Page 41 - DIY Investor Magazine | Issue 36

Thankfully, managing your pension is now much more sophisticated than having all the money in one portfolio, with short, medium and long-term portfolios the norm. Medium and long-term pots can, therefore, have higher exposure to equities.
THE 4% RULE
This is a retirement income rule, the theory being that if you take no more than 4% of your portfolio as income then it will last at least 30 years; its origins are based on equity and bond returns in a 60/40 equity/bond portfolio. The income taken doesn’t have to stay static – it can safely be increased by inflation; ‘index linked’ in the parlance.
Once a staple of advisers, the 4% rule has more recently been considered too simple and most advisers now use cash flow models and blend income from different sources to prevent depletion.
Long periods of low interest rates and therefore bond returns, as experienced after the global financial crisis, can bring the safe rate below 4%.
Some will continue to work or perhaps receive a windfall, which means sticking to 4% represents an unnecessarily frugal retirement; however, the downside of a one-off splurge, especially early in retirement, can ravage the portfolio to the point where it cannot recover.
THE 8 TO 18 FUND RULE
This is the manageable number of funds in your portfolio; more holdings than that can make it difficult for an investor to keep track — professional portfolio managers tend to have about 50 holdings but are on the case 24/7 with a supporting team.
There can also be wasteful overlap in holdings, where funds hold the same underlying investment, concentrating your portfolio in an underlying stock without you realising.
Many brokers offer online tools to allow you to really look under the bonnet of funds and look at the balance of your portfolio.
It is important to ensure that your portfolio maintains its overall shape to allow you to achieve your objectives. Having too many funds can make you well diversified but at a high cost —you may be better served by a cheap mixed asset fund or trackers.
You may hold shares from privatisations or have been gifted them by your employer, or from a share incentive plan.
Where shares shoot up in value they can dominate a portfolio, and that is when it makes sense to reduce your reliance, for example, on your employer, from whom you may get your salary, your pension and investments.
Consider selling some off and buying something else.
Have a good look at your portfolio and give it a spring clean by switching out of the poor performers.
Most platforms can rank your fund, and it is worth looking at independent lists such as Square Mile’s Fund Select list.
Alternatively, if you don’t have time to devote to managing your portfolio, then it’s worth considering a risk-managed multi-asset fund or having a robo adviser do it all for you.
Fortunately, ‘petting’ is not believed to have a negative impact on the outcome of a long-term investment strategy.
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Dec 2022
DIY Investor Magazine ·