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£200k lump sum to invest for an immediate income

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Alan7878
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Re: £200k lump sum to invest for an immediate income

#395243

Postby Alan7878 » March 13th, 2021, 2:38 pm

1nvest wrote:
Alan7878 wrote:Excellent responses all, thank you very much. I do like the idea of a diversified basket of ITs for growth and income; particularly for the funds within an ISA. I'm also wondering about the intervening years when the majority of money will be outside of ISAs but I still want to achieve growth/income. Would you employ the same strategy and spend a bit more time on your annual tax return with various different ITs outside of an ISA :( OR, would you go for something simpler like a world tracker with one or two years in cash/bonds/other to feed income and ISA each year?

Thanks again

Alan

Gilt capital gains are free from CGT, with low yields on those and cash the tax implications of being outside of ISA are low. Gold legal tender coins are CGT exempt. Have a read about the Golden Butterfly (GB), which is a 80% Permanent Portfolio (Harry Browne's, that you'll also need to read about) and 20% stock asset allocation.

Basically a standard GB might be 20% in each of 20 year gilt, cash deposits, gold, FT250, S&P500. But give that a brain. Pretty much at any time one of the assets will look to be a bad choice and more often that comes to fruition. 1980 and the Dow/Gold ratio was 1.0, gold was expensive so if started then drop gold from the set. Rebalancing isn't required, just let the assets ride, but periodically reset/restart, which is in effect rebalancing to some extent, as/when valuations look extreme. 1999 and Dow/Gold was up at 40 levels, so stop/restart with a lower allocation to stocks. Recently interest rates are very low so restart without Long Dated Gilts ...etc.

For income, apply a 3.3% SWR that should be a perpetual rate (PWR) i.e. 3.3% of the initial amount, uplifting that by inflation as the amount drawn in subsequent years - so a nice consistent inflation adjusted income come what may where inflation adjusted capital value is not only likely broadly preserved, but expanded by a decent amount over time (3% real+ type rate).

Starting for instance with 25% in FT250, 25% US stock, 25% gold, 25% cash at recent valuations and the cash could near enough be stuffed under the mattress, gold might be legal tender coins, both outside of ISA. Leaving 100K of stock outside of ISA but that with a couples allowances could have 80K of that migrated into ISA using this years and next years ISA allowances if not already used ... within weeks.

Prepare to be blown away by the actual rewards generated and the low downside risk/volatility (worked long term in UK, US and even did very well in Japan since 1970's).


Thanks 1Invest. I have read briefly around those portfolios in the past but I'll have another look

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Re: £200k lump sum to invest for an immediate income

#395258

Postby Hariseldon58 » March 13th, 2021, 3:14 pm

veeCodger1 wrote:
Hariseldon58 wrote:Equity Income trusts both Global and UK still have merit, they will keep paying dividends in the teeth of market difficulties as we have seen

I think this would be the main benefit that income ITs could give the OP.


Hariseldon58 wrote:FWIW I have Merchants, City of London IT, Shires, Lowland, Murray Income, North American IT, Murray International, Scottish American and TR Property Trust.

I wonder how this performance would compare to a world tracker (e.g. VRWL), where the OP could have regular drawdown instead of dividend from ITs. I suspect the world tracker would produce superior returns and may need a safety margin, although this might not be applicable to the OP.

VC


The taking of the same ‘income’ using a tracker has merit, using a mix of capital and income.

Over recent years the Equity Income Trusts have underperformed the simple world tracker ( which is what I have largely concentrated on for the last few years) however the Income Portfolio does provide a backstop of income and may well benefit from a rotation to value.

This sub portfolio is around 15% of the whole for me and has already provided some diversification in the recent upsets.

I rarely make major changes to my portfolio but have recently done so, as I feel my new sub portfolios can combine to perform better than my Index sub portfolio alone, on a five year view but off topic here.

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Re: £200k lump sum to invest for an immediate income

#395264

Postby scotia » March 13th, 2021, 3:45 pm

veeCodger1 wrote:
Hariseldon58 wrote:Equity Income trusts both Global and UK still have merit, they will keep paying dividends in the teeth of market difficulties as we have seen

I think this would be the main benefit that income ITs could give the OP.


Hariseldon58 wrote:FWIW I have Merchants, City of London IT, Shires, Lowland, Murray Income, North American IT, Murray International, Scottish American and TR Property Trust.

I wonder how this performance would compare to a world tracker (e.g. VRWL), where the OP could have regular drawdown instead of dividend from ITs. I suspect the world tracker would produce superior returns and may need a safety margin, although this might not be applicable to the OP.

VC

OK - cease wondering :)
The 5 year total return (rounded to nearest 1%) of the above mentioned ITs (info from Hargreaves Lansdown) is
Merchants (MRCH) 55%
City of London (CTY) 30%
Shires (SHRS) 57%
Lowland(LWI) 28%
Murray Income (MUT) 61%
North American IT (NAIT) 66%
Murray International (MYI) 64%
Scottish American (SAIN) 109%
TR Property Trust (TRY) 56%

And Vanguard World Tracker ETF (VWRL) 94%
I think your suspicion of a world tracker giving a superior return to this collection of ITs may be well founded.
And I think if you look more deeply at this list of ITs, you may find that they focus on "Income" - with the exception of Scottish American.

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Re: £200k lump sum to invest for an immediate income

#395265

Postby Lootman » March 13th, 2021, 4:01 pm

scotia wrote:The 5 year total return (rounded to nearest 1%) of the above mentioned ITs (info from Hargreaves Lansdown) is
Merchants (MRCH) 55%
City of London (CTY) 30%
Shires (SHRS) 57%
Lowland(LWI) 28%
Murray Income (MUT) 61%
North American IT (NAIT) 66%
Murray International (MYI) 64%
Scottish American (SAIN) 109%
TR Property Trust (TRY) 56%

And Vanguard World Tracker ETF (VWRL) 94%

I think your suspicion of a world tracker giving a superior return to this collection of ITs may be well founded.
And I think if you look more deeply at this list of ITs, you may find that they focus on "Income" - with the exception of Scottish American.

Yes, and if you really want to know where the growth came from, look at the Vanguard US Growth index fund. It is up about 200% (i.e. has tripled) in the last 5 years. That is a total return of about 25% a year.

But of course if "immediate income" is that important to an investor then presumably they would be happy to forego that.

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Re: £200k lump sum to invest for an immediate income

#395314

Postby 1nvest » March 13th, 2021, 9:27 pm

scotia wrote:
veeCodger1 wrote:
Hariseldon58 wrote:Equity Income trusts both Global and UK still have merit, they will keep paying dividends in the teeth of market difficulties as we have seen

I think this would be the main benefit that income ITs could give the OP.
Hariseldon58 wrote:FWIW I have Merchants, City of London IT, Shires, Lowland, Murray Income, North American IT, Murray International, Scottish American and TR Property Trust.

I wonder how this performance would compare to a world tracker (e.g. VRWL), where the OP could have regular drawdown instead of dividend from ITs. I suspect the world tracker would produce superior returns and may need a safety margin, although this might not be applicable to the OP.

VC

OK - cease wondering :)
The 5 year total return (rounded to nearest 1%) of the above mentioned ITs (info from Hargreaves Lansdown) is
Merchants (MRCH) 55%
City of London (CTY) 30%
Shires (SHRS) 57%
Lowland(LWI) 28%
Murray Income (MUT) 61%
North American IT (NAIT) 66%
Murray International (MYI) 64%
Scottish American (SAIN) 109%
TR Property Trust (TRY) 56%

And Vanguard World Tracker ETF (VWRL) 94%
I think your suspicion of a world tracker giving a superior return to this collection of ITs may be well founded.
And I think if you look more deeply at this list of ITs, you may find that they focus on "Income" - with the exception of Scottish American.

SAIN has pretty much compared to the S&P500, as has VWRL ... "superior returns to this collection of ITs" ... over that particular 5 year time period. At other times things swing the other way around.

FT250 has broadly compared in total return to TJH HYP, but where it pays less dividends. If you held the FT250 and took the same income via dividends/selling shares to match the income provided by TJH HYP ... you'd still be at around the same level overall.

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Re: £200k lump sum to invest for an immediate income

#395347

Postby scotia » March 13th, 2021, 11:54 pm

1nvest wrote:SAIN has pretty much compared to the S&P500, as has VWRL ... "superior returns to this collection of ITs" ... over that particular 5 year time period. At other times things swing the other way around.

Indeed - fashions change. But when investing currently, I fear that it would be taking a big gamble to assume that selecting 8 out of 9 ITs in the currently poorly performing "income" area is the wisest choice. Although I may be wrong.

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Re: £200k lump sum to invest for an immediate income

#395348

Postby Lootman » March 14th, 2021, 12:07 am

scotia wrote:
1nvest wrote:SAIN has pretty much compared to the S&P500, as has VWRL ... "superior returns to this collection of ITs" ... over that particular 5 year time period. At other times things swing the other way around.

Indeed - fashions change. But when investing currently, I fear that it would be taking a big gamble to assume that selecting 8 out of 9 ITs in the currently poorly performing "income" area is the wisest choice. Although I may be wrong.

Let me express that another way. The UK HY sector is about 3% of global market cap. One would need a compelling reason to believe that it will out-perform the other 97% going forward. Why restrict oneself in such an arbitrary manner?

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Re: £200k lump sum to invest for an immediate income

#395372

Postby flyer61 » March 14th, 2021, 9:00 am

Scotia and Lootman....

take a bow

re arrange these words into a well know phrase.

Nail, Hit, Head....

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Re: £200k lump sum to invest for an immediate income

#395451

Postby 1nvest » March 14th, 2021, 2:08 pm

flyer61 wrote:Scotia and Lootman....

take a bow

re arrange these words into a well know phrase.

Nail, Hit, Head....

Shooting oneself in the head with a nail-gun ?

A factor is that sampling/sub-sets will tend to see drift from the whole, broadly on average that tends to wash on paper over full cycles. In practice however there can be differences. Higher fees, higher costs, higher taxes, including obvious valueless junk ...etc. If say French dividend withholding tax rose to 70%, which it has in the past then 4% gross dividend is reduced by 1.2%

It's common to compare over particular time periods and highlight how so much better x was compared to y, but where often over other periods that reversed.

Image

One of the greatest risks is to profit-chase, constant changing things around. Index fund providers who take a percentage cut of the capital they attract may suggest buying the entire haystack, but that also has large differences in what is included (or not) and in what proportions (cap weighted, equal weighted, value weighted ...etc).

You can't control much, but cost and tax efficiencies are one element that is under your control.

How income is provided is largely irrelevant, be it via dividends or out of total returns, or whatever. Again however there may be cost/tax efficiencies that favour one over another.

Diversification is important in order to avoid over-concentration risk, again one of the major risks, but that can be achieved with relatively few individual holdings. Historically when trading was expensive many held around 8 different stocks, 12.5% risk per stock. Nowadays a index comprised of 500 stocks can still have a 10% exposure to a single stock.

Fundamentally

1. Diversify enough to reduce concentration risk to reasonable levels.
2. Strive to minimise costs and taxes - and other forms of others looking to take a percentage cut.

All in income-funds/trusts for instance is a concentration risk, as is all in a single currency/country ...etc.

Holding assets via a trust that might levy 1% or more in fees in addition to some of the holdings perhaps having incurred a 1% of assets value dividend withholding tax ...etc. is not in my books a good choice. I invest for my benefit, not to keep someone else in their Porsche.

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Re: £200k lump sum to invest for an immediate income

#395519

Postby scotia » March 14th, 2021, 6:37 pm

1nvest wrote:It's common to compare over particular time periods and highlight how so much better x was compared to y, but where often over other periods that reversed.

Image



Thanks for the graph

1nvest wrote:How income is provided is largely irrelevant, be it via dividends or out of total returns, or whatever. Again however there may be cost/tax efficiencies that favour one over another.

Diversification is important in order to avoid over-concentration risk, again one of the major risks


Agreed

Now getting back to the US Market. Is it currently overvalued, and is the UK market undervalued? But even of both of these are true, does it affect market sentiment? I have become a bit twitchy on the US market - but is it justified? Could it be that most of the dominant high-tech companies which are continuing to grow substantially are in the US - hence we should expect the US continuing to out-perform the rest of the world? But what about China? Could it be a major disruptor to the US dominance?
So where does this lead me? I am still heavily invested in the US - some directly into S&P500 and Nasdaq Index ETFs, but mainly through Global indexed and managed funds. However I have been recently making some adjustments in favour of European and UK funds. But what about China? I'm very conscious of the wide berth that Terry Smith (of Fundsmith) has given to China - along with his reasons which centre on Chinese government control. So I'll make do with the Chinese investments held in various Global ITs - of which Scottish Mortgage holds the largest fraction (20%)
So having suggested that I would not favour another contributor's selection, I feel that I should add a few of my own investments (5 year total return in brackets) :-
A Global ETF - Vanguard VWRL (94%)
A Global OEIC - Fundsmith Equity (130%)
A Global IT - Scottish Mortgage SMT - only if the investor can accept substantial volatility (389%)
A European IT - BlackRock Greater Europe Investment Trust BRGE (133%)

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Re: £200k lump sum to invest for an immediate income

#395523

Postby dealtn » March 14th, 2021, 6:52 pm

scotia wrote: Could it be that most of the dominant high-tech companies which are continuing to grow substantially are in the US - hence we should expect the US continuing to out-perform the rest of the world?


But that's only ever half the story, you have to take into account price too.

If one market is priced to deliver 20% annualised growth and only delivers 15%, and another is priced to deliver no growth, but manages to deliver 5% annualised growth, I would happily be invested in the "wrong" one that doesn't "grow substantially".

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Re: £200k lump sum to invest for an immediate income

#395599

Postby Hariseldon58 » March 14th, 2021, 11:50 pm

scotia wrote:
1nvest wrote:
How income is provided is largely irrelevant, be it via dividends or out of total returns, or whatever. Again however there may be cost/tax efficiencies that favour one over another.

Diversification is important in order to avoid over-concentration risk, again one of the major risks



So having suggested that I would not favour another contributor's selection, I feel that I should add a few of my own investments (5 year total return in brackets) :-
A Global ETF - Vanguard VWRL (94%)
A Global OEIC - Fundsmith Equity (130%)
A Global IT - Scottish Mortgage SMT - only if the investor can accept substantial volatility (389%)
A European IT - BlackRock Greater Europe Investment Trust BRGE (133%)


My income selection forms around 15% of a very diversified portfolio, I am looking forward five years. I allocate a % to near cash investments that will likely return almost nothing, but I do hold investments that have performed slightly better over the last five years and may do so again, including the 4 above, but nobody knows what comes next...

That’s why we diversify, I’m happy to take income from gains, cash, dividends whatever but not everyone is and an ‘income’ sub portfolio has merit as a backstop

Scotia has done really great with his selection of four assets with an average of almost 200% in five years, I’m not in that league by any means, but I’m not unhappy with a decent tax free annual income/gains from a diversified portfolio, its far more than we spend and that’s really all that’s needed.

Looking at the figures, we spent five years of income of course from the investment returns but gained a further 14 years of income... there comes a point where there is no need to seek the maximum possible returns.

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Re: £200k lump sum to invest for an immediate income

#395607

Postby hiriskpaul » March 15th, 2021, 1:08 am

Alan7878 wrote:
hiriskpaul wrote:If you want income, and I am not sure exactly why you do, have you considered the NHS Additional Pension? Guaranteed index linked income at a price DC pension holders would die for.


Interesting point Hiriskpaul. I hadn't looked at that for a number of years. Just reviewed the NHS pensions website and the calculator suggests that I can buy units of £250 in additional annual pension for £4880. That would be £200 after tax and so about 4% return if I am calculating this correctly. Like the rest of my pension, it increases with CPI each year from the payment start date. Not sure if it's revalued using CPI during the intervening three years prior to my retirement if I purchased today, but I expect it must be. The only problem is that I wouldn't be able to take it until I'm 60 and I have special class status allowing me to retire early at 55. when I would get my main pension. I could bridge a higher income level from ISAs for those 5 years though knowing my pension will increase from age 60.

Thanks

Alan

You will receive tax relief at 40% on your contribution. So that £4880 is only costing you £2928. £200 per year after basic rate tax means an index linked yield of 6.8%.

A couple of caveats. 1) Check out your wiggle room on your annual allowance. 2) check your lifetime allowance. Exceed the LTA and your income will be reduced by 25%, essentially just giving you basic rate tax relief. Even so, many would be very happy with an index linked annuity paying 5.1%. I definitely would!

If you can get your secured index linked income up to cover most of your needs it means you can go all out risk on your other investments if you want to. No need for a bonds/cash safety net to offset sequence of returns. That means higher expected long term returns.

The AP is increased by CPI each year, including the years before you retire.

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Re: £200k lump sum to invest for an immediate income

#395608

Postby hiriskpaul » March 15th, 2021, 1:28 am

hiriskpaul wrote:
Alan7878 wrote:
hiriskpaul wrote:If you want income, and I am not sure exactly why you do, have you considered the NHS Additional Pension? Guaranteed index linked income at a price DC pension holders would die for.


Interesting point Hiriskpaul. I hadn't looked at that for a number of years. Just reviewed the NHS pensions website and the calculator suggests that I can buy units of £250 in additional annual pension for £4880. That would be £200 after tax and so about 4% return if I am calculating this correctly. Like the rest of my pension, it increases with CPI each year from the payment start date. Not sure if it's revalued using CPI during the intervening three years prior to my retirement if I purchased today, but I expect it must be. The only problem is that I wouldn't be able to take it until I'm 60 and I have special class status allowing me to retire early at 55. when I would get my main pension. I could bridge a higher income level from ISAs for those 5 years though knowing my pension will increase from age 60.

Thanks

Alan

You will receive tax relief at 40% on your contribution. So that £4880 is only costing you £2928. £200 per year after basic rate tax means an index linked yield of 6.8%.

A couple of caveats. 1) Check out your wiggle room on your annual allowance. 2) check your lifetime allowance. Exceed the LTA and your income will be reduced by 25%, essentially just giving you basic rate tax relief. Even so, many would be very happy with an index linked annuity paying 5.1%. I definitely would!

If you can get your secured index linked income up to cover most of your needs it means you can go all out risk on your other investments if you want to. No need for a bonds/cash safety net to offset sequence of returns. That means higher expected long term returns.

The AP is increased by CPI each year, including the years before you retire.

Ps I could be and likely am wrong about the 25% income reduction on exceeding your LTA, it may be lower. DB pensions are complicated!

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Re: £200k lump sum to invest for an immediate income

#395613

Postby Alan7878 » March 15th, 2021, 6:00 am

hiriskpaul wrote:
Alan7878 wrote:
hiriskpaul wrote:If you want income, and I am not sure exactly why you do, have you considered the NHS Additional Pension? Guaranteed index linked income at a price DC pension holders would die for.


Interesting point Hiriskpaul. I hadn't looked at that for a number of years. Just reviewed the NHS pensions website and the calculator suggests that I can buy units of £250 in additional annual pension for £4880. That would be £200 after tax and so about 4% return if I am calculating this correctly. Like the rest of my pension, it increases with CPI each year from the payment start date. Not sure if it's revalued using CPI during the intervening three years prior to my retirement if I purchased today, but I expect it must be. The only problem is that I wouldn't be able to take it until I'm 60 and I have special class status allowing me to retire early at 55. when I would get my main pension. I could bridge a higher income level from ISAs for those 5 years though knowing my pension will increase from age 60.

Thanks

Alan

You will receive tax relief at 40% on your contribution. So that £4880 is only costing you £2928. £200 per year after basic rate tax means an index linked yield of 6.8%.

A couple of caveats. 1) Check out your wiggle room on your annual allowance. 2) check your lifetime allowance. Exceed the LTA and your income will be reduced by 25%, essentially just giving you basic rate tax relief. Even so, many would be very happy with an index linked annuity paying 5.1%. I definitely would!

If you can get your secured index linked income up to cover most of your needs it means you can go all out risk on your other investments if you want to. No need for a bonds/cash safety net to offset sequence of returns. That means higher expected long term returns.

The AP is increased by CPI each year, including the years before you retire.


That makes it very interesting. I will speak to my employer about this. Thank you


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