Sequence of Return Risk

Discussion in 'Share Investing Strategies, Theories & Education' started by dunno, 2nd Sep, 2017.

Join Australia's most dynamic and respected property investment community
  1. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,480
    Location:
    Sydney
    I am curious about the methodology here.....are they just using price return for Australia perhaps (not accounting for divs?). Worthy of a closer look
     
  2. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    As was told to me many years ago “beware the well meaning American”! Each country is unique especially when spending in retirement. Which is why I look to local investing mentors / role models rather than the big names in print which are predominantly Americans.

    Also beware of extrapolating bond returns into future decades in particular:
    In this case the same would seem to roughly apply to Australian Bonds.

    Our tax system strongly favours the dividend focused investor particularly in retirement. Hence if mostly franked dividends and a cash buffer can meet your retirement spending needs then it would appear to be a reasonable strategy for the Aussie investor.

    Geriatric ramblings made worse by alcohol consumption as usual. Others will no doubt disagree. I read and read and read, think and think and think but nothing yet can convince me to change the strategy that has worked So well for us for a very long time. Gimme income.

    Not advice.
     
  3. Heinz57

    Heinz57 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,002
    Location:
    Desert Island
    Heh! "Gimme Income"
     
  4. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    Same thoughts. Doesn’t look right to me.
     
  5. Heinz57

    Heinz57 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,002
    Location:
    Desert Island
  6. Snowball

    Snowball Well-Known Member

    Joined:
    28th Dec, 2016
    Posts:
    661
    Location:
    Perth
    Gotta be joking right?

    Withdrawal rate of 2.5%?

    Dividend returns alone would’ve been 4-5%. Market returns were around 9-12%. Both ignoring franking which is a decent chunk of return these days.

    Something doesn’t add up alright.

    I don’t bother wasting my time reading this stuff anymore. There never will be a magic number. Markets change over time and what worked in the past can’t necessarily be extrapolated into the future.

    Everyone needs to be adaptable and also accept there’s no bulletproof plan - only the one that you can stick to and you feel comfortable with.
     
    Hodor, Nodrog, Heinz57 and 1 other person like this.
  7. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    Anne11 likes this.
  8. Snowball

    Snowball Well-Known Member

    Joined:
    28th Dec, 2016
    Posts:
    661
    Location:
    Perth
    See a couple readers are thinking why can’t we just live on the dividends in retirement and have a buffer - and they’re already doing it.
     
    Anne11 likes this.
  9. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    Sounds like a good plan to me:).
     
    Redwing and sharon like this.
  10. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,924
    Location:
    WA
  11. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,924
    Location:
    WA
    Exactly, I see these articles as guidelines or signposts rather than hard and fast 'rules'

    Your individual situation will differ due to date-of-birth, asset balances and expense/budget requirements along with consideration towards other income streams such as Super, social security, pensions, part-time work and the gyrations of the investment markets

    You generally need a lot more financial assets these days to replace the income from working your day job to the life of Riley based on investment and retirement income alone

    [​IMG]
     
  12. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    :D
    Love your shoes @Redwing. And since when have you started shaving your legs and wearing nail polish:eek:?
     
    Redwing likes this.
  13. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    Redwing likes this.
  14. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    @Anthony Brew I copied my and your posts to here so not to get the ETF thread off topic. Well done in quickly picking up on some key strategies.
    Have a read of this cheap booklet by Bernstein. He’s well respected in the industry given his vast knowledge of market history and risk management:

    https://www.amazon.com.au/Ages-Investor-Critical-Life-cycle-Investing-ebook/dp/B008CM2T2A
     
    Anthony Brew likes this.
  15. Anthony Brew

    Anthony Brew Well-Known Member

    Joined:
    18th Feb, 2017
    Posts:
    1,176
    Location:
    Australia
    Finally got through the thread. I have a question though.

    Lets say you have 3 buckets
    1. Cash for living expenses for up to 1 year.
    2. Fixed interest for up to 3 years.
    3. Equities

    Each year take the difference between dividends paid and 1 year worth living expenses and take that from bucket 2 and put it into bucket 1 (along with dividends).

    I am not sure what the rules for moving from bucket 3 to bucket 2 is though.
    One article suggested that you only move it if the return for equities that year is at least 12-15%, and this would mean some years bucket 2 will deplete but they said that it's ok as it will eventually get refilled.
    This sounds wrong to me because due to SOR risk you would want to have buckets 2 full when the markets have gone sideways and then there is a crash in which case following their advice would leave you with depleted bucket 2 just before a crash, totally missing the point of the whole exercise.

    Another said that you avoid taking money out if there was a negative return for the year. I am not sure if this means negative after taking dividends or before. This has it's own problems too becuase what if the market went down 20% for each of 2 consecutive years and then increased a normal amount. You are still buying it low.

    Wondering if anyone has figured out any rules for when to take money out of equities to replenish bucket 2?
     
  16. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    First up can you give me a link to the article that recommends 12 - 15% before rebalancing bucket three to fixed interest.

    So many variables:

    What’s your age?

    When do you want to retire?

    Is your wealth sufficient to live on dividends alone allowing for a temporary cut in dividends when markets tank?

    What’s your idea of fixed interest, term deposits vs bond fund?

    One of the more conservative approaches to risk management of retirement income is the “ floor with upside” approach. It also comes under the name of “liability matching”. Think of this like two buckets, one in risk free assets to cover a lifetime of essential expenses and the other in risk assets for non-essential expenses not covered by dividends / interest, inflation protection and bequests etc. However you need a decent level of wealth to take this approach.

    Did you read the book I suggested?
     
  17. Anthony Brew

    Anthony Brew Well-Known Member

    Joined:
    18th Feb, 2017
    Posts:
    1,176
    Location:
    Australia
    Thanks for the reply @Nodrog.

    I am thinking about if I was to retire in my 40's (in less than 10 years), so there would be a lot of decades that the money would need to last.

    I would be planning to retire with enough to use a 3.5% withdrawal rate. As I am not sure I will be retiring in Australia or not, I think it is too risky to have more than half of my equities in the Aussie market. And since VGS has a lower dividend and if I retire outside Australia as a non-resident I would get no imputation credits, I am thinking that I won't have a choice to live off the dividends alone, which is a bummer as that would be very easy to do.

    My idea of fixed interest is VAF, not bonds.

    I can't imagine ever having enough wealth to have a lifetime of essential expenses in low return risk-free assets. That's beyond me. If I was that rich I wouldn't have to read property chat lol.

    I haven't read the book yet. I will start on that shortly.
     
  18. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    Given this additional information that book may not be suitable.
     
  19. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,670
    Location:
    GONE
    In that case something like this might be helpful:

    A better way to generate retirement income
     
    Redwing likes this.
  20. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,924
    Location:
    WA
    Nodrog likes this.