SWR 4%: An ongoing thought experiment – November Update

Ohhhh yeah, roll on the weekend.  And what better way to start than with thinking about a fake portfolio.   
The standard recap
Back to the beginning.  We are now eleven 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.  Nothing real.  So calm yourself down.
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.

Each month I assume that the alternative Mr Z has spent every penny of the prior month’s drawdown and is ready to drawdown once again from his retirement fund at the start of the month, so no cash left over from the prior months.  And he will do this whatever the financial weather, there will be no buckling down the spending hatches if the markets go a bit Norman Bates or spooging a bit more cash in the good times.

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

The fund is very simple, and the allocations to the various ETFs were almost done at random, large world, UK or US trackers.  This isn’t supposed to be a test of asset allocation, the ‘4% rule’ or any kind of detailed back testing.  Think of it more as a thought experiment, would you be able to trust your strategy when things turn south?  Chopping and changing strategies, constantly trading, only ever seems to be bad for portfolios in the long run…but we all got to deal with our curious nature and tendencies to meddle in things.  
Initial Position at 30/11/2015
First lets have a wee look at where the portfolio would be without anything withdrawn;

My my the markets have been kinder, puling us back up from the lows just after the summer.  This buy and hold type strategy just might have something going for it. 
A quiet month on the income front;
 – £180 income from the U.K. Government Bond UCITS ETF
– £41 in interest on a Cash ISA.

Dividends or interest are assumed to be paid into the cash account before we look at any withdrawal.
Mechanical rules are followed to simplify things, based on the initial asset allocation of 75% Equity and 25% Bonds&Cash.
Distributions will be taken first as income in the month and then any remaining withdrawal will be taken by selling capital, aiming to re-balance towards the 75:25 allocation with any dealing costs picked up by poor Mr Z himself.  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.
Doing this every month, rather than quarterly or annually, might not be the best option.  It exposes the intrepid Mr Z entirely to the volatility of the markets and the closing price on one fixed day at the end of the month.  Still, that’s how we started this.
At the end of November the portfolio was very slightly overweight in the Vanguard Lifestrategy fund and the US S&P500 ETF, when compared to our original target allocation, so some of those units are sold.
This results in 49 units from the S&P500 being sold (at £26.40 per unit), 2 units being sold from the Lifestrategy fund (at £136.41 per unit) and the remaining taken from cash.
Following withdrawal the portfolio looks like;

So nearly a year on from when we started this, 11 months of withdrawals at £2,083, totalling just under £23k and the fund is nearly exactly where it was.  Awesome.  I would be pretty happy with this.

Some comparisons
Let’s have a quick gander at where we would be with some alternate fund choices;

What a cracker of a graph.
The darker blue line is the experimental portfolio.  The purple line is the most aggressive allocation, with 100% in equities (the 100% equity LifeStrategy fund).  

The straight red line is just cash, earning interest and slowly running down, guaranteed to be exhausted at some point.  

The green is 100% invested in a government bond ETF.

The light blue line is *brand new*, was interested to see where an option invested in the Vanguard All-World High Yield ETF would have ended up.
These portfolios are coming back together after a huge spread in September.  The bond option is still at the top and perhaps surprisingly the high yield ETF is scraping the bottom of the barrel some way off the pace. 
In the long run, we would expect equity to out perform cash and bonds and things are coming back together again.  It would have been easy to panic in September if you were that way inclined, selling at a loss in some futile attempt at ‘limiting’ your losses.  Sticking to our asset allocation in this experiment has allowed some recovery.
A summary of all the past months are here.

Mr Z

10 thoughts on “SWR 4%: An ongoing thought experiment – November Update

  1. weenie

    Great graph! A little surprised about the Vanguard All World High Yield ETF lagging behind the others, so it'll be interesting to see how that goes as time goes on.

  2. JoeCrystal

    Hmm, just wondering here. What is the interest rate on All In Cash? I always thought it was more important to generate much dividends and interests as possible than making the capital to grow. After all, if you are relying on the income, then should the focus would be on dividends and interests instead? Great to see the fake portfolio, it is always fun to work out what might happen!

  3. London Rob

    Interesting reading and thanks as always for keeping this going – if I had managed to live for 11 months and still be worth the same as I was at the start, I would be very happy as well (I would of course have preferred if it had increased, but..!).
    Interesting on the High Yield ETF – I will watch with interest, especially as I chucked some into my ISA last week!

  4. Mr Zombie

    Hi Joe,

    The interest rate on cash is 1.55%, which was the best cash ISA I could see about a year ago.

    In my opinion, it doesn't matter. Capital growth or income, it's all part of total return. There is a mental barrier to overcome if you need to sell units, it somehow seems like you are going backwards or it's a negative thing. But I try not too look at it that way.

    If we are invested in equities and trust the 4% rule (or whatever withdrawal rate that we are happy with) then it doesn't matter if this is funded by income or selling down capital, in my opinion 🙂


  5. Mr Zombie

    Evening. Haha yeah, and increase would be nice!

    I was thinking the same about the high yield ETF. It's too short term to mean anything, but it's not what I was expecting!

  6. London Rob

    Morning 😉 Well I know I will get a nice warm fuzzy feeling inside knowing that it is still ticking up (even an extra pound a month…), but lets see.
    As I say I will watch with interest on this, and also see how my dividends from it come – is it more risky than the standard global, or does it give better returns? Who knows…!


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