Thank you for your rapid and thoughtful response Tom.
I note that your reply is consistent with previous insights you have given into the mechanics of your portfolio management.
PRM, I like that;) Certainly less grandiose than ‘endowment’ or ‘family office’ or some such. My net worth is nowhere near that required for such a title!!
Fortunately, taxes are largely taken out of the equation due to the UK’s rather generous legislation towards small and medium sized personal investors. Similarly, expenses are now negligible (<0.1%) due to the evolution of the industry and careful choice of investments.
However, while I understand your approach (I think) I am coming at it from a total return perspective and treating this portfolio as a whole. There are of course numerous nuances at granular levels due to personal circumstances, risk tolerance, domicile, etc. however, conceptually, I should provide clarification.
My objectives are 1) to make withdrawals from the portfolio that in the medium term (10yrs) at least keep up with inflation and 2) to at least maintain the portfolio’s real value over the long term (20yrs).
I do not distinguish between the source of investment returns (income, capital appreciation, volatility trading et al). I intend to take 3.5% of the value of the portfolio each year.
I am comfortable with both the portfolio and withdrawals from it potentially declining by 30% (nominal) and expect to act rationally when this occurs, with a plan if things get worse. My reference point is a traditionally managed 70/30 stock/bond portfolio invested globally both from a risk and return perspective.
I am currently at 70% equities and 30% cash and am managing the whole portfolio as a single Aim account. I am looking for the Aim settings to throw off cash which keeps the capital reserve nicely stocked in the good times and that anything above the vwave cash level becomes a ‘bonus’ which I could choose to withdraw and spend or ‘reinvest’ by pulling a ‘vealie’ (I love that phrase btw, it ‘vealie’ clearly tells me what to do. Pardon the pun :) :)
The true benefit of using AIM, I hope, will be in reducing the recovery time following drawdowns to help smooth the annual portfolio values and achieving something close to the 5%ish long term real equity returns (with a nod to Clive’s significant contributions on this subject) to make the 3.5% withdrawal rate achievable with headroom.
The cash side is currently earning me c.2.5% above base rate which pre 2018 would have been about 2.5% real (ah the good old days). This is achieved mostly by seeking out the best deposit accounts and CD’s with a bit of credit risk in there too to bump up the yield (but nothing too serious). A sort of fixed income barbell aimed at maintaining the real value of cash in the short term. Stock side is essentially an ACWI tracker. Dividends are reinvested.
My thinking on the pc adjustments is to keep me on the straight and narrow with the inflation tracking aspects of my objectives over the long haul while recognising that short term portfolio values will deviate significantly. I have no requirement to take an ‘income’ that monotonously increases by cpi each year and believe any requirement to do so adds a significant risk of failure for a distribution portfolio invested mostly in volatile assets.
Hopefully this blathering makes sense. I suppose posting here is a reality check moment for me and to see what other thoughts are out there. From my wider reading I still think short thrift is given to ‘living off your assets’ in the personal finance ecosphere and much of the verbiage is downright dangerous.
That’s enough for today. Soap box stays in the cupboard.
Thanks again
Nick
AI
