Your "forced-sale trap" comment may simply be a misunderstanding of what I intended when referring to relying on dividends from xd stocks for the next pension payment. I was just making the point that I want to have as little in cash as I possibly can. There has never been a problem raising sums needed to meet dividend payments. Only 0.5% of the fund goes out in cash each month, inclusive of dividends, so very little needs to be sold. (The platform fee also needs to be added).
I definitely see the logic in minimizing idle cash, but I wonder how much your approach has benefited from very favorable market conditions over the past 15 years. Those years have generally been strong for equities, which makes relying on dividends and minimal sales seem sustainable. However, this may not hold during prolonged downturns.
I think it is fair to expect 15% dips every 5 years, 20% every 6 years, 30% every 10-20 years, and 40% rarely but occasionally.
As returns revert to the mean, volatility tends to increase. In such periods, dividends and liquidity may not be as reliable. Market pessimism often spreads, making capital more expensive and cash flows less predictable.
Another concern is that market performance is typically concentrated in a handful of companies. Most firms don’t endure for decades. Nokia was dominant 20 years ago, yet today it’s a shadow of its former self. Will Nvidia still lead in 20 years? Hard to say. This uncertainty is why active managers often fail to beat passive funds over the long term. Relying on a few dividend-paying stocks to consistently deliver cash feels risky.
The situation is possibly best illustrated by the topical concept of "lifestyling". The premise behind the default strategy for My Future Fund is that the natural habitat for pension savings is equities but as one approaches retirement the timing risk looms and it becomes appropriate to start "insuring" that risk. Not wanting to fall into an off topic rabbit hole, @Colm Fagan's proposal for auto - enrolment, what he was suggesting was 100% equity investment throughout with the individual timing risk self insured through inter cohort pooling.
My own issue with the default lifestyling is that it can reduce growth potential too early, especially during the accumulation phase when compounding matters most. While reducing equity exposure near retirement mitigates timing risk, doing so prematurely may leave significant returns on the table. So, its a question not of one-size-fits-all, but can you structure your portfolio such that it can pay your costs of living for a comfortable retirement, but also allow enough equitities there to allow for future growth. Its about balancing die-with-zero against being overtly frugal during retirement.
For many, it is undoubtedly the case that the psychological stress of this suggests that are better served by an annuity. For those risk-on folks (especially with larger pots) I'd argue it should be about wealth preservation and growth without undue risk.
Ben Felix argues (with compelling evidence) in that video link I posted that global diversification in bonds is the most effective way to de-risk without sacrificing too much growth. Capital always wants to flow to the place where it makes the best return. That inevitably isn't cash or bonds. So geopgraphical dispersion can help. Felix's point also aligns with the idea that what we call "sequence-of-returns risk" is really "sequence-of-withdrawals risk". Withdrawals during downturns are what do the real damage to compounding. Returns are what they are.
So, if you can adjust your withdrawals (through a strategy, such as Guyton-Klinger guardrails, or just reducing your spending naturally (unnaturally?) as a reaction to market performance), then maybe it will all be fine. Most corrections last less than a year, but not everyone has the discipline to ride them out.
When I was referring to cash and bonds as a form of insurance, I was thinking more for the worst case: IIRC, the slowest major stock market recovery was after the 1929 Great Depression crash, with the Dow taking over 25 years to regain its pre-crash peak, though the market took about 4.5 years to hit its trough and start recovering from the crash bottom. Other long recoveries include the 1970s downturn (over 9 years) and the "Lost Decade" (dot-com bust & Great Recession), which took over 12 years to reach prior levels. These types of black swan events could do huge damage to a portfolio if the timing wasn't advantageous.
So, I think 100% equities with concentration in a few stocks obviously works well in strong markets, but it assumes conditions that may not persist. Diversification, flexibility in withdrawals, and some form of insurance (global diversification and potentially cash buffers or bond ladders) can provide resilience against rare but severe downturns.
