I often wax lyrical about bargain hunting among investment trusts trading at a discount – that is, trusts whose shares trade for less than Net Asset Value (NAV).
Think buying £1 coins for 90p.
We’ve also written reams over the years on investment trusts as a potential source of steady income.
Former Monevator contributor The Greybeard had a lot to say about it – although he grew frustrated by the relentless pushback from hardcore passivistas.
More recently I’ve launched an investment trust income model portfolio for Moguls members.
I won’t rehash the whole active/passive debate with respect to income today. If you’re a passive investor but you have an open mind, I’ve written a Mavens post on using ETFs to do much the same.
But if you’re a global equities tracker and drawdown diehard, probably best to wait for the next article!
Give peace a chance
Just briefly for those on the fence – or simply confused – I’m not saying the average person would do better stock picking investment trusts to grow their capital.
I’m not even saying they would do better – certainly not that they’d see higher total returns – living off the natural yield from income investment trusts in retirement.
Rather, I see advantages to an actively managed income approach (less stress and income volatility, no planned capital depletion, lower infirmity risk) that make it worth considering. To the extent that I’ll probably go down this route myself when I do throw my portfolio into decumulation mode.
Okay, enough said. Let’s now consider where my hobby of investment trust dumpster diving could dovetail with an investor’s income goals.
Discounts and income from investment trusts
Firstly, a quick reminder about how discounts work:
It’s often the case that the share price of an investment trust trades at less than its NAV per share.
Remember, the NAV is – in theory – the best estimate of what the trust owns, minus any debts.
Clearly, buying shares for less than they are worth may present an opportunity. Price is what you pay but value is what you get, to quote Warren Buffett.
For instance, the fictitious Monevator Investments plc may trade for £1.20 a share, despite its NAV per share being £1.60.
In this case, a buyer is getting £1.60 of underlying assets for just £1.20.
Bargain! The share is trading at a discount to NAV:
The discount is (£1.60-£1.20)/£1.60 = 25%
In principle, you get more for your money when you invest at a discount. Hopefully in time the discount will narrow, pulling the share price back up towards the NAV and amplifying your returns.
So much for – fingers crossed – capital gains from discounts.
But what about income?
Yielding to the discount
The crucial thing to grasp is that any cash paid out by a trust is unaffected by the discount. 1
Let’s say Monevator Investments has a NAV of £1.60 per share, as above, and that it pays an annual 8p per share dividend.
If you were to calculate the yield based off the NAV, this represents a yield of 5%:
- Dividend/NAV = 8/160 = 5%
However this trust is trading at a 25% discount. We can buy the shares for £1.20.
Yet the dividend payout is still 8p per share. So for someone buying the shares today in the market, the yield they’ll get on their investment is:
- 8/120 = 6.7%
All things being equal, this higher yield is locked in. Provided the cash payout remains at least 8p, then this investor’s annual yield on cost of their Monevator Investments shareholding will be 6.7% – regardless of whether the share price rises or falls, or whether the discount closes.
Of course, dividends from decent income investment trusts tend to rise over time, as do their NAVs. Though sometimes dividends can be cut, too.
That’s a discussion for another day. The point is the chunky discount here has boosted the purchasers’ starting income yield, compared to if they were buying the shares at NAV – let alone a premium.
Note that in both cases – whether the shares are priced at NAV or at a 25% discount – the underlying assets (represented by the NAV) generate enough income for the trust to pay an 8p dividend per share.
When you buy for only £1.20 due to the 25% discount to NAV, you are getting the same 8p at a cheaper price. But because each share costs only £1.20 instead of £1.60, the same lump sum investment would buy more shares – and therefore more of those 8p dividends.
For example:
- No discount (£1.60): £10,000 buys 6,250 shares × 8p = £500 income
- 25% discount (£1.20): £10,000 buys 8,333 shares × 8p = £667 income
Happy days.
A striking hypothetical example of higher income returns
Generally investment trusts trading on discounts don’t draw attention to the fact. Their annual reports will wave their hands about what they’re doing to close the gap, and direct your attention to graphs of rising NAVs over time, or photos of employees from portfolio companies curing cancer or drilling for oil.
So the following illustration in a recent presentation from an investment trust I hold – Canadian General Investments Trust (LON:CGI) stood out:
Source: Canadian General Investments
For a cluster of reasons we don’t need to get into, Canadian General’s whopping 40% discount to NAV is pretty much out of its control. 2
While CGI has sometimes traded at NAV – usually during commodity booms – a big discount is typical.
Hence management has a reason to turn this bug into a feature with this table. And what it’s illustrating is exactly what I’ve explained above.
The table simplistically assumes a 10% annual return – high but less than CGI’s long-term track record – split between 7% capital gains and a 3% dividend. All the income is presumed to be paid out.
If you were to buy $100,000 of Canadian General as a hypothetical open-ended / mutual fund – that is, with no discount – then for your hundred grand you’d get $3,000 paid out as a dividend income.
- That is, 3% of $100,000 = $3,000
However at a 40% discount to NAV, your $100,000 is buying you $166,667 of Canadian General’s assets:
- 3% of $166,667 = $5,000
Your income is higher from day one, just as we’ve already seen in my example above.
From there, the company compounds NAV at 7% and holds the 3% payout (of NAV) steady. The discount stays at 40%:
By year 20:
- 3% of $602,775 = $18,083
We can also work out the ongoing yield on cost of your initial $100,000 investment:
- $18,083/100,000 = 18% on your original purchase price.
A very nice income if you can get it.
Discounts are a bonus for income investors
There’s plenty of slips betwixt cup and lip and all that. Dividends can be cut. Canada is an odd place to put a lot of your money. Canadian General’s exposure to US assets muddies the picture.
But that’s all for another discussion. Here I’m just focused on the mechanics of discounts and income.
You see, readers often ask me why I should expect a discount to close.
The simplest answer is that most usually do, eventually, at least for a time and in the absence of structural impediments such as those at Canadian General.
But the point here is that if you’re an income investor after natural yield, then it doesn’t matter. You can simply aim to buy and lock-in a high starting yield and then let the income roll in. (Touchwood!)
Buy in the sales
Unfortunately, the top flight of dedicated UK equity income trusts rarely if ever trade for anywhere near 25% discounts. Their income underpinnings, steadier investments, and decent long-term records tend to curb such extreme dislocations.
However they can reach discounts of 10% or so when out of favour, or in wider times of distress.
Still, the same income-enhancing argument holds for more specialist trusts, too, where we have seen much chunkier discounts.
For years even income seekers bought infrastructure trusts on a premium, for reasons I never understood. However as I covered on Moguls, in early 2025 they were trading on 25-30% discounts. That meant income yields of 8% or more for new money buying the likes of HICL (LON: HICL).
Such super-wide discounts have now closed, though you can still bag HICL at a 15% discount. (Disclosure: I hold.)
Property trusts and many REITs are still on big discounts to NAV, for what that’s worth.
And there remain a few – troubled – renewable trusts on big discounts touting very high yields for the brave.
Despite misgivings, I’ve dipped a little toe in with Greencoat UK Wind (LON: UKW), currently on a 22% discount and yielding 10%.
Looking to the long-term
Infrastructure, property, and even renewable investment trusts have all traded at premiums to NAV in the past. I’m not saying they will again (especially not renewables). But as we’ve seen, for braver income seekers that might not matter, just so long as the dividends keep flowing.
Still, I’m more confident about the very long-term with Ye Olde UK equity income trusts – those of the much-vaunted (and debated) Dividend Hero variety.
Anything else is a bit of a special situation when it comes to long-term income.
And yes, to belabour the point: this is active investing. Nobody needs to pipe up that a global tracker will outperform in the long run or that discounts might be flagging bigger risks or mention Neil Woodford.
I get it and I mostly agree. So should anyone who goes down this path. Do your own research!
But personally, I’m starting to think I might smooth the transition from accumulation to decumulation by opportunistically buying – and then looking to hold – these income trusts as I head towards drawdown.
That would probably be much less stressful than switching overnight from an accumulation to decumulation portfolio – albeit likely at some cost to my returns.
Indeed as I get closer to the end than the beginning, I have started making tentative stabs at building up a natural yield again. Ironically this takes me back – philosophically – to where I started as an investor.
True, I’m still finding it hard not to trade when the discounts close, or some other shiny object pops up…
But as I transition at least a chunk of my portfolio towards income, maybe that illustration from Canadian General will help me stay my hand.
The point about enhanced dividends is well-made. But the IT discount must, in my view, “compensate” the investor for the fund management charges and for the stamp duty (SDRT) which the investor must usually pay and which an ETF investor does not. Happily, the discounts available often do provide such compensation.
Another nice article, thanks TI.
Having reached an age when I need to start drawing from my fund, I never expected it to be so difficult to do, not from an admin perspective, but more from the unexpected degree of personal pain and resentfulness I felt at having to sell down accumulating assets for income. It’s hard in a rising market, think what it must be like in a crash. So, the fund was re-jigged to give a natural yield of around 6% and I take 3-4% as income.
So far, so good and the emotional drawdown is much reduced.
Thanks @TI I really like your articles on ITs and enjoyed Greybeards too. Your mention of “transition” to drawing income resonated and I’ve created a sub portfolio (c10%) of these income focused assets just for this purpose. And just as you say while being fully aware that this ISN’T the most efficient way to run a portfolio. Two of the 4 elements of this are ITs – and as you’ve talked about in your other articles sometimes ITs are an easier route to owning real assets and not equity proxies.
When I retired at 53 I started building up holdings in ITs – dividend heroes, infrastructure and regional. Held in an ISA the tax-free income stream is helpful and they add a bit of diversity to my core global equity. When they’re yielding around £15k/year I’ll stop investing any more and gift the surplus income
Thanks. Fascinating – that these discounts exist.
They’re not for me though – you’re not claiming higher total returns, and I’m trying to achieve gradual capital depletion as I de-accumulate.
Been down the Investment Trust route many years ago in my accumulation phase-admittedly going for total return at that time
Too much like active investing with all that that entails-high fees,star managers coming and going etc
Don,t regret my investing time with them but moved on to index investing and have no regrets
Latterly my chosen ITs were all closet index trackers anyway-Alliance Trust,Witan ,F&C etc
xxd09
My issue with Investment Trusts (I own quite a few, albeit a relatively small proportion of the overall portfolio), is the growing conflict of interest in their boards (especially those with wide discounts and high fees). Where winding up or merging could be the best strategic option, which arguably grows with the discount; the turkeys won’t vote for christmas (and lose their cushy fees).
I hold SEGRO and UKW, as my IT discount/yield/diversification play. M&A activity is seeing the end of SEGRO and will surely see the end of UKW. Nothing wrong with that but the number of quality alternatives to maintain this strategy is dwindling.
Agree about the fees point but look for those linked to share price rather than NAV.
@Mark – agreed, there’s a decent argument to say they should, in a natural state, trade at a discount equal to the NPV of future management charges.
We have a small proportion in ITs spread across Private Equity, Infrastructure, Renewables, Wealth Preservation and 1 pure equity (Brunner).
Yield is reasonable across them boosted by the renewables and infrastructure ones bought at heavy discounts to Nav for the reasons outlined in the article.
Act as useful diversifiers to standard global equity trackers and provide a reliable income stream that we can withdraw or reinvest as circumstances dictate.
Share prices have been all over the place TBF, and I doubt it is the most optimum approach but it works for us.
I’ve also got a mix of Investment Trusts (Infrastructure, Property, Renewable Energy, Private Equity, high yield debt, etc) and dividend ETFs in my ISA to provide income.
And a total return approach of low cost rackers in my much larger SIPP.
State and equal DB pensions and a small linkers ladder to come in 6 years to provide an income floor.
If total return falls out of fashion, I’m hoping dividends will be stable.
Three legs of my retirement strategy.
Dividends are great -they certainly can mimic a retirees work salary -the ideal -however…….
Dividends come at a price ie come from a companies growth so removing them reduces the companies returns
For an investor /retiree this ideal situation (ie living on dividends only) can be achieved with a very large portfolio but for most of us not able to accumulate enough to reach that happy position total return and selling fund units as required possibly works out financially better in the long run
xxd09
I think one possible problem with substantial discounts is that it makes the investment trust susceptible to closure or merger since there is a one off profit to be made by realising the assets (provided, of course, where liquidity is low that the assets have been valued accurately). Nothing wrong with the profit, but the retiree will then need to find another source of income.
Beyond this, there is a steady(?) churn of ITs. For example, in 1970 there were 313 ITs quoted on the LSE of which 38 survived to the end of May 2026. In other words nearly 90% of the ITs that existed in 1970 have been merged or liquidated over that 55 year period (at a mean rate of 5 per year). In other words, a retiree may very well have to adapt their natural yield portfolio over their retirement (it is not a ‘choose once’ option).
@xxd09 (#12). Probably getting OT, but the comparison will depend on the withdrawal strategy adopted in the total return case. Where the underlying investments are the same, income from natural yield will be similar to a fixed percentage of portfolio strategy where the percentage is close to the dividend yield. A total return approach does give more control over the withdrawals (e.g., the percentage can be determined using actuarial methods to spend down the portfolio, e.g., bogleheads VPW).
@AlanS – You have summed it up nicely. ITs at a substantial discount are easy pickings for closure through M&A. My experience has been that the final restructuring operation highlights that the assumptions underpinning the NAV had been over optimistic and this is the main problem with the sector.
Moving large slugs of money after closure of trusts takes a lot of research to avoid ITs that were well-founded but now run out of steam but rather than winding up are effectively kept going through share buybacks to serve managers need for fee income and their Non-Execs’ wish to keep their hand in after their executive career is over.
Withdrawal rates are indeed the key whether dividends or fund units are used for income
For the smaller portfolio (probably most of us) a dividend stream is subject to too much variation for me possibly even resulting in sale of fund units in tougher times
Use of fund units only is simpler ,easier to manage and makes the investor feel more in control of what is a serious variable ie a portfolio,s performance
Personally I imbibed the lesson of the “4%” rule from the Trinity study of many years ago -using a lesser % for safety reasons and because U.K. investors dont do as well as American ones
A 3.3% to 3.8% withdrawal rate has been possible for my retirement (23 yrs) -so far!
xxd09
@xxd09:
Whilst I do not use a SWR approach, for interest I converted my annual spend to a withdrawal rate (vs our Pot value of the previous December) and it is much more variable than yours. I have been retired over nine years now. Our SWR range from this calculation (max rate to min rate) is greater than 2:1*.
Could you say some more about how you have have manged to keep your SWR so steady?
*as too is our annual spending
@Al Cam (16)
Remember that the Bengen/Trinity approach to drawdown is based on a constant inflation-adjusted percentage of the *initial* fund value. So an assessment of the WR as a percentage of the previous year’s fund value is not directly comparable.
That said, I should imagine that anyone using a strict application of Bengen/Trinity WRs would have to manage variability of expenditure vs constant (inflation-adjusted) income in the same way as a salary earner, i.e. by savings or debt. Of course, as you imply, a retiree using drawdown has a different option, viz. adoption of a variable withdrawal strategy. Knowing that you favour floor and upside, presumably if the floor is adequate there are no theoretical constraints on withdrawal of the upside, beyond reduction of the probability of future upside.
@DavidV,
The B/T approach could explain a lot of it. Thanks.
Using that approach with a (carefully selected) initial [seed] rate of 3.7% and CPIH (Dec to Dec) for the inflation adjustment, I get a [nominals] SWR range of 3.3% to 3.8% with our [baseline] Pot over the last nine years.
Re floor and upside – no disagreement in principle. However, definition of “adequate” is important to avoid risk of the Upside becoming somewhat superfluous for folks with no strong legacy motive.
@Al Cam (18)
Your 3.3% to 3.8% WR is uncannily identical to xxd09’s, assuming (maybe wrongly) you are both calculating on the same basis.
As for floor adequacy and upside, we have debated this many times, particularly over at SLIS, so I’ll leave it there!
@DavidV,
I did select my seed value to try and mimic xxd09’s range. I wonder what he actually used; perhaps he will advise? All I could deduce from above was less than 4% and probably greater than 3.3%.
AFAICT, there are obvious differences between our scenarios – like I started my DB pension during my year 7. Which may possibly reduce my maximum SWR.
Nonetheless, the similarity of the respective SWR ranges did surprise me.
Especially as IIRC the composition of our respective Pots whilst both fairly conservative are far from the same, and our respective retirement durations (to date) are very different too.
Not sure if this is actually telling us anything useful, but at a first glance it is somewhat of a curiosity.
@FrequentFlyer (#14)
There is a large amount of academic research in the ‘pricing puzzle’ of investment trusts. A good review of the various explanations (which include investor irrationality, liquidity, fees and manager ability, tax overhang, bookkeeping errors, etc.) can be found in Cherkes, “Closed-End Funds: A survey” (2012).
Interestingly, discounts across the IT market, although exhibiting a wide spread, tend to be correlated and change with time (e.g., see Sotiropoulos et al., “UK investment trust valuation and investor behavior, 1880-1929”).
While I considered a natural yield strategy using ITs in retirement, in the end I went with a total return approach using index funds with dynamic withdrawals largely because the income from our portfolio is small compared to our floor so it didn’t really matter but also because I could find very little in the way of numerical work comparing the two approaches.
I’ve been running such a portfolio for a few years now, still in accumulation but in the run up to retirement. I still hold HICL and added INPP and some credit ITs more recently, but did sell out of some renewable trusts including Greencoat. Usually I have very little churn but the solar funds especially seemed doomed. I’m actually tempted to buy back into Greencoat though.
Overall I’m split roughly half and half between investment trusts and ETFs for income. Yields vary between 3-9%, overall portfolio yield around 5.5% at present.
While income has been pleasantly stable I have in the last couple of years decided to lock in some guaranteed yield by buying some individual high coupon gilts such as T41F with a 5.25% coupon, which will be held to maturity.
In about another year I should be able to live reasonably comfortably on the natural yield. Most of this is in a SIPP, with a smaller simpler distributing ETF-only portfolio in S&S ISA.
I do think we are now in an environment where such a portfolio is likely to work much better than in the ZIRP era, with less risk and less likelihood of hugely underperforming a global index approach given valuations.
I suppose any reasonable withdrawal rate can be set and maintained if you have a large enough portfolio to start with and if that chosen withdrawal rate is enough to then sustain your desired lifestyle
I had a very conservative portfolio 30% equities and 70% bonds at retirement 23 years ago which ended up consisting of 3 index funds (OEICS) only
Vanguard Developed World ex U.K.,Vanguard FTSE AllShare and Vanguard Global Bond-all very low cost
Used Total Return and sold fund units once or twice a year as required-no trading costs
All investments in tax free wrappers-SIPPs and ISAs
Portfolio split valuewise equally between SIPPs and ISAs
Currently nearer 40/54/6 where the two equity funds are split 38% and 2% respectively and 6% = 2+ years living expenses in cash (ie Easy Access Cash ISAs and a High Interest Bank Account generating income up to the 20% tax free limit(currently £1000 for a 20% tax payer)
Lived on the Tax free lump sums from the SIPPs and then from ISAs only for many years-therefore paid no tax
An relatively simple to manage portfolio and easy to understand
It’s all very personal but the more obviously important two facts are the amount saved and the ability to then to live off a low withdrawal rate
For me so far so good but it’s a moving playground out there so keeping on my toes!
xxd09
@xxd09,
Thanks for those extra details.
FWIW, our Pot is also conservative; we have a fairly similar allocation to equities, but with, less bonds and more cash.
To some extent I have approached the problem from the other way round and let our annual (highly variable) spending needs drive Pot withdrawals*. As my DB came on stream (in principle at least) the need for such Pot withdrawals dropped and might (in theory) drop further once out SP’s turn up**.
Have you stuck rigidly to the B/T approach for 23 years or did you step your Pot withdrawals down as your SP’s (and/or any other DB pension) came on stream?
Re “For me so far so good but it’s a moving playground out there so keeping on my toes!”
Recognise your approach to income tax. Will you do something different [than, I assume, originally planned with your SIPP] now that it is potentially liable for IHT?
Lastly and just OOI, what was your initial withdrawal rate – FWIW, I guessed it was 3.7%?
*over and above the income provided by our floor
**in reality [to date, at least] this has turned out not to be a straight-forward 1 for 1 issue for a variety of foreseen (and unforeseen) reasons
Never really altered my withdrawal rate much -had decided that the portfolio asset allocation could handle this designated withdrawal rate-so just kept going!
Better holidays some years etc etc!
Portfolio has had some severe tests along the way -GFC ,Covid etc but “stay the course” seemed to work-portfolio perhaps shielded by a large bond % never went down too much and recovered quite quickly
Of course we have been living in good times re the stockmarket which helps immensely-a war and or a severe recession could alter things
Re IHT changes -indeed now running down my SIPPS mainly which includes a 20% tax bite on withdrawals which might affect withdrawal rate/spending going forward -keeping a weather eye on this
Wife and I both 80 so -slowing down a bit but medical bills increase sadly
Kids all financially secure so actually no pressure re an IHT bill for them
Re my initial withdrawal rate -was long ago so not too sure but 3%+ would be close
Looking a long way back I think another important finding of mine was realising early on the staggering amounts of savings needed to fund a good retirement
A bit of luck always helps -we both have been lucky -so far!
xxd09
@xxd09 (#25)
The amounts needed for a good retirement will vary considerable with retirement age and, fairly obviously, with what you mean by good!
To take an example, a couple both at 67yo who wanted another £12k per year in addition to their SP of £12k each (i.e., for a total income of £36k) could purchase an RPI annuity with 100% beneficiary to provide the additional £12k for about £255k*. For those who have been on minimum wage for their entire lives, £255k might be quite staggering, but this would probably be less so for those paid around median salaries.
* drawdown with an initial inflation adjusted withdrawal of 4% (adding a moderate level of dynamics would increase the chances of portfolio survival) would require £300k, a 33 year collapsing ILG ladder (to take the couple to 100yo) with a withdrawal rate ~4.1% (at current gilt prices) would require about £292k. To be marginally on-topic, real income from the equities part of a natural yield portfolio is unknown in advance (as is the real income from the coupons of nominal bonds) and will, almost certainly, be highly variable.
Trying to do this at 60yo, would cost £300k (4.0% payout rate) for £12k of annuity income and £170k for a 7 year ILG ladder to provide £24k per year in the gap to SP (i.e., a much larger total of £470k).
Definitely agree about luck!
@TI:
Apologies for dragging this somewhat off topic!
@xxd09:
Thanks. Looks like you follow a percentage of corpus amount approach* rather than strict B/T – and this probably explains your comment about “sold fund units once or twice a year as required”. AIUI this is a pretty good way to ensure your Pot never runs dry.
Totally agree about luck!
@Alan S,
Interesting numbers – thanks for running the calcs.
Agree about variability of natural yield – but even Zwecher notes that if your W/D rate is a low enough percentage then yield approaches are perfectly viable. A key point he makes in his book (that IMO is often over-looked) is that if your W/D rate is low enough any “sensible” approach should work!
*with some discretion year-to-year around the percentage value
With respect to natural yield and retirement, another benefit I see (which I haven’t discussed much) is I strongly suspect the strategy would enable most people to hold a higher equity allocation for psychological reasons, which in most scenarios is going to lead to (perhaps significantly) higher potential withdrawals and/or legacy accumulation.
Holding low return fixed income and the like is partly there to avoid getting nearly wiped out in a 1929-type scenario, but the fact that I’ve reached back so far is because it’s mostly there to help with a Covid / GFC type short-lived drawdown scenario.
If a natural yield investor is confident their portfolio will throw off enough income in most situations without too much trouble (not 1929!) and so they will and theoretically can strategically ignore capital fluctuations (because they are not tithing their capital) then higher equity (/risk) allocations become a very practical option IMHO.
@TI:
Interesting thought.
Ordinarily, as you get older the ability to recover from a large equity drawdown reduces. Assuming you are not investing for the next generation, then I suspect that this closing horizon may (for some “older” folks) win out over the effect you identify. Just my tuppence worth though!
If you are investing for the next generation, etc then all the advice I have ever seen seems to favour largely (if not totally) equities with a w/d rate of up to 2% being pretty bomb proof for a perpetual annuity according to Ed Thorp, see e.g.: https://www.aqr.com/-/media/AQR/Documents/Insights/Interviews/AQR-Words-from-the-Wise-Ed-Thorp.pdf
I do recall a Bogleheads graph back in the day (may even have been in Vanguard Diehards times) and it’s a graph that does reappear from time to time
Essentially asset allocations of 70/30 right through to 30/70 with low withdrawal rates of 3%+ get you over the retirement line with the higher equity allocations liable to leave you ending up with a much bigger portfolio
The investor according to his ability and wish to cope with volatility and risk pays his money and makes his choice
Just another rough guide for the investor to consider
xxd09
@AlCam @xxd09 — Thanks for thoughts, remember I’m not talking about a traditional drawdown. In natural yield, it doesn’t particularly matter (yes yes, miller modigliani etc, I don’t think that’s the whole story here) that a portfolio falls 40% for two years then recovers by the end of three years. You weren’t ever pressured into selling any equities because mostly your yield holds up and you can sit through it, with perhaps a modest reduction in yield. At least you can hope to outside of really dire 1929 type scenarios (or perhaps very inflationary scenarios) with a well constructed portfolio I’d wager, anyway. (It’ll be interesting to see how my model portfolio holds up over on Moguls on this score 🙂 ).
But for those talking about a traditional 4% drawdown, there’s been research showing rising equities into retirement can be a useful strategy. E.g.:
https://www.financialplanningassociation.org/article/journal/JAN14-reducing-retirement-risk-rising-equity-glide-path
The rationale / reasoning is basically that the early years are when you are at most at risk from an equity market crash. You do indeed have fewer years to recover when you’re towards the end of your natural life if that’s when you see your crash but (a) by then earlier good years have hopefully fattened the portfolio and (b) in any event, you’ve much fewer years left to fund (unfortunately!)
@TI:
AIUI, what that paper describes is also known as a bond tent around the date of retirement. That is, the equities allocation forms a U shape, with the min at or around retirement. Target date funds typically only reduce E’s up to [and often beyond?] retirement.
As xxd09 said, your choice as you see fit. FWIW I did not reduce my E’s on the run up to pulling the plug.
One of the biggest worries for a new retiree is a stockmarket collapse at retirement so as withdrawals commence the portfolio is in a reduced format
Withdrawals if they continue lock the portfolio into permanent low numbers from which it probably will never recover
Retirees classically dealt with this potentially rather serious scenario by increasing their bond % prior to retirement and/or have a cash buffer as a mechanism to use for a year or two allowing the stockmarket to recover
Personally I did both -ie large bond % in my asset allocation pre retirement and I then lived off my tax free lump sum for some years ( a sort of “cash buffer”)
Luck -that prequisite for a successful investor?-turned out that there were no stockmarket drops at my retirement
Now using a rising glide path 30% equities to currently 40% -that will be enough for me
xxd09
The bond tent allocation does make sense to guard against both sequence of returns risk at point of retirement and then inflation risk over the following decades.
Not many people seem to discuss it though.
Regarding having a 2 year cash buffer, my current pension contributions are going into a “cashy” fund that holds mainly short dated gilts. I will be doing phased drawdown so will crystalise from that for a years worth of money, and built up the next years cash pot from natural yield.
When retirement D-Day comes I will be around 50% equities, 40% bonds and 10% cash/near cash.
Regarding the bond tent idea, I doubt I’ll bother actively increasing equity allocation after that, but will probably leave it alone if overall equity allocation rises through growth and not rebalance.
I want it to be a fairly idiot proof plan that just chucks cash out without much meddling.
@SP (#34);
Agree in principle that if once retired you [mostly] draw from non-E’s, and do not [conventionally] rebalance, then normally your allocation to E’s will drift up over time. Certainly did for us – thus far.