I am approaching an important and significant milestone with my Investing activities where I will need to start taking Cash out of my Main ISA Share Account in order to have dosh for my day to day spending needs. In this blog I intend to go through the implications of this and to look at best ways to manage any Drawdown so I get out the Cash I need to eat but also so that I still achieve decent Investment Returns and manage to compound gains as much as I can but obviously removing Cash reduces this beneficial effect. I am pretty sure that careful management of the Drawdown process should mean the impact on Returns is not too hefty.
I have now been ‘retired’ for pretty much 10 years (by the way, today is my second birthday – 21 years since my Bike Accident !!) and up until now I have had Cash and Investments outside of my ISA Share Accounts which I was merrily spending through but that source is drying up. I still have a big chunk of my overall Wealth in a Prudential With-Profits Bond but I see this as a bit of a ‘rainy day’ kind of thing and in a way it is for ‘emergencies’ such as if we are in a horrible Bear Market when I can’t see obvious ways to get Cash out of my Share Accounts. Fortunately over those 10 years my Main ISA has grown a lot.
In addition I have a small bit of Cash kicking around but probably only enough for 6 months or something and I like to have some sort of ‘Cash buffer’ that gives me more comfort although of course if push comes to shove then things like Credit Cards and Overdrafts can be used in extremis and I always make sure I pay off these in full each month so I avoid Interest Charges. I don’t recommend this as a regular habit and thankfully I have not had to do it in 10 years although I often have quite a big outstanding balance each month because I basically do all my spending on my Tesco Credit Card unless Cash is easier. These days with the 30 quid or whatever ‘tappy tappy’ thing with your Card it is very convenient and easy to pay everything by Card. On my Tesco Card I get Points which means Vouchers for money off my Food Shopping.
Some huge advantages I have are that I don’t spend much money at all on a yearly basis and I get a big chunk of my yearly spending needs from other sources outside of my Share Investing activities – probably more than half. If you look at the blogs in the ‘Scores on the Doors’ category these will give you more information on this sort of stuff. If you look at my ‘Portfolios’ page then you will see more about what Investments I hold.
Up until recently I was picking up a fair bit of Cash out of my Spreadbet Portfolio as these are highly Cash generative when things go your way but at present this has been a bit difficult to manage because I have huge Hedge Positions which have gone against me mucho bigly and of course these paper losses need funding. As a slight aside, having Stoplosses would avoid this other awkward side-effect of Positions going against you and I have been putting a lot of thought into this. Had I not had the need to fund these Positions then my Cash constraints would have been easier although thankfully my Shares in my ISAs have gone up nicely and more than offset the hit from the Shorts. If you read my Weekend Markets Blogs then you will have probably read my thoughts on all this a lot and I will continue to narrate about how it all plays out. It is also the case that my Cash generated from Spreadbets is highly variable – some years I get piles out and other years it is a nightmare – but I think that goes with the territory to an extent and it is very much to do with my relaxed long-term approach to life.
Another thing that didn’t help my Cash situation outside of my ISAs was the screw-up I made with Hedging back in 2017 when I made a huge mistake of closing a Short Position and taking a big loss only to then find out in late 2018 that it would have paid off big time if I had held on and managed it properly. On balance I suspect Stoplosses are the best approach but “I am where I am” and “I wouldn’t start from here”. If I can manage my Hedges and take my planned actions then I should be able to get out of the situation and recover a lot of Cash. The important thing is that they are Hedges so I am making money on my Shares anyway – it is a pain but I am sure I can resolve things in a decent way. As I have written in blogs before, much of the problem is that the Hedges have just turned out a lot larger than I would ideally like them to be.
In addition to my ‘Main Trading ISA’ (‘Trading’ is the wrong word there really but that is what I have always referred to it as), I hold some Stocks in a relatively small Income Portfolio (all of this is on the ‘Portfolios’ page) and my intention is to move more to this kind of low activity, low risk, low return, approach over time as I get older but I suspect I will be actively doing Shares for many many years yet (heaven forbid, I am only 54 years young !!............ok, I look 94).
The thinking behind the Income Portfolio is that I really do very little to it and because it has a steady stream of Dividends just dropping in month after month, I can simply just pick up that Cash whenever I need dosh for my Pub visits. I need to build that Portfolio up and ideally I will get it to £200k in time so that I can pick up perhaps as much as £10k in annual Dividends with not much hassle. This will involve growing the Pot and also adding some Cash from my other ISAs etc.
I feel quite well placed also because I work on the basis that what I have is what I have to live off and anything extra that comes is a bonus and I have not factored that into my ‘plans’ (assuming I get any of it). What I am pointing out here is that I think my official State Retirement Pension thing is due from either 67 or 68 so in the worst case I need to survive for another 14 years and then I will get perhaps £5000 a Year from that source although it might be a bit higher. In effect I am ‘bridging’ a gap over those 14 years and then I will be absolutely rolling in Cash and I’ll be constantly pis*ed out of my face in the Pub !!
When I gave up working 10 years ago I got in touch with the Pensions people and they told me I would get the Full State Pension when I retired (I can’t remember if it was 67 or 68 and I can’t be arsed to look into it), which surprised me because I didn’t think I had enough ‘Qualifying Years’ but I could just about figure out how they got to the required 24 years or whatever it was at that time. Anyhow, since that the devils have changed the rules and introduced the new flat £7500 a year Pension or something like that and now I think you need a lot more Qualifying Years which there is no way I have (I think it might even be 35 years). Anyway, I really can’t be bothered with it all and as I mentioned I see it totally as a Bonus and if I get anything I will be very happy.
On top of this my Parents have died in recent years and as a result we are going through the process of sorting out the Estate and there is a House involved as well. I am not sure how this will play out and I might get nothing as a result but then again I might get quite a big chunk of Money; again, I am seeing this as a Bonus and if it happens that would be lovely but if I get nothing then I am in good financial shape anyway. If you like, my potential State Pension and any Money from my Parents’ Estate is more contingency for me in case things all go belly up (like a Corbyn government !!).
I nearly forgot this bit (aha, I knew my blog plan would help !!) but I must just sling in some comments about Capital Preservation. There is no doubt that once you ‘Retire’ and get into Drawdown mode there is more pressure to control and manage Risk and to look after what Capital you have. Of course this introduces psychological pressures in itself and could impact Returns but as ever the Golden Rule is to constantly assess your Risk Levels and you must only Invest / Trade with an amount of Risk that is commensurate (strewth Wheelie, you have gobbled a Dictionary or something) with what you feel comfortable with and if you cannot sleep like a log then you are taking too much Risk (or perhaps it is just a very hot period of weather in July !!!).
At a high level I guess there are 2 main elements to be aware of, which are the impact a poorly executed Drawdown process can have on Returns, and also the psychological pressures that a need to Drawdown Cash from a Share Portfolio can create.
I have already mentioned that Drawdown can hurt Results as Cash is slowly dripping out of the Portfolio but obviously the bigger the Pot you have then the less this effect is. In addition, I am sure that if you manage the process well and plan well in advance then the impact on Returns shouldn’t be too onerous.
The psychology one is important because if you know you have a Bill to pay and you need Cash soon, then it might be an undue and irrational influence on a decision you make regarding the Selling of an entire Position or perhaps a Topslice. It is hard to mitigate against this but simply being aware that it might be swaying your Decision making regarding a Sell is a step forwards. I would postulate (gosh, where are my words coming from today !!) that if you plan ahead and ensure you have a bit of a Cash buffer (perhaps a few months) then this psychological impact is reduced.
The Selling side of things is where psychology is most likely to impact but it might impact on the Buy side as well. If you go through a difficult period (believe me, you will see plenty of those over the years so you better get used to it !!) then it might be that you start stressing and worrying that you won’t make enough Money for a given year to be able to meet your spending needs and you might start making reckless and poor Buy Decisions and taking too much Risk such as by deviating from your normal Quality approach and buying crappy Stocks and perhaps trading too often. Again this is not easy to mitigate against although having a proper set of Rules for your Approach and taking a long term perspective can probably help. Having some Cash buffer obviously will reduce this impact and planning ahead is important as well.
Mechanics of Drawdown
This bit is quite simple. In essence you can get Cash from your Share Account via Dividend Payments and from when you Sell whole Positions or if you Topslice. In addition, if you have a Spreadbet Account and this goes well then that generates Cash and that can be a very helpful source of Funds but note it is very risky and you need to know what you are doing. I would say Spreadbets (and any form of Leverage like CFDs) are best avoided until you have many years under your belt and you have a proven track record of getting things roughly right. If you screw up on Leverage then it kills you.
Picking up Dividend Payments is by far the easiest way and I would contend that it is likely to do less damage to your Returns than if you make poor Sell Decisions. Obviously my Income Portfolio has big Dividend Payments as part of its reason for being but even in my Normal Trading ISA I pick up a lot of Cash in Dividends and although many of my Stocks in those Accounts pay relatively small Dividends, once your Pot is big enough even these create a nice steady drip, drip, drip of bits of Cash appearing in your Account (it also has a lovely side-effect of putting a daft grin on your face every time you login to your Account and see that a new Dividend has appeared !!).
Many people criticise Income Portfolios but I think this is typical Academic non-Real World thinking a lot of the time. Here in the Real World I contend that the low stress and ease of Income Portfolios is hugely beneficial and this is ever more important as we get older and our health starts to niggle a bit and suchlike. I honestly think keeping active with Stocks is highly beneficial for our Brains as we age but we really don’t need to be stressed and panicking about where the next buck is going to come from when we are in our dotage. Having a do-nuffin’ Income Portfolio alongside your more active Share Accounts can take care of much of your day to day Spending needs and avoid many of the pressures that Drawdown can put on a Portfolio.
In terms of Selling Decisions I think it is best to always try to avoid Selling “because you need the Cash”. It is far better to always have a bit of a Cash Buffer in your Share Account and luckily I tend to find that even after I have cleared out a chunk of Cash it doesn’t take long for the drip, drip, drip of Dividends to build up again. As an example, just the other day I was looking at my Cash in my ISA and thinking it looked a bit tight but then I had the luck of the EU Supply EUSP Takeover happening and all of a sudden a huge slug of Cash has appeared in my Account and I had to make no decisions about it at all (apart from actually deciding to let the Takeover Process go through to its full conclusion which is unusual for me because I normally sell in the Market but this time the Takeover Premium was not much [16% I think] and I wanted to maximise my Gain. Because I had planned ahead I did not need this Cash desperately).
In an Ideal World we want to be making Sell Decisions totally independent of any Drawdown needs. This means Selling at Highs or perhaps on Profit Warnings or whatever your approach tends to be (and it could be Topchopping on a High or whatever) but the main thing is not to let the “Drawdown Tail wag the Trading Decisions Hound”.
Just to reiterate this, as a general rule you NEVER want to be a Forced Seller – it is your job to take advantage of others who are Forced Sellers so you can buy well, but you mustn’t be the mug yourself. Drawdown is just another factor that can make you a Forced Seller if you do not manage things properly and plan ahead.
Another helpful solution might actually be to create a rough Cashflow Forecast for your Spending Needs for a given Year. Obviously this is difficult and likely to only be approximate but simply doing this exercise might help with getting a good grip on things and minimising negative impacts on Returns. In practice I do this to a small extent and often in my head or on a fag packet and just for a couple of months ahead but it is definitely a valid technique. To keep it simple, if you spend £36k a year, then you will roughly need £3000 a month and that gives you a rough and ready feel for how much you would need for the next few months or whatever.
Another idea which could help both the calculation of Annual Returns and the psychology aspects is to put aside Cash you will need for Annual Spending in December or something so in effect you won’t be Drawing Down as such in the coming year because you know you have the Cash parked to one side. Another similar variation is perhaps to park Cash needed for 6 months ahead although perhaps the Yearly approach is best if your Pot is big enough and the timing goes well for you to do it. For example, perhaps at the end of a particular year you have some nice Sells and a Takeover or something and you happen to have a Cash mountain in your Share Account(s). In such circumstances you could take the Cash out and park it and then you have no worries all year. In other years this might not time so well for you. As an aside, in terms of calculating your Yearly Return if you have been taking out Cash during the year, you can use something called the ‘XIRR Function’ in Microsoft Excel – I know many people use it and I looked at it once and it seemed pretty nifty.
The basic reality is that whatever you do there will always be some psychological bias nibbling away at the back of your mind. For example, just last Night I decided to Sell all my remaining Holding in Trifast TRI (I will update the Website in a bit !!) and I tried to be utterly 100% rational and objective about it and as always I did make the Sell Decision after the markets had closed and I was already mulling it over during the afternoon **Oh my goodness, I am typing this on my Laptop rather than a separate keyboard what I normally use and all of a sudden all my text simply vanished !! Luckily I worked out where the ‘Redo’ button is and the text came back but I must have somehow managed to ‘Select all’ and ‘Delete’ at the same time !! ** but however carefully I thought about it there was also this nag in my mind that “getting a bit more Cash in your Account wouldn’t hurt” and without doubt it influenced my Brain. Also, a good mate sold his TRI yesterday afternoon and we exchanged a few TXTs and I have no doubt that also influenced my thinking. Psychology is so dangerous !!!
I think that covers it and the Related Blogs below give more insights around this topic.
I wrote these a long time ago but they are totally bang on subject:
This epic is about Spreadbetting and is an essential read if you mess about in those dangerous waters or if you are thinking about it. There are links at the bottom to the earlier Parts of the Series:
This is such an important concept EVERY INVESTOR / TRADER MUST KNOW THIS:
And another gargantuan Blog on Hedging:
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