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Re: Retirement imminent - diversification dilemma

#169910

Postby bluedonkey » September 28th, 2018, 5:21 pm

I don't see the point of paying them to do it when it's pretty easy to DIY. Lots written about it on the HYP-Practical board.

Darka
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Re: Retirement imminent - diversification dilemma

#169949

Postby Darka » September 28th, 2018, 7:31 pm

bluedonkey wrote:I don't see the point of paying them to do it when it's pretty easy to DIY. Lots written about it on the HYP-Practical board.


Agree with you, it is pretty easy.

The problem is you will reach an age when it becomes less easy and eventually impossible to manage, or worse you'll die and your partner will have to take over.

I'm guessing that most of our partners couldn't do that, some will of course but mine in particular would struggle - so I'm building up some IT's for her future and to protect her income in the case of me dying first.

There are of course many other benefits to IT's, this is just one.

regards,
Darka

Julian
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Re: Retirement imminent - diversification dilemma

#170083

Postby Julian » September 29th, 2018, 3:15 pm

Darka wrote:
bluedonkey wrote:I don't see the point of paying them to do it when it's pretty easy to DIY. Lots written about it on the HYP-Practical board.


Agree with you, it is pretty easy.

The problem is you will reach an age when it becomes less easy and eventually impossible to manage, or worse you'll die and your partner will have to take over.
...

I know there's that famous Gordon Gecko line from Wall Street ("don't get emotional about stock") but for some people (or at least me) that does play into it. Frankly, as mentioned before, it does annoy me when I enter a year-on-year divi reduction and see my annual forecast go down. Yes, the week before I might have entered an increase that made it go up and in two weeks time I might be entering another increase, but I notice the drops and find them irritating especially when they are due to currency fluctuations affecting unchanged or even rising non-GBP dividends. It's a personality thing and frankly for me slow and predictable simply suits me better than fast and unpredictable, I prefer a succession of possibly smaller steps but all forward (hopefully!) rather than bigger steps forward and a few back.

I do agree with Blue Donkey though, even if my income portfolio was 100% invested in ITs that all had the sort of 50+ year rising dividend history that CTY has, I would still implement some level of income buffer (reserve) myself.

It might be worth pointing out at this point that an income reserve can be used for things other than smoothing out fluctuations in the incoming dividend stream. For instance my first level income buffer (the float in my income collection account) is equivalent to about 3 months worth of income that I draw and that is set at that level not because I expect the divis to fluctuate that massively but so that, were one of my brokers to maybe corrupt my bank details and all its dividend payments to me fail for a while, or even worse have some big internal issue that locked access to everyone's funds and dividends or a while, I would still be able to keep paying myself income for a while to give time to get the problem sorted out and potentially to take further steps to survive a more prolonged stalling of my dividend stream.

- Julian

Gengulphus
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Re: Retirement imminent - diversification dilemma

#170103

Postby Gengulphus » September 29th, 2018, 4:31 pm

Julian wrote:I know there's that famous Gordon Gecko line from Wall Street ("don't get emotional about stock") but for some people (or at least me) that does play into it. Frankly, as mentioned before, it does annoy me when I enter a year-on-year divi reduction and see my annual forecast go down. Yes, the week before I might have entered an increase that made it go up and in two weeks time I might be entering another increase, but I notice the drops and find them irritating especially when they are due to currency fluctuations affecting unchanged or even rising non-GBP dividends. It's a personality thing and frankly for me slow and predictable simply suits me better than fast and unpredictable, I prefer a succession of possibly smaller steps but all forward (hopefully!) rather than bigger steps forward and a few back.

That sounds to me as though all that you're achieving by taking such frequent looks at your annual forecast is to annoy and irritate yourself...

If so, the solution is obvious, though clearly it's up to you whether you want to use it...

Gengulphus


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