Withdrawal experiment – Month 15 – March 2016 – Keep on chugging!

I had to wrestle control back from The Queen, but I have it back.

I got a bit over excited with this months update.  Let me explain.  I overamped and updated the numbers a day early, so everything is at 30th of March.  Please forgive me 🙁

Things have felt like they have calmed down since January and the financial collapse that didn’t happen.  With all the assets in this experiment invested in Vanguard funds, a read of The Escape Artist’s repost of a Jim Collins article is some nice reading.      

The standard recap

Back to the beginning.  We are now 15 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 the experimental fund totalled £625,000 and was split 75% to equity and 25% to cash/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.  I.e. 4% of £625k = £25k.

Each month I assume that the alternative Mr Z has spent every penny of the prior months drawdown, so no cash is left.  And he will do this whatever the financial weather, there will be no buckling down the spending hatches if the markets go into a kamikaze nose dive or splurging on new biros and fancy tea bags in the good times.

In reality you could 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.  All helping to make your portfolio that much more resilient. 

The allocation between ETFs, Funds and cash is very simple and honestly chosen at pretty much random at the start of the experiment.  This isn’t a test of asset allocation, rebalancing, the ‘4% rule’ or any kind of detailed back testing.  Think of it more as an ongoing thought experiment, would you be able to trust your strategy when things turn south?  Failure or success of this one isolated case is so very far from testing the actual robustness of the 4% rule and it shouldn’t be taken as such.  Chopping and changing strategies, constantly trading, only ever seems to be bad for portfolios in the long run…but we all have to deal with our curious nature and tendencies to meddle in things.

Initial Position at 31/03/2016

First, a peek at where the portfolio would be without any withdrawals, just market movements and income.  A bit of a recovery following that volatile January;

How will the safe withdrawal rate hold up?

March 2016 – 4% SWR Experiment

Increases across all the equity holdings in our fictitious funds with bonds remaining relatively flat.   Combined with some nice distributions at the end of March leaving us nearly back up at £625k, where we started this whole thing way back in 2014.


‘Cause tonight for the first time, just about half past ten.  For the first time in history, it’s going to start raining…distributions?

  • £622 from the S&P500 ETF
  • £913 from the FTSE100 ETF
  • £345 from the Developed Europe ETF
  • £170 income from the U.K. Government Bond UCITS ETF
  • £38 in interest on a Cash ISA.

That’s a total of £2,088 in income for the month, lovely.  There is a big distribution due from the LifeStrategy Fund, which makes up most of the portfolio, but it is not due for settlement until May.

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 March we are overweight compared to our targeted 20% S&P500 allocation and our 5% cash allocation due to all the scrumptious dividends in the month.

With such a fruitful month in terms of distributions the whole month’s withdrawal can be funded by these alone.  The £2,106 monthly withdrawal can simply be taken from cash.

Following withdrawal the portfolio totals £622k, that’s up £12k from February.  Certainly not an amount to shake a stick, or anything else, at.  Comparing it to the same portfolio but with no withdrawals;

March 2016 - 4% SWR - Comparison to no withdrawal

March 2016 – 4% SWR – Comparison to no withdrawal

The portfolio is now only £1k down on where we started, but remember that this includes just over £31k of withdrawals.  With ‘no-withdrawals’ the portfolio would have increased to £652k, a £27k increase, or 4.2%, over 15 months.

Withdrawals are a huge bleed on a portfolio.  Admittedly it’s the whole point of them in the world of Financial Independence, build them up to a point where they can spew out enough dividends and capital growth for us to exist off.

At the same time, just a small amount of other income to support the portfolio or flexibility would have a huge positive impact.  As a quick approximation multiplying a monthly income stream by 300 gives us as estimate of the capital that it ‘replaces’.  Even just £100 a month can replace £30k of required capital.  £500 a month from a small part time job that you love reduces the amount of capital you need by £150k.  That’s huge!

Some comparisons

Let’s have a quick gander at where we would be with some alternate fund choices, holy shit, what a graph;

March 2016 - 4% SWR Experiment - Comparison to other portfolios

March 2016 – 4% SWR Experiment – Comparison to other portfolios.

  • 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 UK government bond ETF.
  • The light blue line is the Vanguard All-World High Yield ETF, which might have seemed like an attractive choice to use during your drawdown phase.

The test portfolio and 100% in the LifeStrategy100 fund are trundling along a freakishly similar path. The All-World High Dividend Yield ETF option had a bit of recovery in March, leaving the 100% option flagging.  The bond fund price has (finally!) retreated a little, but is still looking like the most attractive option.

Long term expectation tells us that shares should outperform bonds over the majority of time periods, so we may well see a reversion to that at some point in the future.  I must admit to being happy that the All-World High Dividend Yield ETF has overtaken cash.  I know it’s just volatility that put it below cash, but it was a little disconcerting nonetheless.   If the bond fund would now drop to somewhere in between the options that include equity and the all cash option it would make me feel better.  Stupid I know, but it would.

A summary of all the past months are here.


I know that equities (and bond funds) are volatile.  That’s part of the bargain you strike, in return for higher long term returns.  It still doesn’t sit right with me that the bond fund has been out performing the equity options, since half way through 2015.  What’s happened is just one path of possible billions, just chance that it has happened, and in most of the other cases the equity would be outperforming the bonds.  Hence the overall expectation that equities out perform bonds.  And it’s potentially just a blip, in the long run equity should out perform.  So why doesn’t it sit right?

I realise that it is perfectly possible for bonds to outperform equities over the next 30 years, it is a viable possible outcome.  Even if it is very unlikely, it is still a plausible outcome.  Perhaps it’s just the confirmation that the risk inherent with investing is very real that’s making it sit uneasy.

Happy weekend all.

Mr Z

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