A.I.M. Users Bulletin Board

[ls7550]

Hi Tom.

I recently helped a friend start a 30/30/30/10 portfolio. 30% Growth Index ETF, 30% Real Estate (REIT) ETF, 30% Gold surrogate ETF and 10% cash equivalents. I suggested annual rebalance or to watch for the percentages to deviate by maybe 20% of their starting point (36% high side, 24% low side). The cash sleeve is there to trim if they are feeling excessively motivated by market activity. This is a relatively small account and they're in their '70s. They don't want to be bothered often but promise to look at their statement once in a while to see if the ratios are holding.

Some opt to never rebalance, or do so via directed additions (if accumulating) or withdrawals (retired).

A UK variant similar to that is to own a home so you don't have to find/pay rent (liability matched), and split the rest initially equally between US stock (for a British investor that's foreign), cash deposits and gold - after setting a 2.4% SWR i.e. a 2.4% capital amount of the collective value that is initially drawn for first year spending, and where that $$$ amount is uplifted by inflation as the amount drawn from the portfolio at the start of subsequent years. Just take that from whichever asset(s) are the highest value at the time.

Historically imputed rent averaged 4.2% in the UK over the last century or so, so also factoring that in when 25% of the portfolio and its like a 3.5% type withdrawal rate. In the worst case that was pretty much a perpetual withdrawal rate, for instance since 1896 always saw more than the inflation adjusted start date value still intact at the end of 50 year periods.

Some might prefer to draw monthly, and set a initial 0.2% monthly value to draw, and being inflation uplifted its a nice regular inflation adjusted 'wage'.

Some like having 10 years of spending in cash deposits as a comfort for when house/stock/gold prices may be down. 25% in foreign stock (US$ for a British investor) and 25% gold (global currency and a commodity) and if/when the British Pound is in decline those foreign 'currency' holdings are a comfort.

If you don't bother with intentional monitoring/rebalancing it doesn't really matter. Just taking from whatever is the highest valued is a form of partial rebalance that suffices. As a home isn't liquid you just count that as already having paid its contribution in the way of imputed rent.

1M of wealth, 250K home value, 250K in each of stock, gold and cash, 24K/year inflation adjusted income drawn for spending, and perhaps the 250K of home value avoiding otherwise having to find/pay perhaps 10K/year rent. 34K/year combined effective 'wage', perhaps tax efficient also. For another to compare perhaps they might have to earn a 50K/year gross wage, see that reduced to 34K after taxes (net/take-home wage), reduced further down to 24K/year after paying 10K/year rent.

If house prices crash, or soar, no need to rebalance, just carry on as before. If gold, or stocks soar, no need to rebalance - you'll just tend to be taking income more often from gold (or stocks). If stocks (or gold) crashes, well you'll again just be taking income from gold (or stocks). If both have crashed - well you have 10 years+ of income in cash deposits. Cash is perhaps the exception i.e. if depleted due to a number of years of being drawn during bad times you'll likely want to top that up again during good times. Ongoing stock dividends and cash interest also help to top up cash. Cash earning little/no interest, Meh! the other assets tend to compensate, and if so inclined perhaps sell some of the years best performing asset to add your own 'cash interest' payment.

Yes that leaves a lump sum that might otherwise have been spent assuming no desire to leave to or absence of heirs, but it's also a insurance policy such as potentially helping with late life care costs.

For those who don't own their own home and have relatively little wealth saved up, I guess in my mid 70's and in that position I'd be looking to spend what I did have down over perhaps a 15 year life expectancy horizon and count myself lucky if I outlived that, or perhaps unlucky depending upon the degree of quality of life. Many coming up to retirement seem transfixed on worries about the likes of a 4% SWR only having a 95% success rate probability or whatever the figure is, and overlook that they have a 85% probability of never seeing another 30 years (upon which the SWR 4% rule is based).

Regards.

Clive.