It’s now three months into the experiment where Mr Z in Parallel Universe Number 1
pulled the trigger on early retirement. This is a completely fictitious portfolio
and just a little experiment for me, hopefully giving some insight on what it would actually be like through the ups and downs of living off an investment portfolio.
Each month I am going to assume that Mr Z has lived true to his word and spent every penny of his last paycheck and is ready to draw down once again from his retirement fund, bang on the end of the month. The drawdown is assumed to be taken from the overweight allocations.
This should be prudent, as in reality you would cut back when the markets are down, you may have some months where you do a little bit of work and get a little bit of side income, you might not spend the full withdrawal amount, etc
Mr Z had yet another good tail wind, leaving all but one of his positions up since the end of February and a few distributions at the end of Quarter 1 have provided a nice boost to the cash position.
Quite a few distributions were paid out for Q1 from the various index funds.
– £564 in distributions from the US S&P 500 ETF (VUSA)
– £775 from the FTSE 100 ETF (VUKE)
– £289 in distributions from the Developed Europe ETF (VEUR)
– £177 from the UK Government Bonds ETF (VGOV)
– £41 in interest on his Cash ISA.
All of the funds are the income type and so distributions are assumed to be paid into the cash account.
Following last months method, there are some mechanical rules for Mr Z to follow, based on the initial asset allocation of 75% Equity and 25% Bonds&Cash.
Any distributions will be taken directly and then any remaining withdrawal will be taken to re-balance towards the 75:25 allocation with any dealing costs picked up by poor Mr Z himself out of his £2,083). This should then skim off any parts of the portfolio that are doing well and hopefully give any flagging parts of the portfolio catch up while avoiding drawing on capital unnecessarily.
|Asset Allocation predrawdown as at 31/3/2015
So Mr Z’s fictitious portfolio would sit at 75.07% equity and 24.93% Bonds&Cash.
Including the income on the Cash ISA there was a total of £1,845.45 in distributions in the month, so leaving £237.49 left to distribute.
Therefore he will draw down a weighted amount from each of Lifestategy, S&P 500 and cash depending on how overweight they individually are.
With a bit of rounding and a slight adjustment to sell a whole number of units we actually see withdrawals of;
– £143.19 from the LifeStrategy Fund (1 units)
– £79.91 from the S&P 500 ETF (3 units)
– £14.38 extra from cash
The remaining portfolio
Following withdrawal the portfolio looks like;
|Portfolio after drawdown – 31/3/2015
Every position is actually up since the start apart from the FTSE 100 ETF which is pretty much even.
It’s worth remembering that at this point there have been 3 month’s worth of withdrawals. So £2,083.333 * 3 = £6,250 has been drawn down in total and the position is still significantly up since starting this experiment.
When I initially set this up I spent about 30 minutes choosing the asset allocation and the actual funds for investing in (all of which are Vanguard). I didn’t want to get too involved in fund selection or asset allocation at that point, just a simple 75% equity and 25% bond/cash split and go from there.
So what has Q1 taught me? That Mr Z is flying along nicely in his parallel universe, but this is all due to upwards movement in the global market place, nothing fancy to do with portfolio design. So that could easily go the other way.
When things do (and they will) turn south I’m hoping that there will be enough in bonds and cash to reduce the overall volatility and to weather the storm. At the moment there is about £162k in bonds and cash, which is approximately 6 and a half years worth of expenses. But that will be eating directly into capital, so we’d hope that our equity would bounce back when this happens.
With a lot of chirp in the press at the moment about an imminent crash I wonder if I would be strong enough to trust my asset allocation at this point and sit with such a large portion exposed to the market. Who knows? But I do know that Mr Z in the parrallel universe has no choice and he will plow on regardless.
Best of luck old chap.