I was away for most of April on holiday, hence the general lack of updates round ‘ere. Let’s see how the ‘safe withdrawal rate’ experiment portfolio got on.
The standard recap
We are now 16 months into my experiment, where Mr Z in Parallel Universe Number 1 pulled the trigger on early retirement. This is a completely fictitious portfolio. It will hopefully give some insight into what it would be like living off investments, through the ups and downs that the markets provide. So actually being Financially Independent and living off investments.
At the start of the experiment, in November 2014, the investments totalled £625,000 and was split 75% to equity and 25% to cash/bonds. Which represents a fairly aggressive equity allocation for someone in ‘retirement’.
£625k should allow a ‘safe withdrawal’ of £25k a year (and increase this annually along with inflation) if we follow the 4% Safe Withdrawal Rate. 4% of £625k = £25k.
Each month let’s assume that the prior month’s drawdown has been completely spent. And that this will happen whatever the financial weather, there will be no buckling down the spending hatches if the markets go into a kamikaze nose dive or equally splurging on new biros and fancy tea bags in the good times.
The allocation between ETFs, Funds and cash is very simple. 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 this 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 30/04/2016
Let us start by looking at where the portfolio would be without any withdrawals, just market movements and income;
A bit of a volatile month, to leave the portfolio near where it was at the start of the year. It takes a while to get used to how relatively small swings mean large absolute movements in the fund’s value. A decrease of less than 1% is still a drop of nearly £6k. Scary for those of us ‘umming’ and ‘ahhing’ over £30 expenses 😀
March tends to be a big month for distributions, so April is a little disappointing at £244 compared to nearly £2,100 in income in March;
- £206 income from the U.K. Government Bond UCITS ETF
- £38 in interest on a Cash ISA.
A total of £244 in income for the month, that’s a pair of excessive road shoes for Mr Z’s bike covered.
The Mighty Withdrawal
We’ll follow simple mechanical rules, based on the initial asset allocation of 75% Equity and 25% Bonds&Cash.
Any distributions will be taken first, as income. Then any remaining withdrawal will be collected by selling capital, with an aim to re-balance towards the 75:25 allocation. Any dealing costs picked up by poor Mr Z himself.
This will mean that the parts of the portfolio that are doing well are sold, and any flagging parts of the portfolio are given a chance to recover.
Doing this every month, rather than quarterly or annually, might not be the best option. Firstly, it will incur dealing costs every month. Secondly, 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 April we are slightly overweight compared to our targeted 20% S&P500 allocation, our 10% allocation to the Developed Europe ETF and our 20% Government Bond allocation. So they will be sold, to rebalance towards the target allocation.
This results in 44 units of the S&P500 ETF being sold for £1,175, 24 units of the Government bond ETF being sold for £520 and 8 units of the developed Europe ETF being sold for £171. The balance of £240 coming from cash.
Following withdrawal the portfolio totals £614k, that’s £8k down compared to March. Ouch. That’s a good few months of salaried earnings for most of us.
Let’s have a look at the historic values of the portfolio, and include the same portfolio but with no withdrawals for comparison;
OK, so the portfolio is £11,000 down from where we started over a year ago, £614k compared to £625k. Remember, that includes 16 months of living off the thing. If we hadn’t been taking anything out, the portfolio would be at £645k now, a £20k increase, or 3.3%, over 16 months.
Looking back, it would have been a rough ride through to September. The portfolio had decreased to £590k in just 9 months, a reduction of £35k from the starting position. Back in September I commented “It is sure easier to stay equities friend when they are climbing like they did for the last few years, at the moment they are just acting all cray-cray.” Seems the Zombie was getting a little rattled. At least the position was rationalised in some way “For all the worrying about asset allocation we would have currently been better off being 100% in cash, but that is a guaranteed bet, guaranteed that in the long run the money will expire, perish, decease and generally wither away.”
Panicking and selling out of equity in September would have missed out on the recovery back up to £614k where it is now, that’s £19k of recovery. A lesson in itself, perhaps.
Let’s have a quick gander at where we would be with some alternate fund choices, holy shit, what a graph;
The test portfolio and the option of simply going 100% in the LifeStrategy100 fund are trundling along a freakishly similar path. Simplicity is always a good option.
The All-World High Dividend Yield ETF option, which might have seemed like the obvious choice, has had a bit of a tough time.
The bond fund price has retreated again.
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.
A summary of all the past months is here.
Happy Monday all.
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