Ohhhh yeah, roll on the weekend. And what better way to start than with thinking about a fake portfolio.
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First lets have a wee look at where the portfolio would be without anything withdrawn;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.
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.