Investment model and retirement buckets

Discussion in 'Share Investing Strategies, Theories & Education' started by Trevor Genis, 18th Dec, 2018.

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  1. Trevor Genis

    Trevor Genis New Member

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    HI All

    Given all the volatility and external factors affecting our investments - I am trying to come up with a resilient investment strategy that can then transition into a retirement bucket strategy.

    This is my thinking for the investment strategy to maximise returns:

    upload_2018-12-17_17-10-5.png

    and then this would transition into a retirement bucket strategy as follows:

    upload_2018-12-17_17-12-28.png

    any comments or guidance would be gratefully received.
    At this point it's me talking to my whiteboard :)
     
  2. willair

    willair Well-Known Member Premium Member

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    Just be care full the white board does not start talking back ,could makes a big difference in the end result..
     
    Never giveup and symposia like this.
  3. Nodrog

    Nodrog Well-Known Member

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    Been very interested in bucket approaches myself over the years. But as a retiree rather than time segmented bucket approach which can be a pain to manage I just keep it very simple with a basic two bucket strategy. That is B1 = Risk Free Bucket and B2 = Risk Bucket.

    I note you’ve well and truely slice and diced your portfolio. In retirement it could be a pain trying to manage withdrawals with so many moving parts. Not sure what your aim is eventually whether performance and / or smoothing capital volatility through correlation relationships etc. Given minimal Bonds I assume it’s performance that you’re after.

    Whether all this slicing and dicing does any better than a simple one or two Fund global portfolio remains to be seen in the future. It’s not as if all this stuff isn’t well known anymore and first mover advantage arbitraged away. And even if it continues to work very few have the patience (especially in retirement when less time to wait) to withstand long periods of underperformance relative to the market in general. Any asset class under 10% is unlikely to have any notable impact on the portfolio.

    So many variables as to age of retirement, level of wealth and whether wanting to live off income or capital or both? And where will you reside in retirement? I note you’re currently in South Africa? Currency and Hedging may also be a factor.

    Taking into account the portfolio you provided perhaps this could be simplified to:

    RISK BUCKET:
    VT - Global All Cap Blend
    VVLU - Global All Cap Value

    It wanting to overweight REITs (to better match property economic footprint) then a US and / or Global REIT Index ETF could be added. I personally don’t bother and simply accept the main index weighting.

    RISK FREE BUCKET:
    Cash, CDs, Bonds, whatever you fancy but preferably “safe” so no corporate bonds etc.

    Normally when anyone mentions Buckets there’s the usual crowd keen to tell you it’s inferior to standard asset allocation (eg 60 / 40) and it’s all just mental arithmetic and to make the investor feel more comfortable and help them sleep better at night. Well given investing success is 80% or more due to behavioural factors then anything that helps the investor understand better, stay the course and sleep well at night Is very important in my view.

    Probably more detail is required to expand further.
     
    Last edited: 18th Dec, 2018
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  4. Islay

    Islay Well-Known Member

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    your investment bucket might be overflowing? more than 100% full?
     
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  5. Nodrog

    Nodrog Well-Known Member

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    I think you’re being cheeky:).

    But overflowing is however one of the main concepts behind Bucketing.

    In our case the Risk Free Bucket equals X years living expenses (adjusted each year for inflation) in cash / term deposits after taking into account other risk free sources of income such as small Gov’t Super Pensions from when we worked in the Public Service.

    Fortunately part of the portfolio dividends alone top up our Risk Free Bucket. But if not one can use the capital overflow from the Risk Bucket (year of strong market returns) to top up the Risk Free Bucket. In years of poor market returns one draws down from the Risk Free Portfolio without touching the Risk Portfolio.

    Words might make it sound harder than it is but it’s extremely simple in practice.

    I’ve read an enormous amount of stuff on this over the years including forum discussions globally but gee some have strong views which can result in endless debate. I just accept that there’s no perfect solution and it’s mostly a behavioural thing which has worked spectacularly well for us over the years of now which we are in retirement.
     
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  6. Islay

    Islay Well-Known Member

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    yes, it was a poor attempt at humour. I like the bucket approach and have a cash/near cash bucket for X years of living expenses. Dividends from bucket 2 will top the cash bucket up as required. Hopefully we will not need to sell the capital base. Bucket 3 -the largest bucket, consists of everything else and is not really a part of our retirement portfolio but we are lucky enough to have it.
     
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  7. sash

    sash Well-Known Member

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    100% agree.....

    Too many different investment type are PIA to manage.

    I too like 55-70% shares (high risk) ...and 45-30% fixed interest/cash (lower risk).

    Though I am 100% cash for the moment....will dip my toes in the new year.....I reckon this correction is very similar to what happened in 2015. Where the market pulled back 15-20%

     
  8. Nodrog

    Nodrog Well-Known Member

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    Similar boat. Unfortunately Super pension rules will force us to sell capital down the track. But then the proceeds will simply be used to buy the same outside of Super. Given there’s no CGT in Super pension it’s just small transaction costs with the only downside being the asset resides in a higher tax environment.
     
  9. PandS

    PandS Well-Known Member

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    The only sure way to bullet proof is have more than you need, as whatever allocation, plan you have you can't be sure it will work as you can't predict the market and how long the down turn will last and it a pain in the ass to keep track.

    say you need a million to retire, make sure you have 2 million then live on 4% income on 1 million, the other million can be used for rainy day, it collecting 4% but you never touch it and it get used during market down turn or whatever
     
  10. Nodrog

    Nodrog Well-Known Member

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    Yeah good points. We’re fortunate enough to be a better position than most.

    However many won’t be in such a position hence why earlier I suggested the reason we use the Bucket Approach is really a behavioural thing which works for us. For others it may be a totally different approach even including such things as annuities (I hate them personally). Given an unknown future all one can do is pick whatever they think will work for them whilst allowing them to sleep at night.
     
  11. Islay

    Islay Well-Known Member

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    yes, that's it. Hopefully we are retired for a long time! We have only started pension phase this year. Meanwhile the super in accumulation continues to grow (hopefully) in a favourable tax environment. Super laws are changed regularly so I am sure we will see many more!
     
  12. Nodrog

    Nodrog Well-Known Member

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    Was fortunate to just scrape in being able to commence Super pension at 55. Currently 58. The recent changes have forced me to move excess into Accumulation which can grow untouched at least under current rules. Dividends cover pension payments easily at this time. The 5% pension withdrawal rate doesn’t kick in till 65. Should franking credit refunds get scrapped and given all our International equities (lower yielding) and most cash / term deposits are in the SMSF some forced selling of capital may potentially come earlier than that. But as mentioned earlier it’s no big deal, just moves into personal names to continue growing there.
     
  13. Islay

    Islay Well-Known Member

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    Except for ages, (we are both 60) we are similar to you. Both capped at $1.6m, both have accumulation accounts. International shares, Cash/near cash are in super too. The removal of franking credits will hurt but we have been lucky and you can never rely on anything a government now or in the future can play with.
     
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  14. Nodrog

    Nodrog Well-Known Member

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    My wife’s still a spring chicken at 55 so she can’t start her Super pension until another 2.5 years at 58:). She’s retired though. Plenty of time to hone her home brewing skills:cool:.
     
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  15. The Falcon

    The Falcon Well-Known Member

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    Where did this asset allocation come from mate? looks like a slicer and dicers wet dream! All US listed ETFs, no AUD hedging, looks like a Merriman special! I think you need to cool out and start with the basic portfolio building blocks.
     
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  16. Nodrog

    Nodrog Well-Known Member

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    Curious about Bucket-3? That is provided it’s something you’re prepared to share of course.

    I’ve seen many variations for Bucket 3 and beyond including riskier growth assets for eventual children Estate beneficiaries etc.
     
  17. Islay

    Islay Well-Known Member

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    I called it bucket 3 just to give it a name. we used to call it our Claytons super - the super you have when you are not old enough to access super (lol). It is our assets that are not a part of our superannuation. We semi retired in 2008/9 and this bucket provided our passive income until this year when we both started pension phase in our SMSF. I guess it will eventually go to our kids.
     
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  18. Scott No Mates

    Scott No Mates Well-Known Member

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    How will you cope with the asset value in on segment increasing or decreasing faster than the others - are you going to constantly rebalance?
     
  19. Islay

    Islay Well-Known Member

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    Are you talking to me @Scott No Mates? As mentioned in a earlier post " I like the bucket approach and have a cash/near cash bucket for X years of living expenses. Dividends from bucket 2 will top the cash bucket up as required. Hopefully we will not need to sell the capital base. Bucket 3 -the largest bucket, consists of everything else and is not really a part of our retirement portfolio but we are lucky enough to have it".
     
  20. Nodrog

    Nodrog Well-Known Member

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    Oh. So if I understand correctly you mean assets outside of Super.

    Sounds similar to us. I retired at 41 and wife at 51. We lived off the dividends from shares in the Family Trust and personal names prior to me being able to get access to Super at 55. We tried to get as much as we could into low / no tax Super environment but due to maximum caps now in place that’s at an end. Hence we still have a sizable portfolio outside Super (Clayton’s Super:)) and glad we do given how Gov’ts keep messing with Super.

    In regard to Super It also means that the excess above maximum starting Pension balance gets to accumulate untouched in the background. You sort of tend to ignore it as you aren’t forced to draw on it. As you say that’s also lucky to have when not needed.

    I’m glad even in retirement we earn more than we spend as I would be very disappointed not to be able to continually buy more listed funds. Collecting more and more parcels of these is my addiction / hobby. Still get quite excited when they’re on sale.
     
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