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What return are you targeting?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Aminatidi
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What return are you targeting?

#229840

Postby Aminatidi » June 16th, 2019, 9:04 am

I'm playing around on Trustnet and Portfolio Visualiser with various mixes of asset classes and volatility and risk level.

One question I've never actually asked myself is "What return do I need?".

Of course the obvious answer to what I want is "as much as possible".

Playing around with (these are simple examples) blends of an equal mix (to avoid manager risk) of:

* Capital Gearing
* Troy Trojan
* Ruffer Total Return
* Senica Diversified Income

(four defensive options that leap to mind)

10 year average returns are 6.6% so you're doubling your return approx every 10 years with a very smooth ride.

Throw in a portion of Fundsmith or Lindsell Train and of course returns improve with some added risk and volatility.

It has got me thinking how much I need to return vs. how much I want to return.

Anyone care to share how they've worked this out other than a finger in the air?

Gan020
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Re: What return are you targeting?

#229852

Postby Gan020 » June 16th, 2019, 9:52 am

Aminatidi wrote:
10 year average returns are 6.6% so you're doubling your return approx every 10 years with a very smooth ride.


Your starting point of 2009 kind of skews the data as it's the lowest point for many years on the FTSE. If your starting point was 2007 or 2010 it would look very different

Aminatidi
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Re: What return are you targeting?

#229854

Postby Aminatidi » June 16th, 2019, 10:01 am

Gan020 wrote:
Aminatidi wrote:
10 year average returns are 6.6% so you're doubling your return approx every 10 years with a very smooth ride.


Your starting point of 2009 kind of skews the data as it's the lowest point for many years on the FTSE. If your starting point was 2007 or 2010 it would look very different


10 years was an example because it's what Trustnet easily spits out for a historic portfolio.

Looking at the constituents the earliest it shows is from 2003 and even then the "since inception" figures average out at 7%.

I get it, you're always looking in the mirror with backtesting, but it did prompt the question of how do you know what you need to target as I am still shocked that, with hindsight, 7% p/a was doable over a long period of time with such "safe" holdings.

I should add I'm in my early 40's with a steady salary so I'm not looking/needing an income for some time yet.

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Re: What return are you targeting?

#229855

Postby TUK020 » June 16th, 2019, 10:03 am

Possibly a more useful set of questions are:
1. What level of income do you need?
2. From when?

tikunetih
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Re: What return are you targeting?

#229889

Postby tikunetih » June 16th, 2019, 12:14 pm

Readers may have already seen this Vanguard article from Jan '18:

Why investors need to prepare for lower returns

https://www.vanguardinvestor.co.uk/arti ... er-returns

Since that was penned US 10Y yields have fallen a bit (~50bps), so their 10 year nominal return estimates in the chart should be a bit lower still.


These may be fairly sobering numbers to anyone extrapolating returns from the past 10 years to the next 10, or assuming a continuation of average returns from the past 40 years. This latter period covers the secular fall of bond yields from very high levels to their now low levels, driving a very long term bond bull market and giving a permanent tailwind to risk assets.

With this in mind, I'd focus primarily on saving as much as you can (while still enjoying life as you go along in case you're unlucky enough to never reach retirement...); keep a handle on costs (both investment costs and living costs); diversify; avoid getting too excited or fearful or trying be too clever; try not to take on more risk than you can stomach. Stay sensible and play the long game. The returns will be what they are.

If in your 40s, you should have a long investment time horizon, but we've no idea what will happen over this period other than all sorts of unexpected things, good and bad. We don't know what will happen next year or even next week.

Julian
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Re: What return are you targeting?

#229913

Postby Julian » June 16th, 2019, 1:52 pm

I live entirely off my investments. I want to be able to extract a certain amount of cash each year to maintain a particular lifestyle (annual purchasing power) and I don't want to be eating into my overall capital base in real terms to do that. (I am willing to extract some of the cash I need by top-slicing low-yielding growth-oriented investments but I want those to, over say a 10 year window, be growing sufficiently such that I am not eroding my capital and what remains, adjusted for inflation, is at least equivalent to my original investment.)

From the above I see two variables that make it difficult to (a) set an absolute number over time, and (b) make it difficult to compare people's numbers.

The variables that I see are...

1 - How will inflation go in the long term? If you are specifying real-terms (adjust for inflation) returns then fine but if not you need to factor in inflation assumptions that, in the absence of functioning crystal balls, will probably vary from person to person. This might also be affected by how important it is to a particular investor for income derived to keep pace with inflation; those more intent on that happening would (I'm guessing) probably be likely to make more pessimistic assumptions regarding future inflation to give themselves more head space to track rising inflation.

2 - This is a compound one with two inter-related variables, how much income do you want to extract each year and how much capital do you have to generate that income? For instance if one only wants £10,000 per year of income and has £1 million of capital then, assuming a 2% inflation rate in deference to my point (1) above, one only needs to target a 3% return. If however one requires a £30,000 income from that same million that goes up to needing/targeting a 5% return. Similarly if one wants a £30,000 income and has £3 million of assets that investor only needs to target a 3% return using the same 2% assumption for inflation to give themselves some more headroom regarding tracking inflation.

Without revealing the figures for me regarding point 2, but none the less attempting a direct answer to the question, I currently assume a 2.5% inflation rate and target a total return of 5.5% per annum over the long term (a 10 year period). Again not going into actual numbers I would however observe that both of my my personal figures for (2) might be somewhat atypical but perhaps balance each other out to become reasonably representative regarding where I end up at with (2). By that I mean that I am lucky enough to have a fair amount of capital but to offset that I have recently decided that life is short so extract from that capital an income sufficient to give me a pretty high standard of living.

- Julian

Lootman
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Re: What return are you targeting?

#229923

Postby Lootman » June 16th, 2019, 2:19 pm

tikunetih wrote:I'd focus primarily on saving as much as you can (while still enjoying life as you go along in case you're unlucky enough to never reach retirement...); keep a handle on costs (both investment costs and living costs); diversify; avoid getting too excited or fearful or trying be too clever; try not to take on more risk than you can stomach. Stay sensible and play the long game. The returns will be what they are.

If in your 40s, you should have a long investment time horizon, but we've no idea what will happen over this period other than all sorts of unexpected things, good and bad. We don't know what will happen next year or even next week.

There was an interesting piece on retirement investing in Barrons last month which turned conventional thinking about asset allocation on its head. I'm not saying I agree 100% with it, but it is food for thought. The reference is here:

https://www.barrons.com/articles/is-con ... 1558116923

Basically he debunks the traditional idea of gradually moving from shares to bonds as you get older, but rather do the exact opposite. In other words in early retirement be (say) 30% in shares, and then increase that as you age. Beyond that I will let the article speak for itself.

I do not have a focus on income so much as on cashflows, and am happy to drawdown some capital where it makes sense. I don't find it helpful to differentiate between income and capital.

I probably subscribe to the traditional view that you can withdraw 4% of your net worth safely each year. That said I look to achieve returns of twice that, which corresponds to the very long-term return from equities. I don't have much use for bonds but do have a considerable cash cushion, plus significant weightings in wealth preservers like Personal Assets and Capital Gearing.

I'm also not nearly as UK-focused as I suspect many here are, with about half my equity allocation to the US. That has done me no harm at all in recent years.

forlesen
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Re: What return are you targeting?

#230028

Postby forlesen » June 16th, 2019, 11:01 pm

Lootman wrote:There was an interesting piece on retirement investing in Barrons last month which turned conventional thinking about asset allocation on its head. I'm not saying I agree 100% with it, but it is food for thought. The reference is here:

https://www.barrons.com/articles/is-con ... 1558116923

Basically he debunks the traditional idea of gradually moving from shares to bonds as you get older, but rather do the exact opposite. In other words in early retirement be (say) 30% in shares, and then increase that as you age. Beyond that I will let the article speak for itself.


I remember reading a longer Wade Pfau piece on this topic a couple of years ago. Here is one such article on his site:
https://retirementresearcher.com/use-ri ... etirement/

This includes a link to a research article he wrote with Michael Kitces, who is the source of the Barrons article.

The phrase "rising equity glide path" crops up in various places in Pfau's articles. I'm not sure if he is completely sold on the concept, however. The article I have linked to ends as follows:
Perhaps the best implication from research along these lines is to at least not think about continuing to reduce stock allocations throughout retirement, and also that it may be okay to start retirement with a lower stock allocation than the traditional withdrawal rate studies suggest.

SalvorHardin
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Re: What return are you targeting?

#230078

Postby SalvorHardin » June 17th, 2019, 9:09 am

My main target is that increases in both capital and income should at least match the Retail Prices Index. This is because I'm retired, mid-50s, and live off my portfolio.

Inflation is a major concern; I remember all too well the havoc that inflation in the 1970s caused (the 1970s has caused me to largely avoid fixed interest investments). Fortunately I can live off a fairly low portfolio yield so I don't have to focus upon high yielding shares with the added risk to both income and capital that this entails (today's example is Kier Group).

My secondary target is to outperform the FTSE100, which I have done by a lot since 1st January 2000 mostly thanks to small oil explorers in the early 2000s and focusing on strong moat companies (being perfectly comfortable with investing in foreign companies helped a lot, there aren't too many strong moat companies in the FTSE100).

Then it's to outperform the MSCI World Index. Harder than the FTSE100, and in any event I don't pay anything as like as much attention to it as the FTSE100.

torata
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Re: What return are you targeting?

#230099

Postby torata » June 17th, 2019, 10:27 am

SalvorHardin wrote:My main target is that increases in both capital and income should at least match the Retail Prices Index. This is because I'm retired, mid-50s, and live off my portfolio.

I remember all too well the havoc that inflation in the 1970s caused (the 1970s has caused me to largely avoid fixed interest investments).


Blimey I'm in my mid-50s and all I can remember from the 70s is The Bradey Bunch, The Banana Splits and the Hovis advert....
Ah, OK, just re-read it. :D

torata

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Re: What return are you targeting?

#230220

Postby LooseCannon101 » June 17th, 2019, 6:29 pm

I look at total return, and so don't differentiate between capital gain and income. Total returns from global investment trusts e.g. Alliance, Witan and F&C have averaged 8% per annum over the past 20 years. I would look under the bonnet of any trust you are considering before parting with any cash. The above trusts have delivered a rising dividend over many 40+ years, easily beating inflation.

I feel more comfortable owning a highly diversified portfolio containing small and large capitalisation shares from around the world, instead of mostly UK-based shares. F&C IT fits the bill perfectly - held for the past 20 years.

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Re: What return are you targeting?

#230300

Postby 0x3F » June 17th, 2019, 10:20 pm

Aminatidi wrote:how much I need to return vs. how much I want to return.


I have 2 benchmarks, I guess the first is a 'need' and second 'want'.

The first is to benchmark against RPI+3%, as my primary objective is to maitain purchasing power with 3% withdrawal rate.

The second is to outperform the Ftse all share total return index with lower volatility. I prefer to view it as more of a risk-return target.

-0x3F

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Re: What return are you targeting?

#230320

Postby tjh290633 » June 17th, 2019, 11:26 pm

My experience with my HYP over a number of periods, all ending with the present day, may be of interest:

Since        Acc Unit   IRR   
31-Dec-98 5.89 7.46%
30-Dec-99 6.85 7.03%
31-Dec-00 6.68 7.57%
31-Dec-01 6.43 8.26%
31-Dec-02 5.23 10.15%
31-Dec-03 6.38 9.43%
31-Dec-04 7.59 8.80%
30-Dec-05 9.69 7.52%
31-Dec-06 12.25 6.13%
31-Dec-07 12.41 6.57%
31-Dec-08 7.41 12.63%
31-Dec-09 10.24 10.23%
31-Dec-10 12.32 9.09%
31-Dec-11 13.45 9.07%
31-Dec-12 15.80 7.84%
31-Dec-13 19.56 5.15%
31-Dec-14 20.34 5.41%
31-Dec-15 21.42 5.43%
31-Dec-16 24.37 2.22%
29-Dec-17 26.70 -2.50%
31-Dec-18 24.06 15.67% (part year)

These are the values of my accumulation unit on the year ends noted, and the IRR is the rate of return from that date to the present day. As you can see, there is a wide range, depending on the starting value. The current value is £25.73.

TJH

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Re: What return are you targeting?

#230562

Postby dealtn » June 18th, 2019, 6:54 pm

I have a soft target of 10% annual, although I should really be focussed on a real return rather than a nominal one.

The weighted ROCE of the companies in my portfolio (excluding financials) is 10.9% for the latest year. Given I only invest in equities, and ROE (should) > ROCE, any long term return <10% would be disappointing to me.

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Re: What return are you targeting?

#230571

Postby dspp » June 18th, 2019, 7:18 pm

Some of you may find this helpful reading in this context.

The Rate of Return on Everything, 1870–2015
This paper answers fundamental questions that have preoccupied modern economic
thought since the 18th century. What is the aggregate real rate of return in the economy?
Is it higher than the growth rate of the economy and, if so, by how much? Is there a
tendency for returns to fall in the long-run? Which particular assets have the highest
long-run returns? We answer these questions.....


https://www.frbsf.org/economic-research ... 017-25.pdf

enjoy, dspp

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Re: What return are you targeting?

#230580

Postby mickeypops » June 18th, 2019, 7:55 pm

I'm hoping for inflation plus 5%. I can live on inflation plus 2.5% I'll probably get something in-between.....

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Re: What return are you targeting?

#230581

Postby Lootman » June 18th, 2019, 8:08 pm

dealtn wrote:I have a soft target of 10% annual, although I should really be focussed on a real return rather than a nominal one.

mickeypops wrote:I'm hoping for inflation plus 5%. I can live on inflation plus 2.5%.

My target is the nominal rate of return and not the real rate of return. My reasoning is that the nominal number makes no assumption about the rate of inflation that actually affects you i.e. your personal rate of inflation. The latter is governed by the types of things you spend your money on. For instance, electronics have generally been getting cheaper, not increasing in cost. Your personal rate of inflation also depends on how much you spend overseas as opposed to in the UK, which in my case is quite a lot.

So I find that the nominal rate of return is more meaningful and objetve than making assumptions about how my expenses change over time. I want to know by how much my net wealth increasd year-on-year. And since nominal rates are what are reported in the press, it's easier to compare how you are doing.

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Re: What return are you targeting?

#232247

Postby jaizan » June 26th, 2019, 11:35 pm

I'm in my early 50s & living off investments, plus a modest amount of rental income.

I don't trust a safe withdrawal rate of 4%.
I'm more likely to target a figure of lower of 3% of remaining portfolio or 3% of initial portfolio with inflation indexing. Although I'm toying with the idea of relaxing limits to 4% for above a certain capital threshold (ie take 3% of everything up to a certain level and 4% on anything above it).

My target is to optimise the portfolio to get >10% real return. However, the requirement & expectation is to do RPI + 3%, which services my proposed withdrawal rate. Also, since I intend to spend an increasing proportion of time abroad, there is a requirement to diversify outside of the GBP, so I am not caught out by weakness in sterling. So over 80% of the stock portfolio is in non-UK assets.

Lootman
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Re: What return are you targeting?

#232346

Postby Lootman » June 27th, 2019, 2:19 pm

jaizan wrote:I don't trust a safe withdrawal rate of 4%. I'm more likely to target a figure of lower of 3% of remaining portfolio or 3% of initial portfolio with inflation indexing. Although I'm toying with the idea of relaxing limits to 4% for above a certain capital threshold (ie take 3% of everything up to a certain level and 4% on anything above it).

My target is to optimise the portfolio to get >10% real return. However, the requirement & expectation is to do RPI + 3%, which services my proposed withdrawal rate. Also, since I intend to spend an increasing proportion of time abroad, there is a requirement to diversify outside of the GBP, so I am not caught out by weakness in sterling. So over 80% of the stock portfolio is in non-UK assets.

Personally I target nominal rates of return rather than a real rate. There are a number of reasons for that but one is that I don't find that the official CPI/RPI numbers have much relevance to the inflation I personally experience. This argues that if you are going to factor in inflation then you should determine what I might call a personal rate of inflation, which reflects what you actually spend money on.

As an example, because my mortgage is paid off, I don't need to worry about housing cost inflation so much. I spend a fair amount on electronics and they seem to be getting cheaper, not more expensive. I travel a lot and so currency issues affect how those costs vary. And so on.

In your case, if many of your liabilities are overseas then it may be that the rate of inflation there is of more relevance than the rate in the UK.

But as I said, I ignore inflation and simply regard myself as needing 4% but trying for 8%.

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Re: What return are you targeting?

#232413

Postby Hariseldon58 » June 27th, 2019, 9:31 pm

@jaizen
My target is to optimise the portfolio to get >10% real return. However, the requirement & expectation is to do RPI + 3%


A real rate of return of 10% would be ..challenging :)

29 years and I have achieved around 10% nominal pa, but I am far less optimistic going forward, I rather think we have had excess returns the last few years and mean reversion normally kicks in.


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