Should I draw from funds that produce lower or higher returns?

You could consider withdrawing out of the lower-yielding investment. Here's why.

I have a small portfolio of rand-denominated offshore unit trusts – each yielding different returns. My question is, when making withdrawals should I draw from funds that produce lower or higher returns?

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Generally, when your portfolio is initially constructed and then reviewed periodically, your investment advisor should understand your liquidity requirements.

Based on the information above, I will assume the lower-yielding returns are funds made up of mostly cash and bond instruments, it may have property and equities as well but a lower allocation.

The higher-yielding investment would probably be made up of equities, property, bonds and cash with almost the inverse allocation.

When we structure clients’ portfolios, we normally build portfolios based on the risk tolerance and time in the market, and we get a risk score that we will use as a baseline to allocate funds accordingly. However if your risk score is high, and you can take on a lot of risk, it doesn’t mean that we will just place funds that you will need in one to two years, for a car, holiday, wedding etc in high-risk structures with a lot of volatility. Those funds will be earmarked for those occasions and will be placed in lower risk/lower-yielding structures like bonds and cash with limited volatility.

Funds that are for a longer investment time horizon will be placed into medium to long term vehicles that will have a lot more volatility but also in theory higher returns.

To answer the question with the information at hand I would withdraw out of the lower-yielding or returning investment, based on the logic above. You should be in discussions with your investment advisors at least annually to discuss the liquidity requirements and your risk profile to make sure that they are properly aligned.

If you want you can email your fund statements to info@graycapital.co.za and we send a link to our risk profile to see if your investments are aligned to your investment strategy.

Do you have any questions you would like answered by registered financial planners?

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This is a strange question but my answer would be that you should withdraw pro-rata from all funds so as not to systematically change your risk (asset allocation) over time. If you draw income from low risk, you increase your risk over time and vice versa. The confusion between yield and performance is another matter here. I assume you mean performance. Yield is a red herring in general, performance through income (yield) and capital gains (price change) are both taxed, so with daily liquidity in your funds the difference is not that material. Actually with the information at hand (no tax information for example) one can only give a very vague and possibly unhelpful answer. There is also an argument for selling winners and holding losers, if you are talking about a list of funds with the SAME market exposure, so that the difference is down to manager alpha cycles (or what I call luck).

Yip … all these decisions must be mediated by the client’s age, lifestyle and of course debt. The 4% withdrawal ratio is what we use and have a mix of managed funds: mainly bonds in 80%, 15% in medium to high risk growth and 5% cash.

There is always the temptation to draw cash when times are good though and of course you will pay in CGT and then with the way luck goes, your portfolio dips and could have done with the boost of the cash you withdrew.

If you want to take the dive, take some rands out when the dollar is weak and the rand strong. The most tricky part is not knowing when we will die so that we can leave jus R1.OO in the account for SARS.

Assuming the “risk” is very different between the 2, you might be right.
But if it’s similar… then surely the lower yield should be the first to draw from.

End of comments.

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