Ron Bewley’s investment bucket list

Print This Post A A A

I planned to submit this piece (with this title) several months ago as the final in my latest series on contributions for this website. I didn’t realise at the time I would be writing it the day after my 65th birthday – so it is unusually relevant!

Even more of a coincidence is that earlier this week on Tuesday (June 16, 2014) an article appeared in the Australian Financial Review by Sally Patten on a new super product from Equisuper to stretch out savings in retirement. I have not studied the Equisuper product and so I will not comment on it but the AFR version makes it sounds exactly the same as the concept I proposed in a series of papers I published around July 2012 on Switzer Super Report – and the name ‘three buckets’ of the strategy matches my writings! I will be commenting on my strategy and not Equisuper’s in this present article.

The bucket list

A problem I have always grappled with is that various commentators talk or write about it being unfortunate when someone retires just as the market has turned bad. It was no surprise to me that I turned 65 yesterday so I have been planning my investment strategy in its growth and its exit for at least a decade. Of course I could have passed away before the date but, sensibly, I had that base covered through my will.

The essence of my bucket strategy is that it hurts a fund when the investor sells down some asset for a pension payment at a low point. Therefore, I have always advocated having two to three years cash (or a closely related safe asset) at hand, or a virtually guaranteed distribution that will exceed the anticipated pension payment.

In bad times, the pension is taken from the cash bucket until either there is less than one year’s cash left, or the market is doing ‘well’ and some profits can be taken from the equities bucket to top the cash bucket back up to the desired two or three years level. In my more advanced analysis I have a number of buckets ordered by expected return and risk. I cascade funds down the bucket line as conditions warrant.

Plan ahead

So rule one is to start doing something at least two or three years before the desired retirement date. Of course illness can put the plan into disarray but perhaps, at the onset of illness if there is time, a potential retiree could bring forward plans.

My personal situation is a little unusual. I do have a modest defined benefit pension from my early retirement from university. That, with the money I earn from my part-time business and dividends from my equity portfolio in superannuation is more than I currently wish to spend. Therefore I do not yet need my cash bucket. However, when I stop working and I might want some big holidays, or healthcare payments, or retirement home expenses, etc., I will need that cash bucket close at hand.

Nevertheless, as I flagged many months ago, I intend to transition to a yield-conviction hybrid portfolio very soon. I am pretty sure I have nailed the software specification that will help me set and monitor my yield portfolio. Perhaps one more iteration will get me there!

It’s all relative

One thing I have noted since I started building these portfolios each month from the 1st February 2014, is that my yield portfolios have done particularly well compared to the index while the conviction portfolios have slightly underperformed. I cannot stress too strongly that different types of portfolios do relatively well at different times and this relative performance should be monitored. Yield has done particularly well in the first half of this year in terms of unrealised capital gains so it is pretty easy to have a winning yield strategy at the moment.

I had lunch with a prominent Australian equities fund manager last week and we discussed this relative performance. They seem to be expecting yield’s advantage may soon dissipate (but not collapse – just market perform). I am not sure when the switch will start. I think it might take a little longer – until rates here and overseas start to rise – perhaps mid next year. My yield portfolio (as it is a hybrid of yield and conviction) should automatically navigate the switch but I will be watching performance carefully during that phase.

As I wrote over recent weeks I sold a material portion of my SMSF portfolio towards the end of May and the beginning of June – including AGK, BHP, CBA, WBC and WPL. I did not think any of these stocks were bad. In fact I may even buy some back if there is a mini correction. Rather I wanted to go to cash first so I could buy the stocks for my yield portfolio when the time was right – in my opinion. I chose the stocks to sell using my sector mispricing measures and consensus recommendations. I obviously avoided selling stocks that I thought were cheap at the time.

I went to cash early because ‘funny things’ can happen at the end of the financial year due to fund managers’ window dressing. I obviously did not predict the Iraq situation but I did believe the market was unlikely to rise much before July.

I could start buying any day if the ‘price is right’ but it is unlikely that I will before July 1, 2014 when I generate my next yield portfolio. That is about the time of my next contribution to this site when I will present those stocks that pass my current filters for inclusion in my portfolios. It will take quite a few issues for me to get my whole point across. I know some of our readers have been waiting for this new yield stock series. I hope it does not disappoint!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition

View More Articles