In the late 1600s, William III introduced the so-called Window Tax, a levy on people living in homes with more than six windows, a crude measure of prosperity at the time.
To avoid this tax, some homeowners responded by bricking up all windows except the six! As the bricked-up windows prevented some rooms from receiving any sunlight, the tax was referred to as ‘daylight robbery‘, because it was considered to be a tax on light and air!
Everywhere you turn these days, there’s talk of asset class ‘bubbles.’
Apparently, we’ve got a bond bubble. An equity market bubble. A property price bubble. A Bitcoin bubble. Oh, and a passive fund bubble! Hell, we’ve got a bubble of bubbles!
It’s not hard to understand why many think equity prices are elevated, and a ‘crash’ will inevitably follow. We’re now over eight years into the current bull market, and there are increasing concerns that equity valuations may be too high.
Get your CAPE on!
One of the more reliable valuation metrics is the Cyclical Adjusted Price Earnings (CAPE) … More →
They say time flies, but in financial services, it does so at the speed of light!
And what a difference a year can make! This time last year, the FCA introduced new capital adequacy requirements (PS14/12) for SIPP providers.
As we anticipated in our last SIPP Financial Stability Report report, not everyone made it to the other side in one piece. Some providers fell by the wayside in the run-up to September 2016 and the months after it.
European Pensions Management went bust in June 2016. It was then acquired by Suffolk Life, which is part of Curtis Banks Group.
It’s not quite in the same class as Frank Whittle’s invention of the Jet Engine or Tim Berners-Lee’s invention of The Internet, as RL’s marketing brochure seems to suggest. But considering how unimaginative providers have been on the subject of retirement income till date, … More →
Asset allocation is a key factor when deciding sustainable withdrawal rate in a retirement income portfolio. And one of the most important decisions is what proportion of a retirement income portfolio should be allocated to equities.
The received wisdom is that allocation to equities should be lower during the retirement income stage. The rational behind this include the fact that retirees tend to have lower risk appetite and reduced risk capacity.
Yet, the common practice in the industry isn’t supported by cold hard empirical evidence. Indeed, in his seminal 1994 paper, Bill Bengen recommended
I had the honour of meeting legendary Bill Bengen of the Safe Withdrawal Rate fame last week.
Our meeting took place near his home in Palm Springs, California. Given his accomplishments, he struck me as a very humble and down-to-earth person, a rare virtue in financial services!
After the pleasantries, we sat down and ordered a drink. I asked Bill if he had any idea when he wrote his first paper in 1994, that his methodology was going to become something of a gospel on retirement planning. “Not at all. I started the research in 1993 and wrote my … More →
One crucial but often forgotten point about Bengen’s Sustainable Withdrawal Rate (SWR) framework is that SWR is defined as a percentage of the capital only in the first year of retirement. Subsequent withdrawals in £ terms are adjusted for inflation, regardless of the outstanding balance in future years. So, in reality the actually current withdrawal rate in percentage terms will change from year to year as the outstanding balance and annual withdrawal changes. But the real withdrawal in £ terms remains the same as the income in the first year!
The two charts below show the nominal (left) and … More →
If I had a pound for every time someone in financial services talks about spending in retirement as being ‘U-shaped’, I’ll probably have enough money by now to never have to work again!
You’ve probably seen this image on spending needs in retirement before. It’s a rather commonly held view (see this, this and this) that most people spend more early in retirement, when they’re active and keen to enjoy their new-found freedom. Then they go into a less active stage where spending declines, only for it to pick up dramatically in later life due to care costs.… More →
One of the most common questions I receive about retirement income planning is, how realistic is the idea of relying on natural yield in one’s portfolio to meet retirement income needs. The rational is that by relying on the natural yield from their portfolio, retirees can avoid drawing on their capital or selling fund units, thereby avoiding the dangers of sequence risk.
The natural yield approach contrasts with the total return approach, which essentially ignores the difference between capital growth and dividends, and instead seeks to draw income from both in a sustainable way.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so’ – Mark Twain
The movie Big Short opens with above quote, which sums up the danger of thinking you know something that isn’t actually true. There’s only one problem. There’s little evidence that Mark Twain actually said or wrote those words, which makes the irony all the more powerful.
The point is, many practices in financial services just aren’t supported by actual observed data on how investment markets work. (Which makes you wonder, where do they come from? But … More →