I have learned a lot from people disagreeing with me.
[FONT="]Then eyes down and take notes.[/FONT]
Why does she need to go to an advisor to construct such a portfolio? There is nothing specific to her about it.
No. It is specific. The OP says the requirement is for €20,000 pa income, and preservation of capital. This, e.g. implies a ‘buy & hold’ portfolio, that will produce a given income with capital preservation; as opposed, e.g. to a ‘withdrawal mode’ portfolio, of which the pensioner would withdraw €20,000 in year 1, and then withdraw this amount index linked each year regardless of overall portfolio performance.
So we’ve been set a specific problem: can a portfolio be constructed for the pensioner with a reasonable expectation that (a) a withdrawal of €20,000 pa (index linked) can be sustained over the over the estimated life-span of the pensioner from a portfolio of €500,000 [FONT="]without eating into the capital sum[/FONT]; and, if this is achievable, (b) is it possible to maintain this withdrawal rate while maintaining the capital sum allowing for inflation.
But as we know that returns from assets are not always positive and linear, for each possible portfolio solution, we need to calculate the probability of success (i.e. the ability to meet the income and capital preservation needs; the estimated frequency of loss and the specific recovery period). This, of course, will be determined by the asset allocation of the portfolios; the returns and volatility of returns of each asset; and the correlation of the various asset classes.
I don't think that ETF's are tax efficient for a pensioner, but I am open to correction on that. I would not exchange a 20% or 41% tax hit for some reduction in "volatility".
You should. If the portfolio suffers a 25% loss it needs an annual return in excess of 10% for three years to recover. (It will actually need more as the pensioner is still withdrawing income in this period). So what is the probability that the portfolio will suffer such a loss over the pensioner’s life-span? What is the frequency this will occur? To answer these questions you need some idea of the portfolio’s volatility.
Volatility tends to be measured on an annual basis, and I don't think it's particularly relevant when we are looking at 20 year horizon.
If you are a pensioner investing for a remaining life-span of 20+ years it is. You don’t want to end up broke with your capital gone. So, for the ‘5 blue chip share’ portfolio, can you estimate what the likely return should be in roughly two out of every three years; what is the likely return to be in all but one out of 20 years; over the estimated life-span of the pensioner in what % of the years will the portfolio deliver a positive return and in what % of the years is the pensioner likely to lose money; how likely is the pensioner to suffer a loss of more than 10%? You can make an educated response to these if you have long duration statistics of returns and their volatility (i.e. standard deviation). So volatility is very important over a 20 year period.
I would love to invest in such a porfolio. Low losses, high returns and good recovery?
You haven’t analysed the OPs problem. The pensioner wants an income (presumably inflation proofed) of 4% of the initial capital sum and also capital preservation – not high returns; You can’t guarantee low losses but you should be able to estimate the probability of loss-making years over the pensioner’s life span, and the likelihood of recovering from a loss.
My gut feeling is that going to an investment advisor is risky.
[FONT="]Yes, it is, especially if the OP just goes in an asks for a €500,000 portfolio that generates €20,000 pa [/FONT]
