Sequence of Return Risk

@dunno, Many thanks for that, I totally agree with your comments re. FG index
Ashley Ormond wrote the attached about the index in 2008, some might find it helpful.
But once again many thanks I owe you.

 

Great spreadsheet.
To work out "cash/equity" proportions, I included on the spreadsheet a Data Input component for my situation by including titles and figures for Super Pension, Super Accumulation, Super Defined Benefit, Cash/Term Deposits and shares (no direct property investments). I allocated the actual figures under headings of either 'Cash' or 'Equity'.
(My P/T Income should probably be included somewhere under 'Capital/Income' headings.)
I am fortunate to have a younger partner so I added 20 years to the 'Expected Death' figure to take it out to 120. Wow those last 20 years reduced my SWR from 3.7% to 2.9%.

 

Hi @Ynot

120!! Long periods of retirement need high equity allocation to minimse SWR levels.

Calculator could have lots of improvements for part time / pension income in retirement etc. better / more intuitive input fields for splitting current asset mix, partnered situations etc.

Good on you for modifying it to suit you. Happy for it to be a community effort if anybody wants to post refinements. I’m not much of a refiner.

Thanks for the feed back.

 

Hi @Intrigued_again

Thanks for the link to the Ashley Ormond writings. Probably some of the most interesting (to me) stuff I have seen written on an Australian perspective. I like where he is coming from in using the FG to understand rather than explicitly time the market.

You seem to have lots of links to these old writings. Any chance you would be prepared to reference them in their own thread so they can be saved for prosperity and be more easily located in future

Regards

 

If your a historical data hound like me, gold mine of australian equity data just released in this research paper.

https://www.rba.gov.au/publications/rdp/2019/2019-04.html

 

and this livewiremarkets article references

100 Years of Equity Returns

 

That’s very interesting

Cheers
Oracle

 

I'm optimistic that's the case but have some concerns about the impact of artificially low short term cash rates.

 

If rates are low, then rates are low for a reason, what’s artificial about it?

 

Can you be sure? RBA mandate is to set rates based on target CPI and unemployment both of which are statistics that are defined and reported by the government. As I said, I'm optimistic, but reserve some possibility of something else going on.

Having said that, I'm pretty sure governments and central banks in most of the developed world are absolutely desperate to generate more inflation to solve the public and private debt 'issue'. This adds to my confidence

But like most people I guess I really don't know, so I just focus on what I can control and stay alert to emergent risk and opportunities!

 

Excellent thanks for this.

 

Managing Sequence Of Return Risk With Bucket Strategies Vs A Total Return Re-balancing Approach

 

I didn't really know where to put this but figured it mostly fits in this thread.

I have a question I hoped the combined wisdom of PC could answer.

I know the SWR principle is based on the total return of the portfolio but in my head I associate a SWR with "selling down the portfolio" and so have a hard time conceptualising how it works in relation to dividends and capital together.

So, say you have a portfolio worth one million in VAS. The classic "4% withdrawal" means you can spend $40k pa.

Situation A: Say VAS is paying 4.3% dividend. I assume that means you need to reinvest 0.3% of that dividend income in order to be keeping to the 4% rule. In this case your portfolio would be growing each year, as defined by number of shares in VAS, and you would not be selling down anything.

Situation B: Say the dividend is only 3%. Meaning $30k in dividend and I assume you would sell $10k worth of VAS shares to take it up the 4%. Now in this case you are selling the portfolio down and your portfolio is diminishing as defined by number of shares in VAS.

In both cases you are "withdrawing" 4% but in situation A your portfolio is growing and in situation B your portfolio is shrinking. So I'm confuzzled!

My thinking at the moment is that situation B, with the smaller dividend, "should" theoretically see more growth in the capital value than situation A with its higher dividend.

So in a theoretically efficient market, purchasing more shares in situation A will ensure your income from the dividend keeps up with inflation where as the rising capital value which you gradually sell down is what keeps your income from the combination of dividend and capital selling up with inflation.

Is that right?

ETA: Just realised I'm a goose! The 4% is only 4% of the initial portfolio value! Not 4% of the portfolio value each year! So regardless of the "yield" you need to make sure you only spend $40k (adjusted for inflation) per year. I'm sure that makes a big difference so now I'll try to get my head around what that means! haha

 

PKFFW have a look at HVST for a classic dividend trap. Started out paying about 7% yield, now paying perhaps 12%. Sounds great, but the yield is only growing because share price is falling, dropped 40%., Giving a total return of about 1.8% p/a. worse than interest from a bank.

 

My concern isn't with what the actual yield is. In my head I've always associated SWR only with selling down the portfolio. So I was trying to get my head around how the SWR principle works when combining dividends with selling down the portfolio.

And now I know that my issue was simply one of getting it straight in my head. It doesn't matter where the, for example, $40k per annum, comes from. If dividends are more than $40k then you should be reinvesting the surplus. If they are less than $40k then sell some stock to make up the difference. It's as simple as that really. (I think! hahaha)

 

Yes, thats my take as well. You can take 4% - whether that is capital or dividend doesnt matter. Theoretically, a high yield portfolio should see reinvestment of income above 4%. Must admit I've never given the 4% SWR thing too much thought.

 

https://www.google.com/url?sa=t&sou...FjAAegQIAxAB&usg=AOvVaw0BKhiX1D9t9ROdEzW0cSYF

Very good podcast with big ern even tho its US centric!

 

I've not given it too much thought myself. However, Dan over at Ordinary Dollar developed an interesting SWR calculator and I was having a play with it and then went down the rabbit hole and was lost!

 

In other very exciting news.....
The AU version of the SWR calculator has just been released by ordinary dollar!

Safe Withdrawal Rate Calculator – Ordinary Dollar

Wonder if this takes into account valuation and the possibility of an ongoing low return environment...
Would be great if he could substitute the US equity portion into a global MSCI index.

 

You're right, you withdraw 4% but indexed by inflation each year.

You're also right, if the dividends are more than what you should withdraw then you should reinvest the difference. Similarly if the dividends are less then sell off the difference.

However, if the TSR of the high yield and low yield equities are the same there is no difference.