So I’ve been running an experimental portfolio for, blimey, nearly two and a half years now. The idea was to start with a fund of £625k and then withdraw 4% annually, in monthly instalments, just to see what happens. The would give someone £25,000 a year to live off.
Historic investigations concluded that a 4% withdrawal rate gives a reasonable chance of success, and indeed many times the fund continues to grow despite withdrawals. Do a bit of light reading and you’ll find there’s plenty of reasons why a 4% withdrawal rate might be adequate and plenty of reasons why it not be prudent enough. Everybody loves a bit of independent speculation.
I’m looking at just a single example, starting at one point in time, and following a pre-determined set of rules. That’s it, it’s very limited. But, hopefully, a little more engaging as it unfolds in real time.
The markets have been kind and this experimental portfolio has grown more than my real one over the last two and a bit years. The rules I’ve set up are very mechanical; withdraw the same amount at the end of each month regardless of what’s happened. But would you have done anything different, given how it’s unfolded so far?
Time hammers on. It’s been three months since the last experiment update which brought us to the end of February. November to February saw markets climb, and the experimental fund increased by £49.9k despite withdrawals over the period.
Since the last update the experimental fund received quarterly dividends of £2,317 in March, and another £469 in April and May. That’s a nice chunk of income from the quarterly dividend payments.
Equity prices dipped in April, but recovered again in May leaving us in a similar position to where we were at the end of February.
Numbers above are after withdrawals. Withdrawals are made monthly, and taken to balance back towards the initial asset allocation. Which is broadly a 75/20/5 split, of equity/bonds/cash. So if the fund is overweight in bonds at the end of the month, then some of these are sold to get back towards the intended 20% bond holding.
Over the last 4 months that meant selling the S&P500 in February and a fair whack of the European ETF in April and May.
Withdrawals started at £2,033 in 2015 and have grown to £2,144 for 2017 in line with inflation.
I also pulled together some alternative portfolios. You lucky lucky lot.
The red line is 100% cash, destined to be depleted as the withdrawals are larger than the interest earned. At least it’s not volatile…
The green line is 100% in government bonds, a bit hard to see in the graph above but it is a less volatile option than equity. The government bond fund price barely moved for the last few months, like Theresa May’s career it looks like it’s flatlined.
The purple line is 100% in the Vanguard LifeStrategy 100% Equity, the blue our experiment portfolio and the light blue 75% in the Vanguard All World High Yield ETF. They represent the portfolios with a heavier weighting in equity. Some quick sums show these have the highest volatility, at least when measured by standard deviation. They are following pretty similar paths, but there is still a £50k spread between them.
It’s interesting looking back, in September 2015 the portfolio was at it’s low following month after month of decline. Things didn’t look so rosy then, and if it was me I would have been rattled. I’d have been lining up the rice and beans instead of the holidays abroad, no doubt at least considering reducing my withdrawal amount. Turns out everything is peachy now.
I take my pants off (I believe that’s the saying) to people actually living off their portfolio and managing their own withdrawals.
Past investigation posts are here, in handy summary page.