It’s been a busy July for poor old Mr Zombie at work in this universe, but Mr Zombie in parallel universe number one just continues to live off his portfolio;
The standard recap
We are now 19 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, the end of 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 (which then increases 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. Luckily, that keeps things simple.
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 31/07/2016
Let us start by looking at where the portfolio would be without any withdrawals, just market movements and income;
Another month with substantial volatility, with an increase of £24k from June’s position. Remember volatility isn’t always a negative thing, upside volatility increases our portfolio. Doesn’t mean the portfolio won’t succumb to the downward pressure of negative volatility at some point.
Every investment is up since the end of June, nice position to be in and hopefully everyone is seeing similar in their own portfolios.
Pretty sparse month for income, I guess the dividend declarers are too busy sunning their pale corporate bodies on beaches throughout July to declare anything;
- £204 income from the U.K. Government Bond UCITS ETF; and
- £42 in interest on a Cash ISA.
A total of £246 for July, pretty pathetic after we saw over £3k in income for both June and July. That is one of the features of using ETF’s, they tend to distribute quarterly or annually, leaving you parched for income the rest of the year.
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.
It’s time to sell some capital, and with the capital increases we’ve seen over the last few months, boy do we have some capital to sell. Our holdings in Vanguard’s LifeStrategy 100% Equity Fund and the S&P500 ETF have increased the most, so we are overweight in these holdings. Best sell some to get back down towards our target allocation and free up some income for the month 🙂
4 units of the LifeStrategy total £617 and 40 units of the S&P500 ETF total £1,245, which combined with our income for the month (and a little bit of rounding) leave us with the desired £2,106 withdrawal.
Following the cash withdrawal of £2,106 the portfolio totals £683k, lovely stuff. Up nearly £60k from where we started just over a year and a half ago.
Let’s have a look at the historic values of the portfolio, and include the same portfolio but with no withdrawals for comparison, to see how the journey has been so far;
The all cash option, the red line, continues on it’s guaranteed decline. Sure, there’s no volatility to deal with, but it’s only a matter of time until it’s completely exhausted.
The test portfolio and the option of simply going 100% in the LifeStrategy100 fund are still heading along the same trajectory, as if trundling along the same rail track. But that track has been climbing for the last three months.
The two surprising points for me are the option of going all into bonds still being up at the top and the Vanguard All World High Yield portfolio trailing by such a margin (£30k).
A summary of all the past months of the safe withdrawal rate experiment are here.
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