Mark66 Proposed Portfolio - Comments Welcome

[Mark66]

I am in the process of planning the restructuring of mine and my wife's SIPP's and ISA's to passive portfolios. We plan to retire in about 3 years time I share what I have come up with here, along with some background thought for my decisions for comment before I take the plunge.

With the security of 25% of my pension as DB, I used to be an advocate of 100% equities for our remaining investments. But all has now changed ...

A few weeks ago I came across portfoliocharts.co.uk which has radically changed my mind about diversification to reduce volatility. The visualisation that portfiliocharts gives was an eye opener to me as to the risk/growth/volatility balance when introducing other asset classes. I now realise you don't have to compromise too much growth to drastically reduce volatility. I would guess most would say this is a wise move, especially this close to retirement.

Yes I have heavily played with portfolio charts to come up with this selection, but I am wary about over relying on past historical data in the design of a portfolio. I have more tried to find the minimum amount of diversification needed in various assets to get a good dose of lower volatility. Gold is probably a controversial inclusion for some but its negative correlation to other asset classes does seem unbeatable to me.

So here is my Proposed Portfolio:



Portfolio charts shows an average return of 7.4% and PWR of 4.2% (taken with a pinch of salt going forward in time!).

I have deliberately put in biases. A small cap bias, and a fair bit of emerging markets. Also tilted perhaps a bit too much to UK (I may change this at a later date) but my gut feeling is UK currency and stocks are depressed with the current brexit debacle, however it is resolved I am expecting a bit of bounce back in the years ahead.

I felt what I was after needed more than the off the shelf vanguard one-stop shop solutions, but still wanted to keep it to a relatively small manageable set of ETF's. At the end of the day I wanted something my wife could easily manage should the need arise.

I look forward to any comments.

Regards,
Mark66

[dspp]

You appear to be doing what is thought by many to be perfect. Whether past trends will continue, in this respect especially in terms of the correlation of returns between the different assets classes, is something none of us I know. Or at least I don't. So if it goes wrong you will be in good company which is not necessarily much comfort.

A couple of queries / comments:

1. If an optimal portfolio has 15% bonds, then surely the DB pension is a pseudo bond. So in that case you need a -5% bond allocation to be optimal. Or is the optimum a 35% bond allocation and have you already taken your 20% DB pension into account in calculating the 15% ?

2. I'm guessing you own a property. Again is the REIT the optimum property exposure after taking into account your UK property ?

3. If you haven't already made those two compensations above, then setting aside the gold, you are back to the 100% equities portfolio.

4. And for gold, it is so sentiment-biased that I really don't know.

5. By the way it might also be worth taking into account the bond-equivalency of a state pension.

regards, dspp

[Itsallaguess]

A few weeks ago I came across portfoliocharts.co.uk which has radically changed my mind about diversification to reduce volatility. The visualisation that portfiliocharts gives was an eye opener to me as to the risk/growth/volatility balance when introducing other asset classes. I now realise you don't have to compromise too much growth to drastically reduce volatility. I would guess most would say this is a wise move, especially this close to retirement.

Yes I have heavily played with portfolio charts to come up with this selection, but I am wary about over relying on past historical data in the design of a portfolio. I have more tried to find the minimum amount of diversification needed in various assets to get a good dose of lower volatility. Gold is probably a controversial inclusion for some but its negative correlation to other asset classes does seem unbeatable to me.

So here is my Proposed Portfolio:



Portfolio charts shows an average return of 7.4% and PWR of 4.2% (taken with a pinch of salt going forward in time!)

Hi Mark,

Portfoliocharts is really quite addictive when trying out different approaches, but for clarity I don't think you've given the correct website address, which in reality is this one if anyone else might find the site useful -

https://portfoliocharts.com/

Even with the above link, the interactive-portfolio section which has clearly piqued your interest is still not that easy to find when navigating the site, so I'll also provide a specific link to that here too, in case it's useful to people who might also want to have a look -

https://portfoliocharts.com/portfolio/my-portfolio/

Playing with your asset allocation using the above link, the combination I came to that aligned with your 7.4% average return and associated PWR of 4.2% is as follows, if you're able to confirm this -




Best of luck with your retirement-planning. I'm a few years off yet, but I gain a huge amount of inspiration from other posters here who have either already retired, or are in the final-stage of their planning processes. It's really encouraging to know that the deliverable end-game to what is often a long timescale of personal-investment is both achievable and worthwhile....

It would be great if you could keep us up to date with both this planning process if it's still under development, or indeed the implementation of it and how it delivers against your expectations, once you decide which way to go with it.

Cheers,

Itsallaguess

[xxd09]

My situation may be of interest
16 years into retirement (72)
Wife has a DB Pension plus our State Pensions as a cushion
Made my pile so 65%Bonds 30%Equities 5%Cash
3funds only Vanguard Global Eq ex UK,FTSE and Global Bond-all Index Trackers
All in ISAs and SIPPs
Cheap,simple and lets me sleep at night
Been through some serious ups and downs so proven
Just sell “chunks” of a fund as required to keep the 5%Cash topped up which is equivalent to 2years living expenses
Does it for me
xxd09

[Mark66]

In response to dspp, no I have not taken DB or my property into consideration. Yes I concede they are part of my assets and arguably should be taken into account. But to me they are certainties that I don't wish to risk. I was purely considering risk/volatility of the ISA/SIPP element when coming up with this portfolio.

I was happy with 100% equities in the past saving what I reasonably could afford with the view I will retire when there is enough in the pot. My original plan for retirement was to have an 18 months cash buffer and in the worst downturn in the markets live off DB + dividends and forgoing the luxuries.

I am 53 now and retiring in 3 years is currently realisable and suits me. Having been looking into drawdown I have been more aware recently of what a recession at the start of retirement can do to a draw down pot. Portfiliocharts just bought it home in a very visual way. Having started thinking about retiring I now want to make this happen. I always thought I would be 'gun ho' 100% equities, this would (100% equities in same proportion in portfoliocharts) yield an average return of 8.4%. So (considering past data 1970 to present) I can get 88% of the growth with considerably less volatility. Some of the graphs like 'Drawdowns' are very revealing to this end. I am now more comfortable with this risk reward balance of the portfolio I have come up with.

To Itsallaguess (I like that username!), yes I can confirm that is the portfolio I had in portfolio charts. Yes I will try and update with progress in the future.

To xxd09, yes I can see you have certainly gone for a more sleep easy straight forward approach. I have just taken a step in that direction from where I was. I have not mentioned cash either in my portfolio. Yes I would go for similar 5%, I have always assumed I would have this outside of my SIPP/ISA (perhaps in a cash ISA). The practicalities of how to run drawdown is an interesting topic in itself I will come to down the road.

[Hariseldon58]

@mark66

Strongly recommend taking a look at McClungs book, “Living Off Your Money”

Whilst it’s US based he looks at UK and Japanese data. He has devoted an enormous amount of effort to studying the data, well worth £28.
Spoiler alert, It will tend to provide confirmation bias, except the gold the advice re drawdown and portfolio mixes are very interesting.
https://monevator.com/review-living-off-your-money-by-michael-mcclung/

Oddly enough I retired in 2007, late 40’s with close to 100% equities.....it worked out ok but interesting for a while !

[dspp]

In response to dspp, no I have not taken DB or my property into consideration. Yes I concede they are part of my assets and arguably should be taken into account. But to me they are certainties that I don't wish to risk. I was purely considering risk/volatility of the ISA/SIPP element when coming up with this portfolio.

I was happy with 100% equities in the past saving what I reasonably could afford with the view I will retire when there is enough in the pot. My original plan for retirement was to have an 18 months cash buffer and in the worst downturn in the markets live off DB + dividends and forgoing the luxuries.

I am 53 now and retiring in 3 years is currently realisable and suits me. Having been looking into drawdown I have been more aware recently of what a recession at the start of retirement can do to a draw down pot. Portfiliocharts just bought it home in a very visual way.

OK. The 'sequence of returns' problem is a real one.

We are in not dissimilar positions, and likely not dissimilar views. I will be interested to hear how your thoughts evolve over time.

regards, dspp

[StepOne]

I am in the process of planning the restructuring of mine and my wife's SIPP's and ISA's to passive portfolios. We plan to retire in about 3 years time I share what I have come up with here, along with some background thought for my decisions for comment before I take the plunge. ...
Portfolio charts shows an average return of 7.4% and PWR of 4.2% (taken with a pinch of salt going forward in time!).

Hi Mark,

What's a PWR?

Also, how are you planning to take income from this portfolio? Are you going to invest in the Income units (where possible)? I'm assuming some of these - e.g. Gold - don't have Income versions, and so will you sell some when required, or is there going to be a regular (annual?) re-balancing where you can take the opportunity to remove some cash. Just wondering in terms of the 'easy-to-manage' part how all that is going to work in practive, as it's similar to questions I'm trying to address myself over the next while.

And how are you planning to take the pension part - Drawdown or UPFLS?

Thanks,
StepOne

[Itsallaguess]

What's a PWR?

PWR is the Perpetual Withdrawal Rate.

An explanation here - https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/

Cheers,

Itsallaguess

[colin]

Also tilted perhaps a bit too much to UK (I may change this at a later date) but my gut feeling is UK currency and stocks are depressed with the current brexit debacle, however it is resolved I am expecting a bit of bounce back in the years ahead

I look forward to any comments.

Regards,
Mark66

Why would FTSE 100 bounce on a rise in GBP ?

[Backache]

Why would FTSE 100 bounce on a rise in GBP ?

Maybe it's not my place to answer as someone else has posted the viewpoint, but I don't think he is suggesting that the FTSE would bounce as a result of a rise in sterling , but that the two could happen simultaneously as a result of improved sentiment or performance in the UK.

[Mark66]

Also, how are you planning to take income from this portfolio? Are you going to invest in the Income units (where possible)? I'm assuming some of these - e.g. Gold - don't have Income versions, and so will you sell some when required, or is there going to be a regular (annual?) re-balancing where you can take the opportunity to remove some cash. Just wondering in terms of the 'easy-to-manage' part how all that is going to work in practive, as it's similar to questions I'm trying to address myself over the next while.

My current thinking:
* When I actually retire I would move to income ETF's where available (as you say none for gold).
* Make the rest up when re-balancing, probably twice a year
* Still aim for to hold 18 months cash in good times.
* Reign in luxuries when market is down so plan luxury holidays, new cars etc. on cash I have drawn.
* But hopefully a bit less volatility in income than if I had stuck with 100% equities!

And how are you planning to take the pension part - Drawdown or UPFLS?

Again current thinking:
* I am currently at 90% of the LTA so drawdown is better for me. If the market continues to grow well I could be exceeding the LTA by the time I retire in 3 years. I always thought I would therefore be better of by moving my pension pot all into drawdown taking the 25% lump sum on doing this. You do need somewhere for this lump sum to go though. Also moving this cash out of pension into my estate would increase my IHT liability. From more than one source I have been told "don't let the tax tail wag the dog".
* My current thinking is therefore a compromise, phased drawdown, e.g. crystalize some each year taking the 25% lump sum and drawdown to personal allowance. Take the tax free lump sums at a rate I can accommodate them into ISA's etc. I expect there will be a few years when I pay no tax!
* My DB kicks in at 60, I would certainly leave enough un-crystalised so the DB starting does not trigger any LTA tax charges. If there are any tax charges it will be on the last bit of crystalising.

But both these points are also tied up with the practicalities of the best platforms for achieving all this. I think this has already strayed off "passive investing". I intended at a later date to search what is already on Lemon Fool and if necessary ask about platforms on "Brokers and Share Dealing", that seems the most appropriate place. May be you will beat me to this!