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  • FIRST POST
    • Retired Minky
    • By Retired Minky 29th Jun 17, 6:50 PM
    • 50Posts
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    Retired Minky
    How do self investors decide on asset/fund allocation?
    • #1
    • 29th Jun 17, 6:50 PM
    How do self investors decide on asset/fund allocation? 29th Jun 17 at 6:50 PM
    If I go SIP or self managed what's the best way to decide on fund/asset allocation?

    Are there sites that offer examples of allocations and changes to make.

    What do other SIP managers do to decide on asset allocation? Not everybody with a SIP can be a stock market expert can they?
Page 2
    • LHW99
    • By LHW99 7th Jul 17, 11:18 AM
    • 953 Posts
    • 799 Thanks
    LHW99
    I believe some funds can include taking short / long positions on stocks in their strategies. If its done with currencies its hedging.

    Not something I would want to try as a private investor though.
    • Malthusian
    • By Malthusian 7th Jul 17, 12:43 PM
    • 3,280 Posts
    • 4,980 Thanks
    Malthusian
    Shorting can be speculation but that's not all it's for. It can also be used to protect you from stock market falls, say by buying a short option that pays out if the market drops by more than twenty percent over the next three months. That can be used to protect you against big drops.
    Originally posted by jamesd
    True, but for the vast majority of investors a better way to protect you against big drops is to wait until you get the equally big rise. Making sure you have enough in cash that you can wait for the rise, and that you are diversified enough that you benefit from the rebound.
    • bostonerimus
    • By bostonerimus 7th Jul 17, 1:47 PM
    • 1,106 Posts
    • 620 Thanks
    bostonerimus
    My only "shorting strategy" is to have a cash allocation and to rebalance on the drops.
    Misanthrope in search of similar for mutual loathing
    • TBC15
    • By TBC15 7th Jul 17, 3:53 PM
    • 226 Posts
    • 79 Thanks
    TBC15
    True, but for the vast majority of investors a better way to protect you against big drops is to wait until you get the equally big rise. Making sure you have enough in cash that you can wait for the rise, and that you are diversified enough that you benefit from the rebound.
    Originally posted by Malthusian
    What’s a sensible amount of cash to have on hand i.e. annual spending x ?
    • AnotherJoe
    • By AnotherJoe 7th Jul 17, 7:08 PM
    • 7,560 Posts
    • 8,164 Thanks
    AnotherJoe
    Depends who you speak to, but around 2-3x annual spend. IIRC I read a backtested strategy where 3x was optimum but I can't recall where now.
    • point5clue
    • By point5clue 7th Jul 17, 10:56 PM
    • 43 Posts
    • 9 Thanks
    point5clue
    On the other hand Big ERN thinks cash cushions are problematic...

    https://earlyretirementnow.com/2017/03/29/the-ultimate-guide-to-safe-withdrawal-rates-part-12-cash-cushion/

    Edit: Wow, I've just re-read this properly - I'd forgotten how damming it is !
    Love to hear contrary views ?
    Last edited by point5clue; 07-07-2017 at 11:01 PM.
    • bostonerimus
    • By bostonerimus 8th Jul 17, 12:20 AM
    • 1,106 Posts
    • 620 Thanks
    bostonerimus
    5% or 1 or 2 years of spending is common. It's mostly to help with cash flow and short term corrections. For serious down turns that last for years you have to also reduce spending and withdrawals or have a source of income other than drawdown. That could be part time work, rent from a BTL, a defined benefit pension or even an annuity.
    Misanthrope in search of similar for mutual loathing
  • jamesd
    On the other hand Big ERN thinks cash cushions are problematic...

    https://earlyretirementnow.com/2017/03/29/the-ultimate-guide-to-safe-withdrawal-rates-part-12-cash-cushion/

    Edit: Wow, I've just re-read this properly - I'd forgotten how damming it is !
    Love to hear contrary views ?
    Originally posted by point5clue
    You may have fallen for their error: you're in drawdown. You have to take that income out of some part of the total returns of your investment somehow. If it's not coming out of dividends, it's coming out of capital.

    They seem to even more greatly misunderstand Guyton-Klinger, wrongly asserting that it first takes income out of the highest returning part of the portfolio, equities. It really takes it first from cash, then bonds, and equities after that. Though there is a bull market rule that sets aside some cash for later use. I don't know whether they drew income first from equities in their attempts to see how the rules worked. For safe withdrawal rate calculations in cfiresim you can also specify a minimum income target and the initial safe withdrawal rate will be adjusted to allow for it. Guyton subsequently presented sequence of return risk reduction rules that change equity holdings based on CAPE but they don't seem to have used those, instead picking an inappropriately high equity percentage.
    • Itsallagame
    • By Itsallagame 8th Jul 17, 12:17 PM
    • 42 Posts
    • 64 Thanks
    Itsallagame
    Shorting is betting that something will lose value. You might have a contract with someone to borrow some shares they own and then give them back plus a fee at some time in the future. If you think those shares will lose value you sell them now and buy them back at a lower price before you have to give the shares back and you pocket the difference.

    This really is gambling and you don't want to be doing it.
    Originally posted by bostonerimus
    It may have escaped your attention but being invested is also gambling.

    Most people who self invest should have a view on markets and be looking to take profits at the appropriate time and then sit out until they feel the market is right for them to invest/gamble again.

    I simply take positions on my SIPP that I hope to make me money based on where I think the market is e.g FTSE100 at 7550 is too high so I buy an exchange traded fund e.g. SUK2.

    In my employers pension I have £50k sitting in a cash fund because I sold out near the top of the market at 7500 on FTSE and the investment options are so limited as I can only buy a handful of funds that are not attractive at this time. It's annoying as I don't want that fund sitting doing nothing for a long spell.

    I am gradually moving into short dated bonds yielding over 5% but at the moment they are as scarce as hen's teeth.
    • Itsallagame
    • By Itsallagame 8th Jul 17, 12:35 PM
    • 42 Posts
    • 64 Thanks
    Itsallagame
    My only "shorting strategy" is to have a cash allocation and to rebalance on the drops.
    Originally posted by bostonerimus
    You can then be out of the market earning nothing for quite a while.

    I have an annual growth target of 5.75% on my SIPP that will deliver retirement at 55. The pension always need to be working
    • Thrugelmir
    • By Thrugelmir 8th Jul 17, 12:50 PM
    • 55,815 Posts
    • 49,184 Thanks
    Thrugelmir

    Edit: Wow, I've just re-read this properly - I'd forgotten how damming it is !
    Love to hear contrary views ?
    Originally posted by point5clue
    The points re dividends are the ones that consistantly get overlooked. When people hold funds they lose sight of high much growth in the funds value is actually generated by reinvestment of dividends. Along with the increase in. Until there isn't.
    "Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
    • Thrugelmir
    • By Thrugelmir 8th Jul 17, 12:52 PM
    • 55,815 Posts
    • 49,184 Thanks
    Thrugelmir
    Most people who self invest should have a view on markets and be looking to take profits at the appropriate time and then sit out until they feel the market is right for them to invest/gamble again.
    Originally posted by Itsallagame
    All the evidence suggests that this doesn't work as a strategy.
    "Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
    • bostonerimus
    • By bostonerimus 8th Jul 17, 1:05 PM
    • 1,106 Posts
    • 620 Thanks
    bostonerimus
    It may have escaped your attention but being invested is also gambling.

    Most people who self invest should have a view on markets and be looking to take profits at the appropriate time and then sit out until they feel the market is right for them to invest/gamble again.

    I simply take positions on my SIPP that I hope to make me money based on where I think the market is e.g FTSE100 at 7550 is too high so I buy an exchange traded fund e.g. SUK2.

    In my employers pension I have £50k sitting in a cash fund because I sold out near the top of the market at 7500 on FTSE and the investment options are so limited as I can only buy a handful of funds that are not attractive at this time. It's annoying as I don't want that fund sitting doing nothing for a long spell.

    I am gradually moving into short dated bonds yielding over 5% but at the moment they are as scarce as hen's teeth.
    Originally posted by Itsallagame
    Attempting to time the market is a strategy that is usually ultimately frustrating.
    Misanthrope in search of similar for mutual loathing
    • point5clue
    • By point5clue 8th Jul 17, 2:34 PM
    • 43 Posts
    • 9 Thanks
    point5clue
    They seem to even more greatly misunderstand Guyton-Klinger, wrongly asserting that it first takes income out of the highest returning part of the portfolio, equities. It really takes it first from cash, then bonds, and equities after that. Though there is a bull market rule that sets aside some cash for later use. I don't know whether they drew income first from equities in their attempts to see how the rules worked. For safe withdrawal rate calculations in cfiresim you can also specify a minimum income target and the initial safe withdrawal rate will be adjusted to allow for it. Guyton subsequently presented sequence of return risk reduction rules that change equity holdings based on CAPE but they don't seem to have used those, instead picking an inappropriately high equity percentage.
    I've not seen anything I've read over the last few years that suggests that anything other than 100pc equity is optimum for long term drawdown (I'm planning on 50yrs - if not for me then for Mrs .5C)
    with the important caveat that you are not allowed to panic and flog the lot at the first sign of trouble.
    • bigadaj
    • By bigadaj 8th Jul 17, 3:01 PM
    • 10,662 Posts
    • 6,965 Thanks
    bigadaj
    It may have escaped your attention but being invested is also gambling.

    Most people who self invest should have a view on markets and be looking to take profits at the appropriate time and then sit out until they feel the market is right for them to invest/gamble again.

    I simply take positions on my SIPP that I hope to make me money based on where I think the market is e.g FTSE100 at 7550 is too high so I buy an exchange traded fund e.g. SUK2.

    In my employers pension I have £50k sitting in a cash fund because I sold out near the top of the market at 7500 on FTSE and the investment options are so limited as I can only buy a handful of funds that are not attractive at this time. It's annoying as I don't want that fund sitting doing nothing for a long spell.

    I am gradually moving into short dated bonds yielding over 5% but at the moment they are as scarce as hen's teeth.
    Originally posted by Itsallagame
    Which shiort dated bonds are paying 5%, sounds fairly risky.
  • jamesd
    I've not seen anything I've read over the last few years that suggests that anything other than 100pc equity is optimum for long term drawdown (I'm planning on 50yrs - if not for me then for Mrs .5C)
    with the important caveat that you are not allowed to panic and flog the lot at the first sign of trouble.
    Originally posted by point5clue
    Then it's well worth you having a look at Guyton's sequence of return risk reduction paper linked from here. That shows that changing the equity percentage based on cyclically adjusted price/earnings improves results.

    Aside from that, 100% equity is likely to be best but up to about 30% bonds doesn't make much difference in safe withdrawal rate.

    Bengen seems to have endorsed both Guyton-Klinger and PE10 based variation on the second page of his September 2016 small-cap paper.
    • point5clue
    • By point5clue 8th Jul 17, 5:54 PM
    • 43 Posts
    • 9 Thanks
    point5clue
    Hi jamesd
    The link to "Jonathan Guyton Tames a Gorilla" is broken

    google suggested this link: https://www.mcleanam.com/jonathan-guyton-tames-a-gorilla/
    • bostonerimus
    • By bostonerimus 8th Jul 17, 9:36 PM
    • 1,106 Posts
    • 620 Thanks
    bostonerimus
    I've not seen anything I've read over the last few years that suggests that anything other than 100pc equity is optimum for long term drawdown (I'm planning on 50yrs - if not for me then for Mrs .5C)
    with the important caveat that you are not allowed to panic and flog the lot at the first sign of trouble.
    Originally posted by point5clue
    There are many papers that develop an efficient frontier for asset allocation in drawdown using historical data. Having 100% equities will definitely maximize your potential income......but it will also have a higher probability of failure that other asset allocations if you run into a bad sequence of market losses. The highest probability of retirement income success is usually found with a 60/40 stock to bond allocation. Of course this uses historical data and that might not be appropriate, particularly in the bond market.
    Misanthrope in search of similar for mutual loathing
  • jamesd
    Hi jamesd
    The link to "Jonathan Guyton Tames a Gorilla" is broken

    google suggested this link: https://www.mcleanam.com/jonathan-guyton-tames-a-gorilla/
    Originally posted by point5clue
    Thanks. Looks as though he removed it from his original blog entry and put it there instead. I've added an Internet Archive version of the two links to try to keep them available somewhere if one goes missing again. I'll do the same with other links where that makes sense. There's a save page now tool there.
    Last edited by jamesd; 09-07-2017 at 9:46 AM.
  • jamesd
    Having 100% equities will definitely maximize your potential income......but it will also have a higher probability of failure that other asset allocations if you run into a bad sequence of market losses. The highest probability of retirement income success is usually found with a 60/40 stock to bond allocation.
    Originally posted by bostonerimus
    It's worth remembering that a safe withdrawal rate is one that worked for the specified allocation for all historic cases, including long bad sequences, if a 100% success rate was specified. The asset allocation doesn't change that outcome at all, only the income level.

    As Bengen observed in the small-cap paper, though:

    "1. The safe withdrawal rates for each year using the “all-in asset allocations” in Figure 1 are always higher than the safe withdrawal rates generated by a conventional asset mix of 35% large-cap stocks, 20% small-cap stocks and 45% intermediate-term government bonds.

    2. In most cases, they are dramatically higher. In some years, the all-in allocation’s safe withdrawal rate reaches 25%, while the conventional safe withdrawal rate never gets much above 10%. The average annual safe withdrawal rate using the all-in allocation is about 11.7%; with the conventional asset allocation, it is about 7.75%. Thus, on average, the all-in allocation’s annual safe withdrawal rate is about 50% higher than the rate from the conventional asset allocation.
    "

    Also interesting is that it's possible to predict the times when low equity mixtures can be expected to do better using PE10. And, of course, to know when stocks and money market (bills) beats stocks and bonds, like now.

    You can also tell if you seem to be living through a bad sequence and adjust, as suggested by Kitces.
    Last edited by jamesd; 09-07-2017 at 11:00 AM.
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