Once again, the month has flown by at a scarily rapid pace. Let’s have a look at where our little experiment got to.
The standard recap
We are now 21 months into this 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. Being “Financially Independent” and living off investments, then.
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 would 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 is 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. Suspiciously, that also 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 31/09/2016
Let us start by looking at where the portfolio would be without any withdrawals, just market movements and income;
Given the increase that we have seen since the start of the year, a £4k increase seems a bit paltry. It’ll all even itself out at some point in the future. Probably. Maybe.
Ah, quarterly Dividends. Don’t the just deserve that capital and don’t you just love them;
- £673 dividend on the S&P500 ETF
- £992 dividend on the FTSE100 ETF
- £391 dividend on the Developed Europe ETF
- £187 income from the U.K. Government Bond UCITS ETF; and
- £42 in interest on a Cash ISA.
A total of £2,2850 for September. Happy days, we can ignore the messy business of selling down any capital in that case.
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.
Just a simple cash withdrawal this month, following the fruitful dividend harvest. After Mr Z sucking out £2,106 to do with as he pleases, the portfolio totals £695k.
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;
Well, well, well. Would you look at that. It seems that the option of going all into a government bond fund has finally fallen from the top perch. What’s caused this reverse of fortune? Who knows, and frankly who cares. It is what it is.
Cash continues its steady, withdrawal driven decline whilst the other options, invested in various different equity options continue along similar paths.
It’s pretty comforting to think that if this experiment was real, and Mr Z was in fact YOU, that after a year and three quarters of living off your investments you would have actually still made a gain. If you so desired you could returm to work, having actually made some fucking money.
Thing is, the real test will come when the next downturn comes around, when the next recession has it’s way with our economy or when the next absolute fuck-nut gets into power. With a depleted market value it will be interesting to see how the fund recovers with wthdrawals
A summary of all the past months of the safe withdrawal rate experiment are here.
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