@@tancreddehauteville764 If you could do that with a rules based approach it could work. Although you may end up with a highly variable income. I guess you’re targeting an income at the high end of withdrawal rates?
What I'm currently thinking is to keep a buffer of around 3 years worth of expenses in cash and the rest in stocks. But I still have 15-20 years to reconsider :)
Watching this video 2 years later it is still excellent AND it is much easier to purchase individual gilts to provide the matched income as shown in your examples.
Reading this the other way, if you're in your 20s/30s, with over 20 years until you can access your pension (let alone draw from it) seems like madness not to go 100% stocks, if you need to damper the volatility then use less risky asset classes in your ISAs/GIAs.
Putting it another way, you can divide the assets into two parts, one guaranteed to cover you for years 1-10 and the other for years 11-20. Invest the former more conservatively than the latter. Or four parts of five years each. (Or 20 parts of one year each, in the extreme.)
Hi Chris - they do. Especially in UA-cam comments it seems. However I know that most people commenting are at the extremes and that most views probably can’t stomach 100% stocks. I sometimes get distracted by comments and assume these are views held by the whole audience - which is incorrect. I hope all is well with you!
Great Video James. Smashed it again. Personally, I am happy to be 100% equities, but I have a good DB pension & my DC pension (150k) is pretty much money for fun stuff. Holidays etc
The asset liability matching concept is brilliant. I’d never thought of that and it’s something I’m going to consider in the future. In a way I already do this by default but it was more coincidental really. Great video!
Great video once again James - I love how you simplify complex issues like this. One question re bonds - am I better to invest in a bonds tracker or specific bonds? I’d welcome a separate video on the bond options available. Thanks for all your hard work, David
Agreed with your points, I'm still thinking 100% Stocks may be safer and better overall because Bonds work well with falling interest rates as has been the case for many years. With increasing rates the bonds don't have the returns to keep up with inflation. Inflation has been very low and the only way now, is really up. One other point is that in all of your graphs the greater volatility has been with the higher stock mix, but the stocks haven't fallen below the value of the Bonds. even though over the period the bonds have benefited from lowering interest rates. I wonder if the result would be much more in favour of the Stocks in any future crash because the increasing inflation rate would also be nibbling at their values. Thanks for your great advice.
Hi James, great video again. Our IFA has changed from one fund(lifestyle 60) 15% on the pound last year but minus 7% this year, so action needed. Restructured into 2 years income low risk, 3 years medium risk and the rest invested in high risk stocks across all sections and as many countries allowed. Doing better than doing nothing so far.
James, you just described my in-laws in the 1996-2016 scenario. They retired in 1997, felt wonderful until 2000, lousy until 2003, better to 2008, and then cashed out about 2011. They locked in all the losses to date when they cashed-in in 2011. Having a cash 'bucket' to borrow from another You Tuber is essential. Thanks.
Indeed. Since 2015 we are now all in much more control of our futures, we can choose what we want to do with our pensions, which is not necessarily a good thing...
The concept of having a cash buffer is an important one that needs emphasising. I think it’s easy to get stuck if you’re following the basic principle that the returns from Stocks and Shares are greater than from cash - true- but then making the mistake of having insufficient cash in a savings account to cover the volatility of the stocks and shares account. And if you need 2-5 years worth of cash to cover expenses - that’s quite a lot of cash. So I think it’s important for people not to become overly focused on the idea that cash in a savings account is losing value so you’re a fool for having cash in a savings account. You actually do need to have cash in a savings account and from what you’re saying here you probably need more than you think. 4 or 5 years worth of cash to cover expenses is actually a lot.
Great video. I’m 5 years from retirement, don’t own any bonds and never intend to. 100% VWRP (accumulating all world etf) where I will remain. When the time comes 4% of the pot value every year whatever it is not increasing for inflation etc.
I think the main issue is that most places recommend 80/20 but that is way to conservative if you still have 20 years of investment. I have 90/10 just out of pure cautious, but in reality it should be 100% FTSE Global All cap
Stocks vs. Bonds paradigm has been killed this year. Adding other asset classes to the mix may add to the survivability, something like the butterfly strategy. Meanwhile, I am finding these videos incredibly informative and appreciate it very much!
Stocks vs bonds would not have worked in 2022-23, as interest rates were very low. In effect, the only way they could change significantly was for lower bond prices (asset values) due to higher required yields. Correlations could be more normal now. That said, quantitative easing by central banks has messed a lot of things up, e.g. good economic data such as GDP growth can mean that the central bank raises rates sooner / cuts rates later which can hurt stock prices, whereas (before 2008, say) this scenario would have been good for stocks but bad for bonds (diversification). We had many central bank rate hikes in 2022-23 but so far only a few cuts around the world, so it could be that stock/bond correlations have normalised recently.
Very interesting but weren't bonds in 2022 worse than 100% equities, does that destroy these principles or should we consider that as one-off combination of normally unlikely scenarios?
Great video. I think reading the comments so far, a video on how to invest in bonds would be useful. Many people are pointing out how putting your money into bond funds would not have been a great idea over the past year. Traditional advice is that bonds provide a parachute to stop your money falling so fast when things get volatile, but that hasn't been the case recently. Your responses suggest short-term bonds would be a better idea in the current climate, but I'm not sure people (and I include myself) know where to look for one kind of bond fund over another - short/long, government/company etc. Plus I tend to prefer investment trusts, is there a lot of choice of investment trust bond funds? Plenty of scope for further illumination!
Thought provoking, I have a mixed defined benefit and money purchase situation. So I approached it as the DB like the bonds as a base pension, with the all stock for the money purchase as the flexible top-up available, being approx 7 years out from retirement the stock risk is mitigated by the defined benefit when I start drawing on it but I will now re-examine that approach.
Exactly - you can also do asset liability matching from an ongoing cashflow perspective. You can have some assets that will provide a reliable stream of income to cover your base costs. Then you can have a more uncertain but potentially higher returning pot that covers your discretionary spending.
Great video James, this is exactly the question I’ve been asking myself about where to invest my pension/investments now I’ve taken early retirement and I was definitely moving down the 100% stock route, given the stats., but this video has made me reconsider that option and puts the 100% stock route into perspective. Thankyou.
Thanks - another thought provoking video! I'm 20 to 25 years out from retirement, but looking at @7:30 the big take away is if I can build a fund large enough to have a 3% w/d rate, I don't really need to care about what he markets doing :) But so don't sell too many units when the market is down, the other question is how long can I tolerate being in a heavy draw down and do I trust my cash buffer is big enough?
Yes, that's it. It's a toss up between working longer to get more certainty (3% withdraw rate or less) or drawing a line in the sand and just going for it know that you can be flexible and change you income if you get unlucky.
This was a great lesson for me and felt like a light switching on towards the end. I really like the buckets concept and look forward to hearing more about it. Thanks James👍
Good video. Even leaving aside the question of risk tolerance, it's worth noting that there have been three periods in the last century when real returns from the SP500 were basically flat after 20 years (positive, but only just). As a retiree in his early fifties, that's a sobering thought. "Expected" returns may be 5-6% real over the long run, but there's absolutely no guarantee those returns will materialize before I drop dead ! As somebody once said about stockmarket investing, "nobody is handing out guarantees of free money". It's called the risk premium for a reason :)
@@allthegearuk Hi - no, the figures that I mentioned assume that you deposit an initial $1 and then sit back and watch your pot grow, reinvesting all dividends but never actually adding more money. Regular DCA'ing might change the results a little, but I don't think it will radically change the outcome. After all, you'd be buying during downturns but you'd also presumably be buying as the market reaches new highs, so over time I guess it would all even out.
@ice4142 I suppose that buying into the falls would accumulate more units generating dividends and bigger capital gains in the bounce backs. I suppose what the analysis shows is that we must have access to cash or near cash for maybe three years, so that in the event of stock market falls we have enough to live on and not be tempted to touch our equity investments whilst we ride the downturn.
Great video. I’ve 20 years until I retire and I’m 100% in stocks. My partner is in a well paying job and will retire seven years after me and is also 100% in stocks. My thinking is that I won’t need to withdraw any money for the first seven years of retirement and we will live off one salary. In theory that gives me 27 years before I need to think about touching my investments. I enjoy the ‘gambling’ aspect of being 100% in stocks and have stomached a few downturns already.
Thank you for taking us through the journey. Knowing me, I'll probably sell out in 2003 at $473,098. I would not be able to withstand the pain of losing more than half of my portfolio from the peak in 2000 at $997,023. Like Mike Tyson said, "Everyone has a plan until they get punched in the mouth".
Hi James, great video. I’m new to investing this year (previously I was in company pensions, which I have now moved into my SIPP) and 100% in passive etf equity at the moment. After watching a handful of your videos, I’m sold on holding a % of bonds. A video on how to move into bonds would be good I.e. short, medium or long term. Uk vs us vs global. How and when to select the appropriate bond etf / fund etc 👍 PS I’m 45 …
The key thing the success probability analysis is missing is what happens in the failure scenarios. The lower-risk strategies might fail less often but they will also fail by less. For most people, having to reduce their monthly drawdown amount slightly to stay solvent is tolerable, but losing everything in a stock market crash is not. The other important thing missing from this whole discussion is longevity risk. If you live longer than expected, the success probability can plummet. That is why buying an annuity with at least some of your retirement savings is a good idea for most people. If you are going to buy an annuity then you have to consider the movement in annuity rates as well. Bonds tend to track annuity rates pretty well, so are a good choice as you get closer to buying that annuity.
👏 👏👏really good video. Love the way you went though buckets and institutional liability matching. Splitting money into different buckets, with different needs, has always philosophically made sense to me, run to match an objective rather than a risk profile. In this regard I 100% would and do go 100% equity (and small cap) re buckets what’s your thoughts on natural income. Obviously a portfolio paying 4-5% income (proper income not yield) would increase the probability of success as you wouldn’t even need to deaccumulate in that bucket at all?
Thank you. I think income is a distraction, you should instead be focusing on whatever will deliver the best total return. Just sell assets when you need them to create income.
So a good answer would be to start converting to dividend paying stocks early on. You get the exposure to stocks and the added benefit of more stable dividend payouts to reduce your need to sell to draw. A 500k portfolio is too weak to try to live off of if selling is the way you draw. You could, however, get a 30K+ draw with that amount with dividends and never touch your capital.
Yes, I am currently using this strategy...the caveat to this strategy is to pick your dividend paying equities very diligently and diversify among at least five sectors of the economy.
Investing for dividends is typically less tax efficient and will likely produce lower returns that investing for total return. However, some investors like the comfort of seeing the income coming in. It also makes it easier to do withdrawals (even if less efficient overall)
@@JamesShack I was told early on to never let taxes be a major factor in choosing investments. If you are making money, you are paying taxes. I used to pass up great opportunities because I was afraid of the tax implications. For most people, except the ultra rich, taxes are a toothless tiger. Make more money, pay more taxes, don't die. 🤣
@@irsmun but paying higher taxes for less gains in not an optimal position to be in. Taxes should not be accepted as default. There are many sensible, and entirely legal, ways to organise your affairs to be more tax efficient. This is why accountants and financial advisers exist!
This is why I'm 'cautious' when people complain about 'payouts to shareholders' and 'shareholder greed' in this current massive cost of living crisis.... Its easy to look at shareholder payouts and complain about low employee pay rises etc.. but who are almost universally, globally, the biggest shareholders: pension funds Ie an average joe is benefitting from in ways (not directly for sure) they dont appreciate. So bashing the shareholders is bashing everyone's pension returns.... This is only in relation to shareholder dividends.
Haha it’s a funny one yes. Shareholders also need to be rewarded for the risks they take - otherwise there would be no companies and no jobs. Similar to asking for govt support but not wanting higher taxes. It’s your money you’re being bailed-out with, you (or your kids) are just gonna have to pay it back in the future!
Hi James what do you mean by the comment at 12.15 that "if everybody tried to invest like this, the success rate would be dramatically lower" and then all the numbers on the slide changing? Do you mean because you have data on what % of those people would then bail out at the worst time?
1:24 are DBs all but extinct? My understanding is that local government, emergency services, military, public sector generally and other still have them. Search Labs AI says: "In 2020/2021, 28% of employees in the UK were in a defined benefit (DB) pension scheme, while 51% were in a defined contribution (DC) pension scheme". I'm sure that's probably slightly lower now. But, even if that's just, say, 25% now - that's hardly 'all but extinct'....
Bought 2 units of a bond fund (VGOV) exactly 2 years ago, to see how bonds would help my portfolio. Cost was £56, so wasn't too concerned, more an experiment. They've lost £19 or 33% over two years, and more than that in real terms and I suspect it'll get worse as inflation continues to bite. Lending money to governments doesn't work if they keep devaluing the currency every time a problem occurs. Think I'll stick to 100% stocks and use a lower withdrawal rate and the ability to reduce some spending e.g. not replacing the car as frequently in retirement, as a mitigation.
VGOV is a long term bond fund with an average maturity of 16 years, which means it's extremely sensitive to changes in interest rates and inflation. Long term bonds should only be used in specific conditions because they can be very volatile, as you've experienced. Fund with durations of 2-5 years are typically more suitable for retail investors.
@@JamesShack VGOV also meant to be in negative corelation to stocks. But recently it was not. Inflation messed up negative corelation between bonds and stocks. I am not surprised so many of us don't like bond funds (to not mistanken it with actual bond cupons, a true fixed income asset).
@@JamesShack True about interest rate risk, and gilts are doing particularly badly right now, but bonds of all maturities have had a lousy time lately. Look at the lifestrategy funds - equities have had a bumpy ride this year so bonds should be providing some protection but the funds with more bond allocation have lost more across the board. This kind of portfolio diversification just doesn't work in an inflationary environment.
A very insightful video. I retired recently at 53 with 100 % in stocks around 70% in ft 100 dividend stocks within my isa at around £300k giving me 8% return tax free. The rest in etf sp500 nasdaq and all world in a trading account which yearly will go into my isa plus a buy to let giving me around £5k profit per year. I'd accept dividends can be stopped or cut on occasions but rarely in well established companies. I also think you need I think 2 years living in cash to ride out any crash . Tax free income is my main goal but takes a while to build up.
Wow that looks seriously risky! Ftse100 has been a dog and the sp500 is considered very toppy at the moment (a likely price adjustment downwards is a real possibility with likely returns to be flat over the next 3 yrs as well.
@nicke6394 i agree the ftse 100 is a dog 🐕 but i am a dividend investor with large blue chips multinationals, so i am not overly concerned with growth. The growth is in my sipp mainly in 🇺🇸. Every year, we here that the sp500 the nasdaq is expensive same old same old 😴 yet it still produces 30% plus simply because they have the worlds best companies and the world's best economy. It's thar simple 🙂
hi james, i love your conviction to the subject, i am 70 now living/working in canada (and still working) and i saw my portfolio go down to next to nothing in 2008 was i worried, no, as i had a full time job that covered my expenses and then some, i also did not take my investments seriously, but your point is well taken, how would i react to that once i am retired and no income from a job.....???
Well explained video. Well done. The takeaways I see are, when investing in the market hold your nerve and secondly accumulate the biggest pot of money possible before retiring.
Great video. The examples make me think of using withdrawal rules like the Ratcheting rule to minimise the risk of having too much in equity. I'm not very knowledgeable about it. I wonder if withdrawing more when equities are high, putting it in a safe place, then reinvesting when equities fall is a good approach 🤔.
I stopped working in 2019 and have experienced exactly this sequence of return risk since then. I mitigate this by holding 4 years of projected expenses as cash (including inflation). Everything else is in stocks. At the moment I'm at 2.7 years of cash so I'll try and pick a time during 2023 to "top up" 1.3 years. It doesn't stop me looking at my stock valuations of course, but because I'm not drawing directly from it I've got a buffer of time to avoid doing anything silly like selling (hopefully!)
Yes, this is a fine way to protect yourself from that. You could also have that money, or some of it in a money market fund or fixed term deposits (not advice)
@@JamesShack yes, I don't at the moment ... It's just in a standard deposit account. I am toying with perhaps doing something more sophisticated but I don't want to get caught in a trap where I feel I can't draw from it because it's down or I'm forgoing returns or something. I think all my "sell propensity" is best channeled to just that small surface of topping up the cash pot periodically. I want to make selling a mechanical decision, not an emotional one.
Actually .. thinking out loud for a second (which is why your videos and comments are so valuable - they spark intensioned reasoning) .... My only mechanical decision is when to top up back to 4 yrs. So there is an element of market timing, and I guess I'll win some and lose some. But ... If I didn't pick a period in the next 2.7 years to top up, then I've crashed my strategy. I'll then be forced to draw yearly amounts directly from the stocks and fall into the points you make in the video. So, even if I don't have the courage to sell 1.3 years worth this year, I'm going to at least do 0.7 to keep that buffer alive.
@@uncountableuk Whatever you choose do it in a systematic way. Quarterly may be more convenient but you need to make sure you actually do it on schedule without thinking about it. Just like when you're investing, always do it via direct debit so you don't have to think.
@@JamesShack perfect ... That's a golden nugget! I'm 55 this year, so can actually reasonably easily set up DD payments to come out of my sipp. If they turn out to overshoot, I can always reinvest inside an ISA (I'm close to the LTA so don't mind doing it that way)
Thanks very much for this - I had assumed I would have no issues with 100% stocks as I was fine with the 2008/9 crash etc but retirement investing is v different as you point out - the problem I have with bonds is that as interest rates go up the value of the funds goes down and we may be in for several years of rate rises
When you buy a bond it should already have inflation and interest rate expectations baked into the price. It's just like a stock - if it's obvious that Apple is going to grow its revenue by 20% this year, it's share price will already have risen to reflect that. It's only if it's revenue missed expectations that the share price would change. So - with all else the same - their price should only rise/fall if we get unexpected rate rises or inflation. If you buy a bond and plan on holding it to maturity, it's day-day price is irrelevant to you. It won't affect your outcome. This is what I'll do a video on in the future.
Very good video James - I’m in my 40s now, realising I probably can’t retire before 60 without making huge savings. My question is how this fits in with buying an annuity? I’m assuming you just have to take what is offered at the time when you purchase one with your pension fund - how much flexibility do you have in the UK to draw down a percentage of capital, take the pension annuity and specify the fund mix you want?
Another great video, thanks. I think another thing to take into account is other pensions i.e. I used timeline to put in what I have invested at the moment, at put at 57 I want 40k per month (I do not need it but just went over the top, to check success rate), 62 I will get a final salary of around 8k (CPI Linked), it is low as I was not in it for long, and then at 67 you get the government pension, so the draws downs will end up been less. When I original did TL, I totally forgot to included two other pensions, so the figures were wrong.
Yes. Other fixed income streams need to be taken into account. If you have a DB or state pension covering your fixed costs then you're in a much better position to weather 100% stocks.
@@JamesShack Big thank out to you. Before I found you in March 2021, I though I could never retire. HL kept sending yearly projections through and it was around 6k, which made me think I would need multiple millions to retire. It was talking about annuities. Thankfully now, I now know I should be able to comfortably retire at 57
@JamesShack I'm binge-watching your videos since yesterday. I've been investing in stock market for 15 years and real-estate for 7 (successful in both), I read many books on investing and countless blogs/vlogs, I analyse *everything* with a calculator and think thrice before I lift a finger (I'm an engineer by profession), so I'd say it's fair to say I've seen a bit of investment world by now. Your videos behumbled me, I feel like a total noob once again! THANK YOU FOR WHAT YOU DO! And for this episode in particular, the most eye-opening one (for me) yet!
@@JamesShack Showing respect and gratitude is the least I can do. Burning through the holidays... yeah, I've been there, done that many times, still doing it too. But you reap what you sow, the price of success down the road... Thank you once more, for all of us! Keep up the excellent work!
I've recently had to change the fund in my pension, as the generic fund I was placed in was terrible 🤣. 100% stocks at the moment at 31 and I'm considering staying in that for a long time.
Hey James, great vid, thank you. I appreciate entirely what you are saying. In the early 90’s I put my life savings into ONE share, Apple and I cashed them in around 18 months ago. It was a fun white knuckle ride but I can appreciate where you are coming from. 👍 Think I might buy an index fund going forward!! 🤣😂
hi James With recent bond fluctuations should we be looking at risk differently? Maybe 100% stocks isn't relatively as volatile we thought compared to a blend with bonds.
I don't think this theory is borne out by the graph shown. During the dips the bonds are falling nearly as much as the stocks. Whereas at the peaks the bonds significantly under perform the stocks.
The allocation depends on how high your withdrawal rate is and therefore how big your total portfolio is, right? A big portfolio can be allocated 100% to stocks, where the withdrawal is less than e.g. 3%. If the portfolio is smaller and therefore the withdrawal rate higher e.g. 7%, you should allocate part of it to bonds in order to decrease the time to recovery in case of a crash. 🧐
The size of your portfolio is not relevant. It's how big your withdrawal rate is - if you have a 5%+ withdrawal rate a high bond allocation will guarantee you'll run out of money, because you won't see enough growth. Stocks MAY achieve enough growth but there is a risk that they won't. But if you HAVE to have a high withdrawal rate, its the only option. Having a lower withdrawal rate would be less risky, but you'll clearly need to work longer to achieve it.
James I struggle with this - I find it hard to get away from the fact that it seems that for the first 12 years or so the all stocks portfolio is only down below the others for a short period, and not much lower at that. It takes an unusual meltdown to make a significant difference in 2009 and the others dropped dramatically as well. Is one way of thinking about this as follows - invest in a way that gives lower returns so that when it drops it won't feel as bad?
There is a fundamental flaw in this analysis James. If investing in 100% stocks vs 50/50 split, then the starting value of $500k would also be different. Unless this person starts this strategy from retirement age. What about someone age 20 choosing to stay exposed to 100% stocks instead of an ever increasing bond exposure over their working life. At at 65, what does their starting $500k equivalent look like then?
James , I thought buying a bond fund was similar to buying bonds. Big mistake . Bonds have near guaranteed returns , bond funds fluctuate like the U.K. weather ! Why are they so different, and where can I buy just bonds directly?
An individual bonds price will still fluctuate just like a bond fund. But if you plan on holding it to maturity the price is irrelevant. The same is true for a bond fund, if you hold it for the funds duration (the average maturity of bonds in the fund) you should receive what you expected when you first invested.
Big fan of the channel, but I'm interested why you rarely mention REITs, or include them as additional comparisons against 100/0, 70/30, 50/50 scenarios? Is this because there isn't any historical advantage over stocks/bonds, or just for simplicity in your videos? My portfolio is roughly split 70/20/10 stocks/bonds/REITs, but I'm starting to second guess the REIT allocation
Give he started with 500k it averaged out at the end. Back then were mainly final salary schemes. He shouldve moved to bonds halfway up the peak and cut his losses
Great video! It's been very tough to watch the declines since last year but I keep reminding myself that as long as I'm still generating income and contributing while also keeping a good emergency fund, I should be able to weather the storm. It's just VERY difficult to watch. At least I don't have bombs falling on my head as they do in Ukraine so I can't complain. No one can predict the future but I suspect 2023 might be a tough year as well. Unrelated: I'll be in London with a friend for two days at the end of September on our way back from Portugal and Italy. We are going to see the British Museum and Tower of London while there. If you have any favorite restaurants in London that your recommend, I'd greatly appreciate it. We are not looking for popular tourist trap type restaurants. We don't need anything fancy. We are just looking for good food and we are both pretty open-minded. Since we are from the South, spicy food is okay with us too. I've heard that London has great Indian food (which I've never had) so we may give that a go.
Yes - in comparison with the pain in Ukraine we're getting off lightly. Soho and Covent Garden are great. Take a look at: The Barbary - North African cuisine thebarbary.co.uk/ Dishoom - Indian, a few around the city www.dishoom.com/ Shawarma Bar - Lebanese/Mediterranean in Exmouth market which is a great aree www.shawarmabar.co.uk/
Hi James, I have a bit of a question that needs all your expertise. I can't find anything online to help. I have 200K in an ISA and approx 1million in a lifestrategy fund, the question is how do I best manage the withdrawal when I am faced with paying tax. Any help on this or a video you have done previously please help?
Is it possible to look at a model where the strategies are changed at certain points? The best strategy would be to somehow take the “profits” of the 100% stock portfolio and insulate them from the devastating losses. I don’t necessarily mean try and time the market. But skim money off the top somehow when times are obviously good.
A 70/30 portfolio does that automatically as it rebalances. If at the end of the year stocks have risen and you’re at 80/20 you’d sell stocks and buy bonds. The opposite would also occur. There is a substantial benefit from this it’s added as much ad 0.5-1.5% in the past. Still 100% is better for an absolute return basis.
@@JamesShack Ah of course, and presumably your model does that rebalancing too? I think the problem I see is that you never really benefit from the highs of the stock portfolio as in reality the goal is not running out of money. Even if you spend in the good times the lows of the bad times will still be lower. If you change your withdrawal rate to a percentage of the pot does that change things significantly? So the average withdrawn over the lifetime was similar but you adjust spending accordingly. I have other sources of income too (rental properties etc), so could potentially make up the difference in other ways.
@@paulh1529 yes. On a percentage based model you would never run out of money. But your income would be hugely volatile , up 20% one year down 40% the next, and you may end up with a very low income in the end. No one spends money like that. People prefer to have a reliable stream of income that they can spend confidently.
DB pension schemes are all but extinct....unless of course you're one of the 5m+ public sector workers. I often think someone should work out what the employer contribution to a DC pension would need to be for an employee in the private sector to have a pension equivalent to that in the public sector. It would give a better idea of the "value" of a public sector job.
20% Vanguard world equity 20% US small cap value 20% FTSE 100 20% Gold 20% long term US treasuries This back tests well with a 5% withdrawal rate for UK retirees spending in £ (OMG home bias, too high gold allocation, long term debt in an inflationary environ, yes yes i know, still back tests well) edit:typo
Nice James! Ive just turned 24. When I checked my pension last year, I realised that from the past 20 years, the 100% stocks option had much much higher returns than the bonds options. Made the switch since I’m young. I think I’ll stick with it until I’m around 45 in all honesty
I am on one these apparently vanishingly rare DB schemes and never see much info about it. Does that mean I don't need to consider anything else for retirement assuming I stay with the same employer till retirement?
Hit 200k today. Thank you for all the knowledge and nuggets you had thrown my way over the last month. I have accumulated 180k today. Started with 17k in last month 2024 Investing with Juliana Heidi
Honestly? I'm so excited. Juliana Heidi strategy has normalized winning trades for me also and it's a huge milestone for me looking back to how it all started😃
Interesting video however when I look at the 3 graphs they all rise and fall at the same time but because the stocks initially grew at much quicker the losses seemed much bigger in reality the 100% of stocks were only below the 50/50 bonds and stocks 5-10% of the time - if and it’s a big if you can hold your nerve stocks still seem the way to go ?
Yes - if you can hold your nerve. Its quite a big call, and what if your wrong? At a bare minimum having some cash/bonds to cover a few years of expenses is good if just for sanity’s sake.
I think if I understand correctly is in some respects the falls seem harder because the wins are bigger with stocks with bonds the wins are not so big so in some respects the losses are smaller - one 20 year period does not really give a definitive answer but if you were to run it 10 times and stocks won every time then you need to be brave .
@James Shack - bonds can crash too. If you look at the current market bonds are down massively. For example the vanguard global bond index fund is down 12% in the last 12 months. We are in unusual times with a reversion to a more “normal” interest rate environment. Hence bonds are crashing and will continue to do so. I expect that we will see a 35-40% crash overall with little likelihood of recovery in the same way you would see with equities. Your thoughts?
Bonds will only continue to crash if we end up with higher interest rates than are already expect, or if they end up sticking for longer than expected. Long term bonds can crash for sure. They are can be extremely volatile, which is why retail investors should stay clear. But if you plan on holding a bond to maturity, you will get the return/yield you originally bought it at. Interim price changes do not affect your nominal return if you plan on holding.
@@JamesShack James - the problem in a rising interest rate environment is that if you bought a 2 year bond with a rate of 3% and during the 2 years inflation rates rise to 9% (like now) you’re stuck earning -6%. Also - during that 2 years the tradable value of the bond may have dropped to significantly below par to reflect this…possibly below 90 cents on the dollar in this case (although it will eventually pay back its face value, that will be worth just short of 20% less than when you bought it in terms of buying power). Bonds should never be seen as an asset only to hold to maturity. Hence bonds are just as problematic as equities and during this transition to high inflation and should be avoided at all costs. Traditional pension strategies do not hold right now especially given the yield inversion we’re in the middle of. When we see short term government rates getting close to the inflation rate and the yield curve un-inverts then we can start reverting to bonds again. Until then avoid like the plague.
@@JamesShack Hi James, so we’re now 2 weeks on and what are your views? The Vanguard Global Bond Index fund is now down 14.5% YTD. The Vanguard UK Government Bond Index Fund is down over 28% YTD (to 23rd Sept - and I suspect today’s gyrations will make that considerably worse) - note this is not the long term gilts fund. Unlike stocks these bond funds will take a long time to recover due to the nature of how they are run. We are in the middle of a global currency crisis and this was predictable - hence why I am continuing to stay far away from bonds. The only way we will get out of the inflation/currency crisis spiral is to raise interest rates above the inflation rate. That implies a 10% interest rate environment - that will destroy all investments in bonds as we go through the tightening. When we get close to 10% then it might be worth a flutter with bonds - but I consider this to be gambling and not investing. Governments are not trustworthy.
Great video as usual, but I sat yawning at the 2008 financial crash 100% in stocks and now far, far ahead and sitting pretty. Happy with stocks risk, but do intend on using the 25% TFLS to pay off the mortgage and provide income for 3 to 5 years in stock market years that are not profitable enough. So the savings buffer and lessened outgoings are my “bonds”.
Yeah, but that’s probably excessive so I might end up using some of it for sons house deposit or uni fees. Also tempted to avoid cash due to inflation - so might keep half of it a stock market tracker in an ISA - got about a year to decide really. channels like yours help me out loads, so thanks! Having a larger pot to me means less risk of my retirement lifestyle and thereby less stress but I know many would hate the idea of volatility with a larger pension pot - I’m probably helped by the fact that I intend to take only 3% drawdown (in good years) and reducing that once state pension(s) kick in - so the pension is definitely weighted to the first 12 years of retirement.
Bond are dropping due to interest rates rise plus the fact that bonds can be risky too in recession . If interest rates go up enough we would be better just keeping it in the bank maybe short term?
You don't lose money on a bond if you hold it to maturity. It's price may fluctuate, but if you hold it to maturity you'll still get your 2% or whatever yield you initial bought it at.
@@JamesShack yep, I was looking at vanguard split vs 100% and the 60 40 is going down more, is there a better way to do bonds that relatively quick and easy?
Do you think you could take the pain of 100% stocks in retirement?
Yes, definitely. I would simply base the percentage withdrawal every year on the SIPP balance, according to whether the market has gone down or up.
@@tancreddehauteville764 If you could do that with a rules based approach it could work. Although you may end up with a highly variable income. I guess you’re targeting an income at the high end of withdrawal rates?
What I'm currently thinking is to keep a buffer of around 3 years worth of expenses in cash and the rest in stocks. But I still have 15-20 years to reconsider :)
Absolutely before the crash starts, Absolutely not after it started... what a great video
No
Watching this video 2 years later it is still excellent AND it is much easier to purchase individual gilts to provide the matched income as shown in your examples.
Reading this the other way, if you're in your 20s/30s, with over 20 years until you can access your pension (let alone draw from it) seems like madness not to go 100% stocks, if you need to damper the volatility then use less risky asset classes in your ISAs/GIAs.
Putting it another way, you can divide the assets into two parts, one guaranteed to cover you for years 1-10 and the other for years 11-20. Invest the former more conservatively than the latter. Or four parts of five years each. (Or 20 parts of one year each, in the extreme.)
Such a great video James. We often forget that the biggest risk to our investments... is ourselves.
It is indeed!
Fantastic video James. Most investors underestimate the pain of a prolonged fall in values, and overestimate their ability to withstand it.
Hi Chris - they do. Especially in UA-cam comments it seems. However I know that most people commenting are at the extremes and that most views probably can’t stomach 100% stocks.
I sometimes get distracted by comments and assume these are views held by the whole audience - which is incorrect.
I hope all is well with you!
Great Video James. Smashed it again. Personally, I am happy to be 100% equities, but I have a good DB pension & my DC pension (150k) is pretty much money for fun stuff. Holidays etc
Insightful as always. I always love it when James backs up my thinking and then throws in another angle that I should be considering.
The asset liability matching concept is brilliant. I’d never thought of that and it’s something I’m going to consider in the future. In a way I already do this by default but it was more coincidental really. Great video!
Yes, most people think of doing it naturally but it's actually a tried and tested strategy used by big money managers.
Great video once again James - I love how you simplify complex issues like this. One question re bonds - am I better to invest in a bonds tracker or specific bonds? I’d welcome a separate video on the bond options available. Thanks for all your hard work, David
Bonds funds is the normal route because, just like with stocks, you get instant diversification. I will do a video on them in the future!
@@JamesShack Can you include Bond ITs aswell?
Agreed with your points, I'm still thinking 100% Stocks may be safer and better overall because Bonds work well with falling interest rates as has been the case for many years. With increasing rates the bonds don't have the returns to keep up with inflation. Inflation has been very low and the only way now, is really up. One other point is that in all of your graphs the greater volatility has been with the higher stock mix, but the stocks haven't fallen below the value of the Bonds. even though over the period the bonds have benefited from lowering interest rates. I wonder if the result would be much more in favour of the Stocks in any future crash because the increasing inflation rate would also be nibbling at their values. Thanks for your great advice.
Hi James, great video again. Our IFA has changed from one fund(lifestyle 60) 15% on the pound last year but minus 7% this year, so action needed. Restructured into 2 years income low risk, 3 years medium risk and the rest invested in high risk stocks across all sections and as many countries allowed. Doing better than doing nothing so far.
Excellent advice, delivered clearly and succinctly. Thanks James 👍👏
James, you just described my in-laws in the 1996-2016 scenario. They retired in 1997, felt wonderful until 2000, lousy until 2003, better to 2008, and then cashed out about 2011. They locked in all the losses to date when they cashed-in in 2011. Having a cash 'bucket' to borrow from another You Tuber is essential. Thanks.
Indeed. Since 2015 we are now all in much more control of our futures, we can choose what we want to do with our pensions, which is not necessarily a good thing...
The concept of having a cash buffer is an important one that needs emphasising. I think it’s easy to get stuck if you’re following the basic principle that the returns from Stocks and Shares are greater than from cash - true- but then making the mistake of having insufficient cash in a savings account to cover the volatility of the stocks and shares account. And if you need 2-5 years worth of cash to cover expenses - that’s quite a lot of cash. So I think it’s important for people not to become overly focused on the idea that cash in a savings account is losing value so you’re a fool for having cash in a savings account. You actually do need to have cash in a savings account and from what you’re saying here you probably need more than you think. 4 or 5 years worth of cash to cover expenses is actually a lot.
Great video.
I’m 5 years from retirement, don’t own any bonds and never intend to. 100% VWRP (accumulating all world etf) where I will remain. When the time comes 4% of the pot value every year whatever it is not increasing for inflation etc.
No cash buffer to let you ride out down periods?
At least a year or two of a cash buffer would be prudent
I think the main issue is that most places recommend 80/20 but that is way to conservative if you still have 20 years of investment. I have 90/10 just out of pure cautious, but in reality it should be 100% FTSE Global All cap
Stocks vs. Bonds paradigm has been killed this year. Adding other asset classes to the mix may add to the survivability, something like the butterfly strategy. Meanwhile, I am finding these videos incredibly informative and appreciate it very much!
Stocks vs bonds would not have worked in 2022-23, as interest rates were very low. In effect, the only way they could change significantly was for lower bond prices (asset values) due to higher required yields. Correlations could be more normal now. That said, quantitative easing by central banks has messed a lot of things up, e.g. good economic data such as GDP growth can mean that the central bank raises rates sooner / cuts rates later which can hurt stock prices, whereas (before 2008, say) this scenario would have been good for stocks but bad for bonds (diversification). We had many central bank rate hikes in 2022-23 but so far only a few cuts around the world, so it could be that stock/bond correlations have normalised recently.
Very interesting but weren't bonds in 2022 worse than 100% equities, does that destroy these principles or should we consider that as one-off combination of normally unlikely scenarios?
Great video. I think reading the comments so far, a video on how to invest in bonds would be useful. Many people are pointing out how putting your money into bond funds would not have been a great idea over the past year. Traditional advice is that bonds provide a parachute to stop your money falling so fast when things get volatile, but that hasn't been the case recently. Your responses suggest short-term bonds would be a better idea in the current climate, but I'm not sure people (and I include myself) know where to look for one kind of bond fund over another - short/long, government/company etc. Plus I tend to prefer investment trusts, is there a lot of choice of investment trust bond funds? Plenty of scope for further illumination!
Hi Mike - bonds are a whole other world that most people don't have a clue about. I will definitely be doing more videos on those.
Thought provoking, I have a mixed defined benefit and money purchase situation. So I approached it as the DB like the bonds as a base pension, with the all stock for the money purchase as the flexible top-up available, being approx 7 years out from retirement the stock risk is mitigated by the defined benefit when I start drawing on it but I will now re-examine that approach.
Exactly - you can also do asset liability matching from an ongoing cashflow perspective. You can have some assets that will provide a reliable stream of income to cover your base costs. Then you can have a more uncertain but potentially higher returning pot that covers your discretionary spending.
Great video James, this is exactly the question I’ve been asking myself about where to invest my pension/investments now I’ve taken early retirement and I was definitely moving down the 100% stock route, given the stats., but this video has made me reconsider that option and puts the 100% stock route into perspective. Thankyou.
I'm glad it's made you think. 100% stock but maybe just for further out cashflows?
Thanks - another thought provoking video! I'm 20 to 25 years out from retirement, but looking at @7:30 the big take away is if I can build a fund large enough to have a 3% w/d rate, I don't really need to care about what he markets doing :) But so don't sell too many units when the market is down, the other question is how long can I tolerate being in a heavy draw down and do I trust my cash buffer is big enough?
Yes, that's it. It's a toss up between working longer to get more certainty (3% withdraw rate or less) or drawing a line in the sand and just going for it know that you can be flexible and change you income if you get unlucky.
This was a great lesson for me and felt like a light switching on towards the end. I really like the buckets concept and look forward to hearing more about it. Thanks James👍
I’m glad!
Good video. Even leaving aside the question of risk tolerance, it's worth noting that there have been three periods in the last century when real returns from the SP500 were basically flat after 20 years (positive, but only just). As a retiree in his early fifties, that's a sobering thought. "Expected" returns may be 5-6% real over the long run, but there's absolutely no guarantee those returns will materialize before I drop dead ! As somebody once said about stockmarket investing, "nobody is handing out guarantees of free money". It's called the risk premium for a reason :)
Stop on 👌🏻
when you say real returns does this include dollar cost averaging if you continue investing during the downturns?
@@allthegearuk Hi - no, the figures that I mentioned assume that you deposit an initial $1 and then sit back and watch your pot grow, reinvesting all dividends but never actually adding more money. Regular DCA'ing might change the results a little, but I don't think it will radically change the outcome. After all, you'd be buying during downturns but you'd also presumably be buying as the market reaches new highs, so over time I guess it would all even out.
@@JamesShackDyslexia rules, KO!
8-))
@ice4142 I suppose that buying into the falls would accumulate more units generating dividends and bigger capital gains in the bounce backs.
I suppose what the analysis shows is that we must have access to cash or near cash for maybe three years, so that in the event of stock market falls we have enough to live on and not be tempted to touch our equity investments whilst we ride the downturn.
Would be great to see a video on personal ALM - and how to sort out the cash flows in the near term.
Great video. I’ve 20 years until I retire and I’m 100% in stocks. My partner is in a well paying job and will retire seven years after me and is also 100% in stocks. My thinking is that I won’t need to withdraw any money for the first seven years of retirement and we will live off one salary. In theory that gives me 27 years before I need to think about touching my investments. I enjoy the ‘gambling’ aspect of being 100% in stocks and have stomached a few downturns already.
Great video! now I just need to get a handle on Bond Funds for the short term. Looking forward to your next video!!
Thank you for taking us through the journey. Knowing me, I'll probably sell out in 2003 at $473,098. I would not be able to withstand the pain of losing more than half of my portfolio from the peak in 2000 at $997,023. Like Mike Tyson said, "Everyone has a plan until they get punched in the mouth".
Haha - yes indeed.
It looks so simple in advance. But you can’t imagine how you’ll feel when you’re in it.
Hi James, great video. I’m new to investing this year (previously I was in company pensions, which I have now moved into my SIPP) and 100% in passive etf equity at the moment. After watching a handful of your videos, I’m sold on holding a % of bonds. A video on how to move into bonds would be good I.e. short, medium or long term. Uk vs us vs global. How and when to select the appropriate bond etf / fund etc 👍 PS I’m 45 …
It’s in the pipeline 👍🏻
The key thing the success probability analysis is missing is what happens in the failure scenarios. The lower-risk strategies might fail less often but they will also fail by less. For most people, having to reduce their monthly drawdown amount slightly to stay solvent is tolerable, but losing everything in a stock market crash is not.
The other important thing missing from this whole discussion is longevity risk. If you live longer than expected, the success probability can plummet. That is why buying an annuity with at least some of your retirement savings is a good idea for most people. If you are going to buy an annuity then you have to consider the movement in annuity rates as well. Bonds tend to track annuity rates pretty well, so are a good choice as you get closer to buying that annuity.
👏 👏👏really good video. Love the way you went though buckets and institutional liability matching. Splitting money into different buckets, with different needs, has always philosophically made sense to me, run to match an objective rather than a risk profile. In this regard I 100% would and do go 100% equity (and small cap) re buckets what’s your thoughts on natural income. Obviously a portfolio paying 4-5% income (proper income not yield) would increase the probability of success as you wouldn’t even need to deaccumulate in that bucket at all?
Thank you. I think income is a distraction, you should instead be focusing on whatever will deliver the best total return. Just sell assets when you need them to create income.
So a good answer would be to start converting to dividend paying stocks early on. You get the exposure to stocks and the added benefit of more stable dividend payouts to reduce your need to sell to draw. A 500k portfolio is too weak to try to live off of if selling is the way you draw. You could, however, get a 30K+ draw with that amount with dividends and never touch your capital.
Yes, I am currently using this strategy...the caveat to this strategy is to pick your dividend paying equities very diligently and diversify among
at least five sectors of the economy.
Investing for dividends is typically less tax efficient and will likely produce lower returns that investing for total return.
However, some investors like the comfort of seeing the income coming in. It also makes it easier to do withdrawals (even if less efficient overall)
@@JamesShack I was told early on to never let taxes be a major factor in choosing investments. If you are making money, you are paying taxes. I used to pass up great opportunities because I was afraid of the tax implications. For most people, except the ultra rich, taxes are a toothless tiger. Make more money, pay more taxes, don't die. 🤣
@@irsmun but paying higher taxes for less gains in not an optimal position to be in. Taxes should not be accepted as default. There are many sensible, and entirely legal, ways to organise your affairs to be more tax efficient. This is why accountants and financial advisers exist!
@@irsmun but I appreciate your attitude. Taxes are a good problem to have.
This is why I'm 'cautious' when people complain about 'payouts to shareholders' and 'shareholder greed' in this current massive cost of living crisis....
Its easy to look at shareholder payouts and complain about low employee pay rises etc.. but who are almost universally, globally, the biggest shareholders: pension funds
Ie an average joe is benefitting from in ways (not directly for sure) they dont appreciate. So bashing the shareholders is bashing everyone's pension returns....
This is only in relation to shareholder dividends.
Haha it’s a funny one yes. Shareholders also need to be rewarded for the risks they take - otherwise there would be no companies and no jobs.
Similar to asking for govt support but not wanting higher taxes.
It’s your money you’re being bailed-out with, you (or your kids) are just gonna have to pay it back in the future!
Hi James what do you mean by the comment at 12.15 that "if everybody tried to invest like this, the success rate would be dramatically lower" and then all the numbers on the slide changing? Do you mean because you have data on what % of those people would then bail out at the worst time?
Some excellent advise from a perspective I had never considered. I like 100% stock allocations but once I retire I will have to change that.
1:24 are DBs all but extinct? My understanding is that local government, emergency services, military, public sector generally and other still have them. Search Labs AI says: "In 2020/2021, 28% of employees in the UK were in a defined benefit (DB) pension scheme, while 51% were in a defined contribution (DC) pension scheme". I'm sure that's probably slightly lower now. But, even if that's just, say, 25% now - that's hardly 'all but extinct'....
Bought 2 units of a bond fund (VGOV) exactly 2 years ago, to see how bonds would help my portfolio. Cost was £56, so wasn't too concerned, more an experiment. They've lost £19 or 33% over two years, and more than that in real terms and I suspect it'll get worse as inflation continues to bite. Lending money to governments doesn't work if they keep devaluing the currency every time a problem occurs.
Think I'll stick to 100% stocks and use a lower withdrawal rate and the ability to reduce some spending e.g. not replacing the car as frequently in retirement, as a mitigation.
VGOV is a long term bond fund with an average maturity of 16 years, which means it's extremely sensitive to changes in interest rates and inflation.
Long term bonds should only be used in specific conditions because they can be very volatile, as you've experienced.
Fund with durations of 2-5 years are typically more suitable for retail investors.
@@JamesShack VGOV also meant to be in negative corelation to stocks. But recently it was not. Inflation messed up negative corelation between bonds and stocks. I am not surprised so many of us don't like bond funds (to not mistanken it with actual bond cupons, a true fixed income asset).
@@JamesShack True about interest rate risk, and gilts are doing particularly badly right now, but bonds of all maturities have had a lousy time lately. Look at the lifestrategy funds - equities have had a bumpy ride this year so bonds should be providing some protection but the funds with more bond allocation have lost more across the board. This kind of portfolio diversification just doesn't work in an inflationary environment.
A very insightful video. I retired recently at 53 with 100 % in stocks around 70% in ft 100 dividend stocks within my isa at around £300k giving me 8% return tax free. The rest in etf sp500 nasdaq and all world in a trading account which yearly will go into my isa plus a buy to let giving me around £5k profit per year. I'd accept dividends can be stopped or cut on occasions but rarely in well established companies. I also think you need I think 2 years living in cash to ride out any crash . Tax free income is my main goal but takes a while to build up.
Wow that looks seriously risky! Ftse100 has been a dog and the sp500 is considered very toppy at the moment (a likely price adjustment downwards is a real possibility with likely returns to be flat over the next 3 yrs as well.
@nicke6394 i agree the ftse 100 is a dog 🐕 but i am a dividend investor with large blue chips multinationals, so i am not overly concerned with growth. The growth is in my sipp mainly in 🇺🇸. Every year, we here that the sp500 the nasdaq is expensive same old same old 😴 yet it still produces 30% plus simply because they have the worlds best companies and the world's best economy. It's thar simple 🙂
hi james, i love your conviction to the subject, i am 70 now living/working in canada (and still working) and i saw my portfolio go down to next to nothing in 2008 was i worried, no, as i had a full time job that covered my expenses and then some, i also did not take my investments seriously, but your point is well taken, how would i react to that once i am retired and no income from a job.....???
Thanks for the Vid. I have a Fisher interview soon....forearmed forewarned ;-)
Love this content, which reinforces and rationalises so much that I’ve heard and read from a variety of sources.... THANKS AGAIN JAMES
Glad you enjoyed it!
Great video. Great explanation. Thank you James for educating the general public about personal finance.
Well explained video. Well done. The takeaways I see are, when investing in the market hold your nerve and secondly accumulate the biggest pot of money possible before retiring.
14:45 James, did you ever record as 'Bond Fund' video as you mention here ?
Brilliant video 👍🏻 really well explained
Excellent analysis James. a reasoned and very clear explanation, I feel educated.
Glad you enjoyed it
Thanks James, keep um coming. Look forward to your videos
Thanks, will do!
Another great video! I can't wait for the Bond index funds one!
Great video. The examples make me think of using withdrawal rules like the Ratcheting rule to minimise the risk of having too much in equity.
I'm not very knowledgeable about it. I wonder if withdrawing more when equities are high, putting it in a safe place, then reinvesting when equities fall is a good approach 🤔.
Hi Michael - that's easier said than done. If there was a reliable way to tell when stocks were high and then when they were low we'd all be doing it!
I stopped working in 2019 and have experienced exactly this sequence of return risk since then.
I mitigate this by holding 4 years of projected expenses as cash (including inflation). Everything else is in stocks.
At the moment I'm at 2.7 years of cash so I'll try and pick a time during 2023 to "top up" 1.3 years.
It doesn't stop me looking at my stock valuations of course, but because I'm not drawing directly from it I've got a buffer of time to avoid doing anything silly like selling (hopefully!)
Yes, this is a fine way to protect yourself from that. You could also have that money, or some of it in a money market fund or fixed term deposits (not advice)
@@JamesShack yes, I don't at the moment ... It's just in a standard deposit account.
I am toying with perhaps doing something more sophisticated but I don't want to get caught in a trap where I feel I can't draw from it because it's down or I'm forgoing returns or something.
I think all my "sell propensity" is best channeled to just that small surface of topping up the cash pot periodically. I want to make selling a mechanical decision, not an emotional one.
Actually .. thinking out loud for a second (which is why your videos and comments are so valuable - they spark intensioned reasoning) ....
My only mechanical decision is when to top up back to 4 yrs. So there is an element of market timing, and I guess I'll win some and lose some.
But ... If I didn't pick a period in the next 2.7 years to top up, then I've crashed my strategy. I'll then be forced to draw yearly amounts directly from the stocks and fall into the points you make in the video.
So, even if I don't have the courage to sell 1.3 years worth this year, I'm going to at least do 0.7 to keep that buffer alive.
@@uncountableuk Whatever you choose do it in a systematic way. Quarterly may be more convenient but you need to make sure you actually do it on schedule without thinking about it.
Just like when you're investing, always do it via direct debit so you don't have to think.
@@JamesShack perfect ... That's a golden nugget!
I'm 55 this year, so can actually reasonably easily set up DD payments to come out of my sipp. If they turn out to overshoot, I can always reinvest inside an ISA (I'm close to the LTA so don't mind doing it that way)
Thanks very much for this - I had assumed I would have no issues with 100% stocks as I was fine with the 2008/9 crash etc but retirement investing is v different as you point out - the problem I have with bonds is that as interest rates go up the value of the funds goes down and we may be in for several years of rate rises
When you buy a bond it should already have inflation and interest rate expectations baked into the price.
It's just like a stock - if it's obvious that Apple is going to grow its revenue by 20% this year, it's share price will already have risen to reflect that. It's only if it's revenue missed expectations that the share price would change.
So - with all else the same - their price should only rise/fall if we get unexpected rate rises or inflation.
If you buy a bond and plan on holding it to maturity, it's day-day price is irrelevant to you. It won't affect your outcome.
This is what I'll do a video on in the future.
@@JamesShack Thanks James I look forward to it as I don't know too much about bonds
Very good video James - I’m in my 40s now, realising I probably can’t retire before 60 without making huge savings.
My question is how this fits in with buying an annuity? I’m assuming you just have to take what is offered at the time when you purchase one with your pension fund - how much flexibility do you have in the UK to draw down a percentage of capital, take the pension annuity and specify the fund mix you want?
Another great video, thanks. I think another thing to take into account is other pensions i.e. I used timeline to put in what I have invested at the moment, at put at 57 I want 40k per month (I do not need it but just went over the top, to check success rate), 62 I will get a final salary of around 8k (CPI Linked), it is low as I was not in it for long, and then at 67 you get the government pension, so the draws downs will end up been less. When I original did TL, I totally forgot to included two other pensions, so the figures were wrong.
Yes. Other fixed income streams need to be taken into account. If you have a DB or state pension covering your fixed costs then you're in a much better position to weather 100% stocks.
@@JamesShack Big thank out to you. Before I found you in March 2021, I though I could never retire. HL kept sending yearly projections through and it was around 6k, which made me think I would need multiple millions to retire. It was talking about annuities. Thankfully now, I now know I should be able to comfortably retire at 57
@JamesShack I'm binge-watching your videos since yesterday. I've been investing in stock market for 15 years and real-estate for 7 (successful in both), I read many books on investing and countless blogs/vlogs, I analyse *everything* with a calculator and think thrice before I lift a finger (I'm an engineer by profession), so I'd say it's fair to say I've seen a bit of investment world by now.
Your videos behumbled me, I feel like a total noob once again!
THANK YOU FOR WHAT YOU DO! And for this episode in particular, the most eye-opening one (for me) yet!
Ah thank you for saying so!
It gives me motivation as I sit here on a bank holiday money painstakingly writing a script for my next video!
@@JamesShack Showing respect and gratitude is the least I can do.
Burning through the holidays... yeah, I've been there, done that many times, still doing it too. But you reap what you sow, the price of success down the road...
Thank you once more, for all of us! Keep up the excellent work!
Excellent and clear content
I've recently had to change the fund in my pension, as the generic fund I was placed in was terrible 🤣. 100% stocks at the moment at 31 and I'm considering staying in that for a long time.
Yes, I would highly encourage everyone to go in and check how their pension is invested!
100% index fund like SP500?
Great video James. Clear explanation as always.
Cheers Tim - thanks for the continued support!
What about dividend stocks instead of riskier stocks.
Hey James, great vid, thank you. I appreciate entirely what you are saying. In the early 90’s I put my life savings into ONE share, Apple and I cashed them in around 18 months ago. It was a fun white knuckle ride but I can appreciate where you are coming from. 👍 Think I might buy an index fund going forward!! 🤣😂
hi James
With recent bond fluctuations should we be looking at risk differently? Maybe 100% stocks isn't relatively as volatile we thought compared to a blend with bonds.
I don't think this theory is borne out by the graph shown. During the dips the bonds are falling nearly as much as the stocks. Whereas at the peaks the bonds significantly under perform the stocks.
Excellent video James! 👍
So James, would it be prudent to buy some gold to further diversify an investment portfolio ?
I think the main point should be you need a bigger starting seed if you want that same absolute return.
Another great video James!
Glad you enjoyed it
Great video, love your content James. Thanks!
The allocation depends on how high your withdrawal rate is and therefore how big your total portfolio is, right? A big portfolio can be allocated 100% to stocks, where the withdrawal is less than e.g. 3%. If the portfolio is smaller and therefore the withdrawal rate higher e.g. 7%, you should allocate part of it to bonds in order to decrease the time to recovery in case of a crash. 🧐
The size of your portfolio is not relevant.
It's how big your withdrawal rate is - if you have a 5%+ withdrawal rate a high bond allocation will guarantee you'll run out of money, because you won't see enough growth.
Stocks MAY achieve enough growth but there is a risk that they won't. But if you HAVE to have a high withdrawal rate, its the only option.
Having a lower withdrawal rate would be less risky, but you'll clearly need to work longer to achieve it.
Another super video James, thank you.
Btw you have the best video intro ever.. And a nice kitchen too
Haha is that a joke? It's so basic! Or do you mean the intro bit before I do before the video starts?
@@JamesShack 00:43.. Simple and professional.. I like it
Another interesting video, bravo and thanks.
James I struggle with this - I find it hard to get away from the fact that it seems that for the first 12 years or so the all stocks portfolio is only down below the others for a short period, and not much lower at that. It takes an unusual meltdown to make a significant difference in 2009 and the others dropped dramatically as well. Is one way of thinking about this as follows - invest in a way that gives lower returns so that when it drops it won't feel as bad?
There is a fundamental flaw in this analysis James. If investing in 100% stocks vs 50/50 split, then the starting value of $500k would also be different. Unless this person starts this strategy from retirement age. What about someone age 20 choosing to stay exposed to 100% stocks instead of an ever increasing bond exposure over their working life. At at 65, what does their starting $500k equivalent look like then?
Brilliant explanation 👍🏼
Glad you found it useful!
James , I thought buying a bond fund was similar to buying bonds. Big mistake . Bonds have near guaranteed returns , bond funds fluctuate like the U.K. weather ! Why are they so different, and where can I buy just bonds directly?
An individual bonds price will still fluctuate just like a bond fund. But if you plan on holding it to maturity the price is irrelevant. The same is true for a bond fund, if you hold it for the funds duration (the average maturity of bonds in the fund) you should receive what you expected when you first invested.
Hi James,great contents as always.Thank you.
You're welcome!
Incredible work and in depth knowledge once again James!
Have a great day
Thank you, Chay
I’m glad you enjoyed it, cheers Chay!
My SIPP is 100% Equities, but I won't need access to this for 10 years. My other savings, ISA's etc. are in slightly less volatile investments.
Big fan of the channel, but I'm interested why you rarely mention REITs, or include them as additional comparisons against 100/0, 70/30, 50/50 scenarios?
Is this because there isn't any historical advantage over stocks/bonds, or just for simplicity in your videos?
My portfolio is roughly split 70/20/10 stocks/bonds/REITs, but I'm starting to second guess the REIT allocation
Why is it on your graph that bonds seem to fall in line with shares? I thought bonds paid out a fixed percentage, so why the fluctuation?
Give he started with 500k it averaged out at the end. Back then were mainly final salary schemes. He shouldve moved to bonds halfway up the peak and cut his losses
Great video! It's been very tough to watch the declines since last year but I keep reminding myself that as long as I'm still generating income and contributing while also keeping a good emergency fund, I should be able to weather the storm. It's just VERY difficult to watch. At least I don't have bombs falling on my head as they do in Ukraine so I can't complain. No one can predict the future but I suspect 2023 might be a tough year as well.
Unrelated: I'll be in London with a friend for two days at the end of September on our way back from Portugal and Italy. We are going to see the British Museum and Tower of London while there. If you have any favorite restaurants in London that your recommend, I'd greatly appreciate it. We are not looking for popular tourist trap type restaurants. We don't need anything fancy. We are just looking for good food and we are both pretty open-minded. Since we are from the South, spicy food is okay with us too. I've heard that London has great Indian food (which I've never had) so we may give that a go.
Yes - in comparison with the pain in Ukraine we're getting off lightly.
Soho and Covent Garden are great. Take a look at:
The Barbary - North African cuisine thebarbary.co.uk/
Dishoom - Indian, a few around the city www.dishoom.com/
Shawarma Bar - Lebanese/Mediterranean in Exmouth market which is a great aree www.shawarmabar.co.uk/
@@JamesShack Thank you, James!
As always brilliant information thank you James.
Thanks - I'm glad you enjoyed it!
Hi James, I have a bit of a question that needs all your expertise. I can't find anything online to help. I have 200K in an ISA and approx 1million in a lifestrategy fund, the question is how do I best manage the withdrawal when I am faced with paying tax. Any help on this or a video you have done previously please help?
Is it possible to look at a model where the strategies are changed at certain points? The best strategy would be to somehow take the “profits” of the 100% stock portfolio and insulate them from the devastating losses. I don’t necessarily mean try and time the market. But skim money off the top somehow when times are obviously good.
A 70/30 portfolio does that automatically as it rebalances. If at the end of the year stocks have risen and you’re at 80/20 you’d sell stocks and buy bonds. The opposite would also occur.
There is a substantial benefit from this it’s added as much ad 0.5-1.5% in the past.
Still 100% is better for an absolute return basis.
@@JamesShack Ah of course, and presumably your model does that rebalancing too?
I think the problem I see is that you never really benefit from the highs of the stock portfolio as in reality the goal is not running out of money. Even if you spend in the good times the lows of the bad times will still be lower. If you change your withdrawal rate to a percentage of the pot does that change things significantly? So the average withdrawn over the lifetime was similar but you adjust spending accordingly. I have other sources of income too (rental properties etc), so could potentially make up the difference in other ways.
@@paulh1529 yes. On a percentage based model you would never run out of money. But your income would be hugely volatile , up 20% one year down 40% the next, and you may end up with a very low income in the end.
No one spends money like that. People prefer to have a reliable stream of income that they can spend confidently.
Hi, when you are doing your own flexible drawdown, you only want to withdraw when the markets are up then/that year. How do you gauge that?
That's the challenge. And it depends on how lean your strategy is, if you have a very low withdrawal rate
Another superb video. Watch & learn!
What about splitting your investing in to stocks for share price and stocks for dividends?
Dividend investing is just as risky and produces lower returns than investing in stocks for total return. Better off just investing for total return.
@@JamesShack but wouldn't it be better than investing in bonds as the price of the actual stock may go up as well
DB pension schemes are all but extinct....unless of course you're one of the 5m+ public sector workers.
I often think someone should work out what the employer contribution to a DC pension would need to be for an employee in the private sector to have a pension equivalent to that in the public sector. It would give a better idea of the "value" of a public sector job.
20% Vanguard world equity
20% US small cap value
20% FTSE 100
20% Gold
20% long term US treasuries
This back tests well with a 5% withdrawal rate for UK retirees spending in £ (OMG home bias, too high gold allocation, long term debt in an inflationary environ, yes yes i know, still back tests well)
edit:typo
Awesome video
Nice James! Ive just turned 24. When I checked my pension last year, I realised that from the past 20 years, the 100% stocks option had much much higher returns than the bonds options.
Made the switch since I’m young. I think I’ll stick with it until I’m around 45 in all honesty
I am on one these apparently vanishingly rare DB schemes and never see much info about it. Does that mean I don't need to consider anything else for retirement assuming I stay with the same employer till retirement?
That depends on whether the income it's set to pay out is enough to fund the lifestyle you want.
Hit 200k today. Thank you for all the knowledge and nuggets you had thrown my way over the last month. I have accumulated 180k today. Started with 17k in last month 2024 Investing with Juliana Heidi
Wow that's huge, how do you make that
much monthly?
Honestly? I'm so excited. Juliana Heidi strategy has normalized winning trades for me also and it's a huge milestone for me looking back to how it all started😃
The first time we had tried, we invested $4,000 and after a week we received $16,400. That really helped us a lot to pay our bills.
More spontaneous T.A with mrs Juliana heidi!! Keep driving those bullas! 69K
BTC? Oh, yeah! cheers mate
Wow wow please is there any way to reach her services, I work 3 jobs and have been trying to pay off my loan for a while now, please help me..
Interesting video however when I look at the 3 graphs they all rise and fall at the same time but because the stocks initially grew at much quicker the losses seemed much bigger in reality the 100% of stocks were only below the 50/50 bonds and stocks 5-10% of the time - if and it’s a big if you can hold your nerve stocks still seem the way to go ?
Yes - if you can hold your nerve. Its quite a big call, and what if your wrong?
At a bare minimum having some cash/bonds to cover a few years of expenses is good if just for sanity’s sake.
I think if I understand correctly is in some respects the falls seem harder because the wins are bigger with stocks with bonds the wins are not so big so in some respects the losses are smaller - one 20 year period does not really give a definitive answer but if you were to run it 10 times and stocks won every time then you need to be brave .
@James Shack - bonds can crash too. If you look at the current market bonds are down massively. For example the vanguard global bond index fund is down 12% in the last 12 months. We are in unusual times with a reversion to a more “normal” interest rate environment. Hence bonds are crashing and will continue to do so. I expect that we will see a 35-40% crash overall with little likelihood of recovery in the same way you would see with equities. Your thoughts?
Bonds will only continue to crash if we end up with higher interest rates than are already expect, or if they end up sticking for longer than expected.
Long term bonds can crash for sure. They are can be extremely volatile, which is why retail investors should stay clear.
But if you plan on holding a bond to maturity, you will get the return/yield you originally bought it at. Interim price changes do not affect your nominal return if you plan on holding.
@@JamesShack James - the problem in a rising interest rate environment is that if you bought a 2 year bond with a rate of 3% and during the 2 years inflation rates rise to 9% (like now) you’re stuck earning -6%. Also - during that 2 years the tradable value of the bond may have dropped to significantly below par to reflect this…possibly below 90 cents on the dollar in this case (although it will eventually pay back its face value, that will be worth just short of 20% less than when you bought it in terms of buying power). Bonds should never be seen as an asset only to hold to maturity. Hence bonds are just as problematic as equities and during this transition to high inflation and should be avoided at all costs. Traditional pension strategies do not hold right now especially given the yield inversion we’re in the middle of. When we see short term government rates getting close to the inflation rate and the yield curve un-inverts then we can start reverting to bonds again. Until then avoid like the plague.
@@JamesShack Hi James, so we’re now 2 weeks on and what are your views? The Vanguard Global Bond Index fund is now down 14.5% YTD. The Vanguard UK Government Bond Index Fund is down over 28% YTD (to 23rd Sept - and I suspect today’s gyrations will make that considerably worse) - note this is not the long term gilts fund. Unlike stocks these bond funds will take a long time to recover due to the nature of how they are run. We are in the middle of a global currency crisis and this was predictable - hence why I am continuing to stay far away from bonds. The only way we will get out of the inflation/currency crisis spiral is to raise interest rates above the inflation rate. That implies a 10% interest rate environment - that will destroy all investments in bonds as we go through the tightening. When we get close to 10% then it might be worth a flutter with bonds - but I consider this to be gambling and not investing. Governments are not trustworthy.
Great video as usual, but I sat yawning at the 2008 financial crash 100% in stocks and now far, far ahead and sitting pretty. Happy with stocks risk, but do intend on using the 25% TFLS to pay off the mortgage and provide income for 3 to 5 years in stock market years that are not profitable enough. So the savings buffer and lessened outgoings are my “bonds”.
So you would keep cash for 3-5 years worth of expenditure?
Yeah, but that’s probably excessive so I might end up using some of it for sons house deposit or uni fees. Also tempted to avoid cash due to inflation - so might keep half of it a stock market tracker in an ISA - got about a year to decide really. channels like yours help me out loads, so thanks! Having a larger pot to me means less risk of my retirement lifestyle and thereby less stress but I know many would hate the idea of volatility with a larger pension pot - I’m probably helped by the fact that I intend to take only 3% drawdown (in good years) and reducing that once state pension(s) kick in - so the pension is definitely weighted to the first 12 years of retirement.
I like this vid. Good insight.
Glad you liked it!
All well and good in theory, until bonds crash along with stocks like in 2022.. Hands up those who were in year 1 or 2 of retirement?
Bond are dropping due to interest rates rise plus the fact that bonds can be risky too in recession .
If interest rates go up enough we would be better just keeping it in the bank maybe short term?
You don't lose money on a bond if you hold it to maturity. It's price may fluctuate, but if you hold it to maturity you'll still get your 2% or whatever yield you initial bought it at.
@@JamesShack yep, I was looking at vanguard split vs 100% and the 60 40 is going down more, is there a better way to do bonds that relatively quick and easy?
Where do REITs fall in this equation?
James, Why do you say that if everybody followed the 100% stocks strategy in retirement, returns would be less?
Because the buying demand would bid up the prices of the stock market so much so that the earnings per share becomes heavily diluted.
@@JamesShack Makes sense!