25% cash, money market or treasury?

[stone]

SanMiguel, I think drawing a distinction between "capital" and "income" for anything other than tax purposes is unwise. All that matters is whether at the end of the day you still have an asset base that can support your spending. If you look at the current "dividend champion" stocks and project back 20 years then imagining buying those 20 years ago seems very attractive. A more realistic view is gained by looking at what were the "dividend champions" of their day, 20 years ago, and then projecting forward to the present day. That gives a much more sobering picture with many declining dividends and lowering stock prices. If you had held a 100% gold portfolio for the last decade (not that I would recommend that) and had drawn it down to pay for your living expenses, then you would now have more "capital" then if you had held dividend stocks and had used the dividends to pay for your living expenses.

[magneto]

I don't really understand the 25% cash part of the PP.
Some say this should be in a high interest bank account, some say you buy short dated treasuries but then you already have 25% in treasuries in another part of the portfolio.
Is there any problem with holding 50% of the PP in an ETF like IGLT where you have long and short dated treasuries?

This thread is drifting into interesting areas, but presumably the answer to the original question is to allow rebalancing of cash and long bonds by keeping them separate?

[stone]

magneto, I totally agree about the importance of keeping the LTT  seperate from cash so as to maximize volatility capture. The TR60 50year gilt has increased in price from 91p earlier in the year to 115p a couple of weeks ago. That sort of swing is a key part of the workings of the PP. If you added money to the PP recently, you'd have wanted the high price to have diverted allocation away from the LTT and conversely earlier in the year you'd have wanted the low price to have diverted allocation towards LTT.

[christina]

So, what would you do for income in a year when the PP doesn't make any money or makes a loss? You'd have to take out capital.

You take income from the 25% cash allocation, which may or may not induce a PP rebalance event.

I dont' understand. There won't be much income from the cash...Do you mean, draw out your cash. If it goes below 15% of the portfolio, then you'll have to sell some stock/bonds to rebalance. But now you're left with fewer stock/bonds, so when they go up, their greater value will be felt less since you have fewer of them. So it's like reverse dollar-cost averaging.

I guess what you're saying is that this is still better than investing in dividend-paying stocks during retirement because the 9ish-10% on average that you will be earning via PP is more than the 4% you will be drawing out?? WHereas with dividend-paying stocks, you'll be drawing 4% but there's no telling whether there will be growth?

[pershing83]

Surely by now all must agree there is no fail-safe. Who is picking these fine high yielding stocks to see you through? Send me the list. Damn I will pay for that list. Maybe I'll just buy AGNC and pocket my 19%. :-))))

Not even H Browne, may he RIP.

[SanMiguel]

You take income from the 25% cash allocation, which may or may not induce a PP rebalance event.

I dont' understand. There won't be much income from the cash...Do you mean, draw out your cash. If it goes below 15% of the portfolio, then you'll have to sell some stock/bonds to rebalance. But now you're left with fewer stock/bonds, so when they go up, their greater value will be felt less since you have fewer of them. So it's like reverse dollar-cost averaging.

I guess what you're saying is that this is still better than investing in dividend-paying stocks during retirement because the 9ish-10% on average that you will be earning via PP is more than the 4% you will be drawing out?? Whereas with dividend-paying stocks, you'll be drawing 4% but there's no telling whether there will be growth?

Exactly.

Take the 4% from the cash pot as income and if that draws down the cash pot to 15% or less weighting then a rebalance will in effect take the most from whatever has the highest weighting at that time from LTT/gold/stocks to top up the cash pot - which in most cases will be a take-profit type action.

Relying upon stocks and dividend only to provide income will at times see both the capital value and the dividend value periodically decline such that a set of stocks that were once collectively paying 4% might see that dividend decline to 2% due to cuts - and likely at that time the share prices will also be down, perhaps substantially. Such that you either have to accept less income in that/those years, or draw down the capital value by selling some stocks at potentially a low price in order to make up the shortfall.

The PP as a combined set is more adapt at providing a relatively stable 4% income together with inflationary growth - even in such extreme cases as Japan post 1990 (an era where their stocks performed terribly) - and the UK in the 1970's when the GB Pound collapsed and had to be bailed out by the IMF (see the Real (i.e. after inflation) gains for the UK PP towards the bottom of this web page http://www.jfholdings.pwp.blueyonder.co.uk/ )

The PP isn't perfectly smooth on a year by year 4% income + inflation uplift basis, but over two or three year periods it comes pretty close in general and is about as close as you'll ever get.

SO, the real gain in the UK is only 5.6% per year on average from PP?

[SanMiguel]

Yes - 5.6% average real for UK PP. 5.23% annualised real.

Compared to 8.9% average real. 5.11% annualised real for 100% stocks.

At the end of the day its the annualised figure that is the actual gains achieved, so the UK PP in effect matched the gains from 100% stocks, but did so with much less volatility, more consistent results.

SO, the real gain in the UK is only 5.6% per year on average from PP?

When you say ONLY, what figure had you in mind as a reasonable real (after inflation) reward?

Is that after inflation? So, 5% increase a year regardless?
Not as effective as the US version running at 9%