SWR 4%: An Investigation. 6 months in

Recap

Back to the beginning.  It’s now a whole five 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, 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 spent every penny of his last drawdown and is ready to drawdown once again from his retirement fund, bang on the end of the month.

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

At the start of this experiment the fund was £625,000 split 75% to equity and 25% to cash and bonds.  That should be enough to withdraw £25k a year (and increase this annually along with inflation) if the 4% Safe Withdrawal Rate is to be trusted.

Position at 30/6/2015
Following on from prior months, first I’ll have a wee look at where the portfolio would be without anything withdrawn;

Positions to the end of June, no drawdown at June
Although volatile, things were generally heading north.  Things have taken a bit of a dive at the end of June in the markets, probably driven by the uncertainty around Greece.  ‘Probably’ and ‘Uncertainty’ in one sentence, I should write an economics column.
Income
Big dividend payouts from our UK and Europe trackers;
– £1,270 from the FTSE 100 tracker 
– £1,038 dividends from the Vanguard Developed Europe ETF 
– £545 in dividends from the Vanguard S&P500 ETF 
– £183 in income from the U.K. Government Bond UCITS ETF
– £43 in interest on a Cash ISA.
All of the funds are the income type and so dividends or interest are assumed to be paid into the cash account before we look at any withdrawal.
Withdrawal
We will follow some mechanical rules, 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.


There is enough in income this month due to June dividends to avoid selling down any capital units.  Nice.  
The remaining portfolio
Following withdrawal the portfolio looks like;

An easy month, with distributions covering the withdrawal amount for the month.  
So 6 months in and we have withdrawn £12,500 from the portfolio and it is down £8,406 overall.  Not quite as rosy as it was looking in March but still better off that if we had buried the cash in the garden.  Perhaps worryingly we would only need a yield of 1.13% on a portfolio that was 100% cash (or anything else) to be in the same position as we are currently.
Ignoring the cash, that was £31k wiped off the equity and bond funds in the space of a month, with both both equities and bonds dashing south, more than a years worth of withdrawals.  Painful.  

Would now be the time to start withdrawing from the cash position to let the equity recover over the coming months/years?  Or is that a bit preemptive?  
It’s the first month with a proper fall, and it’s only been a month after all.  Still it would be easy to get spooked by a market that appears to be tumbling, especially if you are living off the whims of the market.  

It’s a whole new world
Although 6 months is hardly a long enough time to draw any meaningful conclusions I thought it might be interesting to see how it would have played out with different holdings.  To keep things relatively simple lets have a look what would have happened if the portfolio had instead been;
– all in a cash ISA
– all in the UK Government Bond ETF
– all in the LifeStrategy 100% equity fund
Using the powers of Excel;

What initially stood out to me was the bonds, our supposed Mr Calm.  They have been all over the shop, with a noticeable peak in January.  Our slug of bonds that was added to add some calm to the proceedings has been getting off on the volatility normally reserved for Equity, things look relatively correlated in this six months.  Too short a period to really mean anything but it goes to show how things in the short term will never seem to follow your plan.  This volatility will be reduced to noise in the long term, but in the short term it looks pretty scary.

Other than that our test portfolio has been sat between the two extremes of all Bonds or all Equity, doing what it should do.

And, despite all the spread between the portfolios during the first six months, all 4 of the experimental portfolios are within 1% of one another.  Perhaps all the fretting around asset allocation means nothing…but somehow I doubt it will play out like that in the long run.  Cash has nowhere to go but down and the others have the potential to recover (or to come crashing down).

Looking forwards
Interesting month for the experiment.  Nothing too much to panic about perhaps, but I would feel a little bit bad about the apparent loss.  What’s the lesson?  Check your holdings less frequently and let the market do it’s thing?  Maybe…

Mr Z

One thought on “SWR 4%: An Investigation. 6 months in

Leave a Reply

Your email address will not be published. Required fields are marked *