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Post by ludacris on Mar 17, 2018 14:52:39 GMT 7
Last post before I stop thinking about this for the weekend. Here's an in-depth article about keeping an emergency cash cushion and double counting dividends like I did above: earlyretirementnow.com/2017/03/29/the-ultimate-guide-to-safe-withdrawal-rates-part-12-cash-cushion/The whole 23-part series is worth a read. The problems we face in the modern world - it's definitely true the more educated and well off you are, the more options you have and the more you have to think about can lead to increased stress haha.
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chiangmai
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Post by chiangmai on Mar 18, 2018 8:24:51 GMT 7
Perhaps when Fletch (or anyone else) comments on the previous posts they can also comment on the usefulness of buying into an IT such as the JP Morgan Asia IT where the discount to NAV is a whopping -11%.
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AyG
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Post by AyG on Mar 18, 2018 10:07:37 GMT 7
Perhaps when Fletch (or anyone else) comments on the previous posts they can also comment on the usefulness of buying into an IT such as the JP Morgan Asia IT where the discount to NAV is a whopping -11%. (1) When trading at a discount you get more underlying shares for your buck. That means you get more dividend each year - in this case roughly 11% more. (2) One hopes that JPM will introduce discount controls in the future so the trust trades closer to NAV. If this happens you'll get an instant 11% boost in capital value (along, probably, with improved liquidity and reduced bid/offer spread). (If you look at the sector, there are other trusts such as SOI and HEFL which are trading close to NAV.) (3) Discounts like this are why I would never buy an investment trust at the initial offering. Pity the investors who bought into Woodford's Patient Capital, which now stands at a discount of over 14%. What with poor performance and the discount, those investors are sitting on a 27% loss. I for one won't be buying into Baillie Gifford US Growth Trust plc or Global Diversified Infrastructure plc for the moment. (4) In the case of JAI, there's no compelling reason to buy it, despite the discount, when its long term performance is close to the bottom of the list. I also wouldn't buy it because of its high exposure to China/HK/Taiwan (58%) and its exposure to Internet businesses (Tencent 7.1%, Alibaba 4.6%). Indeed, given its exposure to these high growth areas the managers must be doing something wrong (though to be fair, the current managers only started in 2015/6 so can't be held responsible for the longer term performance).
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chiangmai
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Post by chiangmai on Mar 18, 2018 10:36:10 GMT 7
Perhaps when Fletch (or anyone else) comments on the previous posts they can also comment on the usefulness of buying into an IT such as the JP Morgan Asia IT where the discount to NAV is a whopping -11%. (1) When trading at a discount you get more underlying shares for your buck. That means you get more dividend each year - in this case roughly 11% more. (2) One hopes that JPM will introduce discount controls in the future so the trust trades closer to NAV. If this happens you'll get an instant 11% boost in capital value (along, probably, with improved liquidity and reduced bid/offer spread). (If you look at the sector, there are other trusts such as SOI and HEFL which are trading close to NAV.) (3) Discounts like this are why I would never buy an investment trust at the initial offering. Pity the investors who bought into Woodford's Patient Capital, which now stands at a discount of over 14%. What with poor performance and the discount, those investors are sitting on a 27% loss. I for one won't be buying into Baillie Gifford US Growth Trust plc or Global Diversified Infrastructure plc for the moment. (4) In the case of JAI, there's no compelling reason to buy it, despite the discount, when its long term performance is close to the bottom of the list. I also wouldn't buy it because of its high exposure to China/HK/Taiwan (58%) and its exposure to Internet businesses (Tencent 7.1%, Alibaba 4.6%). Indeed, given its exposure to these high growth areas the managers must be doing something wrong (though to be fair, the current managers only started in 2015/6 so can't be held responsible for the longer term performance). I understood Point 1 of course, my concern was that with such a large discount it might be indicative of a falling knife that had further to go. And no I'm not interested in acquiring the fund, I was just curious after the previous posted details of it. But thank you for your answers.
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AyG
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Post by AyG on Mar 18, 2018 11:08:31 GMT 7
my concern was that with such a large discount it might be indicative of a falling knife that had further to go. It's not something that I'd every given any thought to, but I don't think discounts work like that. You're more likely to see a rapid fall in price than a rapid widening of discount. In this case, whilst a 10% fall in price is expected to happen fairly frequently, a widening of the discount by 10% (from 14% to 24%) seems highly improbable. Incidentally, the discount for JAI has hovered around 10% +/- 5% for the last 10 years, as this chart shows: Attachment Deleted
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rubl
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Post by rubl on Mar 18, 2018 12:01:27 GMT 7
my concern was that with such a large discount it might be indicative of a falling knife that had further to go. It's not something that I'd every given any thought to, but I don't think discounts work like that. You're more likely to see a rapid fall in price than a rapid widening of discount. In this case, whilst a 10% fall in price is expected to happen fairly frequently, a widening of the discount by 10% (from 14% to 24%) seems highly improbable. Incidentally, the discount for JAI has hovered around 10% +/- 5% for the last 10 years, as this chart shows: Lack of knowledge I admit, if following is a stupid question please tell me. Is a discount still a discount when it has been there for 10 years? Shouldn't it be a 'less internal overhead' which allows the company to offer at lower prices? Or something similar?
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AyG
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Post by AyG on Mar 18, 2018 12:47:35 GMT 7
Lack of knowledge I admit, if following is a stupid question please tell me. Is a discount still a discount when it has been there for 10 years? Shouldn't it be a 'less internal overhead' which allows the company to offer at lower prices? Or something similar? An Investment Trust (IT) is a company which is created to buy and hold shares of other companies. In theory the value of the IT company would be equal to the value of the shares held, and the IT share price would be that value divided by the number of shares issued. In reality, the IT share price is often lower than the theoretical value, perhaps reflecting a lack of demand for the shares (which are strictly limited in number - unlike a unit trust/OEIC which will issue more units if there's a demand for them), but can also be higher, for example, if the IT has stellar management, is performing stonkingly well, and there's a lot of demand. The discount is what measures the difference between the value of the underlying shares and what the market is prepared to pay for the IT shares. So, it is still a discount, more specifically, a discount to net asset value (NAV).
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chiangmai
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Post by chiangmai on Mar 18, 2018 16:28:08 GMT 7
my concern was that with such a large discount it might be indicative of a falling knife that had further to go. It's not something that I'd every given any thought to, but I don't think discounts work like that. You're more likely to see a rapid fall in price than a rapid widening of discount. In this case, whilst a 10% fall in price is expected to happen fairly frequently, a widening of the discount by 10% (from 14% to 24%) seems highly improbable. Incidentally, the discount for JAI has hovered around 10% +/- 5% for the last 10 years, as this chart shows: Being somewhat naive and very suspicious I would view such offers with much scepticism, a nearly 4% divi. AND an 11% discount off the price, hmmm I would say to myself, where's the catch and why isn't everyone piling in and erases the discount. But wait, it's been that way for 10 years they say, that being the case what else did they get wrong. Not a serious thing, just mild curiosity.
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chiangmai
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Post by chiangmai on Mar 19, 2018 7:20:41 GMT 7
Another one for AyG (or anyone else that has a view):
I know you're against holding most bonds in a portfolio because they are a drag on performance, plus they are all extremely difficult to select (for me at least) and from what I read it's an area that requires some specialist training if risk is to be kept at a minimum.
It looks as though many Mixed Asset funds might reduce the risk of holding bonds since I presume specialist knowledge exists within the fund management that means they can select funds more optimally, plus they have a positive equities loading of up to 85% - I'm thinking specifically of Royal London Sustainable World Trust. There are MA funds that fell by only small amounts during the February correction but their charges are quite high whilst their returns are not great, in fact, some of them seem to be only an incremental step up from holding cash - BGST seems to provide a balance between risk/reward/insurance that fits better. Thoughts?
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AyG
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Post by AyG on Mar 19, 2018 9:33:02 GMT 7
It looks as though many Mixed Asset funds might reduce the risk of holding bonds An issue with such funds is that the fund manager is making calls based on her view of the economic climate. If she thinks bonds will perform better than equities, she'll increase the allocation to bonds, and vice versa. However, such calls are difficult to make. And if they are wrong, fund performance will suffer. At the moment I see no reason to hold conventional bonds since rising interest rates will inevitably mean their capital value falls. The Royal London fund is forced to hold 15% bonds (and they are right at this limit). I suspect the managers would be happier not to hold bonds at all at the moment. some of them seem to be only an incremental step up from holding cash And what's the problem with that? Some people want cautious investments with a better return than cash. For example, Ruffer Total Return describes itself as "The LF Ruffer Total Return Fund aims to preserve capital in all financial market conditions while delivering investment returns ahead of that from cash." Often the objectives will be even more explicit, e.g. LIBOR + x%.
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Post by Fletchsmile on Mar 19, 2018 14:17:11 GMT 7
Perhaps when Fletch (or anyone else) comments on the previous posts they can also comment on the usefulness of buying into an IT such as the JP Morgan Asia IT where the discount to NAV is a whopping -11%. (1) When trading at a discount you get more underlying shares for your buck. That means you get more dividend each year - in this case roughly 11% more. (2) One hopes that JPM will introduce discount controls in the future so the trust trades closer to NAV. If this happens you'll get an instant 11% boost in capital value (along, probably, with improved liquidity and reduced bid/offer spread). (If you look at the sector, there are other trusts such as SOI and HEFL which are trading close to NAV.) (3) Discounts like this are why I would never buy an investment trust at the initial offering. Pity the investors who bought into Woodford's Patient Capital, which now stands at a discount of over 14%. What with poor performance and the discount, those investors are sitting on a 27% loss. I for one won't be buying into Baillie Gifford US Growth Trust plc or Global Diversified Infrastructure plc for the moment. (4) In the case of JAI, there's no compelling reason to buy it, despite the discount, when its long term performance is close to the bottom of the list. I also wouldn't buy it because of its high exposure to China/HK/Taiwan (58%) and its exposure to Internet businesses (Tencent 7.1%, Alibaba 4.6%). Indeed, given its exposure to these high growth areas the managers must be doing something wrong (though to be fair, the current managers only started in 2015/6 so can't be held responsible for the longer term performance). Agree largely with AyG's point. Would just add though: (1) On the other hand you are also paying higher effective % charges too. Charges are based on NAV not share price. So if the annual charge is 1% and you buy 100 worth at NAV, your charge is 1% or 1. However, if it moves to a 10% discount your charge remains 1 (based on NAV) and you are now paying a charge of 1 on something worth only 90. So while you gain on the dividend side you can lose on the expense side. Obviously for funds paying high dividends then you've a net gain. But for growth funds without divs you you're paying higher. (2) Discounts have been annoying around for decades. Very few have come even close to solving this issue. A few come close but even the so called "zero discount policy" funds with discount controls in place often move a few % either way. The "zero discount policy" is really just wishful thinking and a marketing myth. It just means these funds aren't as bad as others. eg if you look at the numbers of those with "successful discount policies" , their definition of success is shall we say rather optimistic. I read an article on this a while back for 2015, just googled it for the link, and while the average discounts are not too bad, the swings are still quite large within the year. "Best" was a 3.5% swing between 2.1% discount and 1.4% premium, worst was a swing of 6.6% premium to 5.1% discount - a swing of 11.7%. And these are the ones they describe as a "successful zero discount policy" www.trustintelligence.co.uk/investor/articles/investment-trusts-without-the-discount-volatility(3) Yes totally agree. I've always thought what's the point of buying at launch, when most funds go to a discount and there will be set up/ launch costs --------- Discounts are just too unpredictable, and can last for several years. Years back for some fund managers they often ran similar unit trusts and investment trusts, and sometimes because of the dicsount/premium it made sense to buy one rather than the other at different points in time. It is worth a look and thought at what the discount is now compared to the average over its history. Plus also considering where we are in the bull/bear cycle. On the latter, after the bull run of recent years discounts generally have narrowed, and some moved to premiums, so when the next crash hits, if a fund manager runs both a similar unit trust and investment trust, while their NAVs will crash by similar amounts, the share price of the IT is more likely to crashes more than NAV as the discount widens again. (Same way we've had the opposite of narrowing in recent years) So while maybe you can tilt the odds in your favour by looking at where the discount is, for me that should be the icing on the cake. They're too unpredictable to try making money just from the discount in isolation. Pick the fund because it makes sense as a fund. A narrowing of the discount would be a bonus.
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Post by Fletchsmile on Mar 19, 2018 14:57:14 GMT 7
Hi Fletch, I've been thinking about your post #80 and what someone would do if they had to go through that. Let's say someone is fully invested in equities and is planning retirement based on the 4% rule. Let's also say their portfolio includes equity income funds that push their overall dividend yield to 2% (see below) and they also have a 2 year cash emergency fund (equivalent to 2 years at 4%). To keep things simple, let's use the S&P 500 index for market returns. That person was most likely accumulating during the 80's and 90's, and let's say they retire right at the very top in 2000. It takes a while to realize you're in a deep bear market, but even if they still sold their 4% up to a year after the peak they would still be taking huge profits. After the first year when the bear market is realized, they stop selling and start using their emergency fund. But their dividend yield is 2%, so to maintain their 4% lifestyle their cash fund only draws down 2% per year and would last for 4 years if the 2% dividends are combined with the cash. So that gets us to 2004 and the market has mostly recovered and they can start taking 4% out again (selling 2% + 2% dividends), but then like you said the market crashes again in 2008. This time that person is really screwed because they already suffered a crash at the worst possible time right after they retired, but now they're in an even worse position because their emergency cash fund is gone. So this time they have no other option but to decrease their spending. So let's say they decrease to 3% (possibly not even counting for inflation since 2000). Dividends are still 2%, so they only have to sell 1% per year. The selling of 1% per year goes on until about 2012 when the market has recovered most of its losses. I ran some numbers on excel for the above scenario and you still break-even as of 2018. So after 2 market crashes in the first 10 years of retirement, having a 2 year emergency fund and being flexible on your withdrawal rate looks like you can still have a successful retirement. Also, although lots of people only have US equities, more realistically you would also have international and emerging markets which did well during that flat decade and with rebalancing could have added to returns. Increasing exposure to equity income funds would give more dividends and reduce selling near the lows as well. In addition, I think it's easy to forget that bear markets and corrections are defined based on the drop from the absolute peak, and most people if they've been accumulating over decades will hopefully only temporarily lose a few years of gains during corrections. During crashes 10 to 15 years can be wiped out until the market recovers, but that's where the emergency fund and being flexible on withdrawal rate come into play. That's far from being completely wiped out though (in theory anyways!). What do you think? Yes I agree with a lot of your points. Many people would get by, as per your calcs. Some additional factors to bear in mind though in modelling: 1) For dividends bear in mind that what was wanted was 2% return on the original amount to continue living off. When markets are crashing it's not that uncommon for companies to be reducing or in extreme cases passing on their dividends. Dividends on a wide basket of companies like the entire S&P constituents would likely be more stable than the capital prices, but based on your existing amounts they could well reduce. (For someone buying in at 40% lower than you after a crash their yield will look better than yours and maybe better than your original 2%). So your total dividends received in absolute terms may well go down and be less than 2% of your original investment. This may mean someone needs to take out more capital. 2) Cutting expenses from 4% to 3% might be possible. Sounds easy in theory but cutting your expenditure by 25% is quite a chunk, and will depend on individual circumstances. Ideally you don't want to be going without the things you enjoy in life though, because of these things. That said people should cut their cloth to their means, and may be forced to do this. In our case, very unlikely we could cut 25% off our yearly expenses easily, given a large chunk of our annual expenses is school fees. Which also brings on to a next point 3) Expenses will likely continue increasing anyway. People's personal consumption related inflation is often much different than the headline indicators. Our school fees seem to go up each year regardless. Also you don't often see cuts in prices of the basics like food, electricity etc You hit the nail on the head when you say realistically diversification should come into play. That's probably one of the biggest factors which makes this sort of recovery time/ peak trough analysis much less useful than it might appear. Living in Thailand who in their right mind has all their money in the S&P? So the recovery time of S&P in isolation is a nice statistic to bear in mind, and a bit of fun analysis but not so useful. In 2001 for example, many of my investments lost money, but Thailand's Aberdeen Growth came in with a nice 25%+ gain This is also an area where I think bonds can also come in useful. They are usually the higher income elements of your portfolio, relative to dividends on shares. Capital falls in a crash relative to equities are also usually less. While in the abnormal recent times, correlations have become closer between equities and bonds, when things start to normalise and the next crash hits, don't be surprised to see those correlations change again. In 2008 all my equity funds lost money. A couple of bond and commodity funds though generated positive returns and above cash as well. So the key is really diversification and understanding your own portfolio. Recovery rates are worth being mindful of, but need to be taken in a much wider context.
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Post by rgs2001uk on Mar 19, 2018 15:33:56 GMT 7
^^^^ the only thing I will add to the above, and it was alluded to, where are your funds and in what currency?
Lets assume guy retires at 50 with one million dollars, he can easily live of the 4%, problem arises in say 10 years, his one million capital has been eroded by not having the dividends reinvested, also Thai inflation kicks in, guy now needs 5 or 6% to survive, now starts eating into his capital.
Guy is now 70 with a possibility of living another 20 years, yes he still has his one million, but its basically worthless.
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Post by ludacris on Mar 20, 2018 9:23:00 GMT 7
Lots of great replies here. Fletch, good points about expenses - much easier to say you'll cut retirement expenses when you're my age than to actually do it when you're retired for sure, especially when you're paying for international school fees for more than one child. rgs20001uk, would having a large allocation to Thai equities have helped in that situation? Thai equities would protect against Thai inflation right? As an expat, I guess that's why it's important to have equities in the currency you're usually spending and well as your home currency and international stocks as well. What could be even worse is if that person planned on retiring at 65 GBP/THB with nothing invested in Thailand! As for the 4% rule, one thing that I overlooked is it assumes 0 capital left at the end of a 30 year retirement in the worst case scenario, which is pretty close to what someone would have gone through if they retired right at the peak of 2000. So he could be right on the glide-path to reach 0 at the end of 30 years. If you want to preserve some capital as well as push your retirement into the 60 year range (quite possible for early retirees) withdrawal rates of 3.25-3.5% are required. It doesn't seem like much of a reduction at first, but like Fletch pointed out taking 1% away from 4% is 25% of your spending. But 0.5% compounded over 60 years can have a huge effect on your ending value. I also found it interesting that as you look at longer time periods of 60 years, bonds become much more risky and 100% equities is actually the least riskiest. I wonder if in a couple decades there will be a lot of people who retired early on the 4% rule only to realize they're going to live a lot longer than they planned and they didn't realize their capital could be depleted around the 30 year mark. Of course all of that is based on past history and worst case scenarios, but the market has a way of messing with people as soon as things become predictable and easy and the little guy starts benefiting too much... This link has a lot more info: earlyretirementnow.com/2016/12/14/the-ultimate-guide-to-safe-withdrawal-rates-part-2-capital-preservation-vs-capital-depletion/
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AyG
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Post by AyG on Mar 20, 2018 9:51:53 GMT 7
As for the 4% rule, one thing that I overlooked I think there may be a few other things you're overlooking: (1) There are lots of different interpretations of what the 4% rule means (4% of initial capital, 4% of current value of investments, 4% of initial capital plus annual inflation). (2) Almost all the research has been done based upon US securities. (3) Almost all research has assumed a 60/40 US equity/bond split. (4) It assumes index-like returns. For a non-US resident, and for the smarter investor, it is largely irrelevant: (a) Many markets have historically dramatically outperformed the US markets. (b) A 100% equities portfolio will always outperform a 60/40 one over the medium to long term. (c) Some active managers can consistently outperform benchmark indices. "Smart beta" indices also claim to do the same. (The performance of Dimensional's funds over the long term suggest this is the case for some flavours of "smart beta".) (d) For someone investing overseas in assets not denominated in the home currency, there is (massive) foreign exchange risk. A 30% swing in the wrong direction (as happens frequently) will eat up perhaps a decade's worth of 4% income.
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