The Lemon Fool

funduffer wrote:Coming back to the OP, my sister needs to invest for income, to bridge the gap between early retirement and state pension - about 10 years. She will need a withdrawal rate of about 8% for these 10 years, so I would expect her capital to run down somewhat over that period, but would hope there will be a good proportion of it left at 10 years.

It will be interesting to see what the IFA suggests, if it is not higher yielding investment trusts like CTY.

I assume there are higher yielding UT’s (like Woodford’s was!), but it will be interesting to see how much they cost and how reliable the income has been through the 2008 crash and more recent pandemic.

FD

I'm going to take a wild guess and say the advice will be for what in tax terms is a "non-qualifying insurance policy". The selling point here is, wow, look you can take out 5% a year tax-free. Yippeee! Wool descends over eyes.

Income need not come from only dividends, but also from selling down one's investments. A diversified world equity fund has achieved a total return (dividends re-invested) of about 8% per annum over the past 20 years.

Starting off with 25% in cash and 75% in such a fund, re-investing the dividends, and depleting the cash first, should allow the fund to grow for just over 3 years before needing to draw down any dividend and/or capital.

I own a substantial stake in FCIT - a highly diversified global investment trust which has been in existence for over 150 years and has increased its dividend every year for the past 50 years. Other similar trusts are available.

The advisor sounds to me as if they are reading from a script and have little knowledge of investing.

LooseCannon101 wrote:Income need not come from only dividends, but also from selling down one's investments. A diversified world equity fund has achieved a total return (dividends re-invested) of about 8% per annum over the past 20 years.

Starting off with 25% in cash and 75% in such a fund, re-investing the dividends, and depleting the cash first, should allow the fund to grow for just over 3 years before needing to draw down any dividend and/or capital.

I own a substantial stake in FCIT - a highly diversified global investment trust which has been in existence for over 150 years and has increased its dividend every year for the past 50 years. Other similar trusts are available.

The advisor sounds to me as if they are reading from a script and have little knowledge of investing.

I agree entirely. It would be difficult to take 8% from a portfolio without selling down some of the capital, and indeed the IFA did refer to this. The way you suggest sounds perfectly reasonable to me.

OP Is the IFA giving advice for a flat fee, or some commission arrangement, either instant or based on ongoing fees. That is bound to colour their advice, whatever their ethics.

I'd expect ITs to make better returns than UTs because of their slight gearing, but that improvement does come with a small extra risk. And active funds rarely outperform trackers once fees are accounted for.

Your sister needs to understand her own attitude to risk, and her view on the active passive debate. She needs to read books like Lar Krojer's Investing Demystified so she can have a more informed discussion with her IFA.

LooseCannon101 wrote:Income need not come from only dividends, but also from selling down one's investments. A diversified world equity fund has achieved a total return (dividends re-invested) of about 8% per annum over the past 20 years.


The advisor sounds to me as if they are reading from a script and have little knowledge of investing.

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quite right .

many people chasing yield and dividends dont get this.

“Many people” are wrong. The FTSE high yield index has performed dreadfully compared to the FTSE low yield index.

Aunt Maud would have been much better off selling 4% of her low yield portfolio rather than taking the 4% division from the high yield portfolio.

And with a capital gains allowance of £12,300, probably wouldn’t have paid as much tax.

But dividends are “so much easier to understand”. And it’s psychologically difficult to sell 4% of your shares in the 3 or 4 years in every 20 that they go down 30%.

As. For ITs vs UTs they they do outperform but with higher volatility due to discounts and gearing. Volatility equals risk, therefore they are more risky - but also more lucrative. It’s an investment axiom that higher risk (usually) delivers higher rewards.