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Pension Investment and Risk?

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Since it's the direct nature of the investment that provides the risk protection, this is just semantics. Additionally, direct holdings are almost cost free and reducing the drain of charges on your fund is another way of reducing risk

This post was made by Edinvestor on another thread and I cant understand how holding direct investments in a pension reduces risk. Equally I cant understand how lower costs reduce the risk?
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Comments

  • purch
    purch Posts: 9,865 Forumite
    It depends on the Investment I would say.............

    If you hold a Fixed Interest Security, and hold till maturity in theory that reduces risk (other than counterparty default risk)

    If you hold till maturity it matters nowt whether or not you buy above or below par, as you know at the time of the trade what the final return will be

    Holding the same type of security through a collective investment has risk, as the fund has not maturity so you can lose or gain on exit.........

    ...errr

    Not sure how charges can be assessed in terms of risk.
    'In nature, there are neither rewards nor punishments - there are Consequences.'
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    Answered on the original thread.

    Purch's point about bonds/gilts is well taken and one could also point out that cash in a SIPP drawdown is real cash, not a moneymarket "cash" fund, which as we have recently seen, may contain certain "structured products" of somewhat dubious value.
    Trying to keep it simple...;)
  • dunstonh
    dunstonh Posts: 119,641 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    I recalled Ed mentioning a portfolio some time back so I looked up the post and found the following shares listed as suggested shares to hold:

    Lloyds Bank
    United Utilities,
    Alliance & Leicester
    Dixons
    Northern Foods (makes the nosh for M&S)
    Boots
    British American Tobacco
    BT
    Legal & General
    Scottish & Newcastle
    Shell

    So, I put that into Financial Express and compared it to Equity Income Funds to see how it compared. I had to leave out Boots and Scottish & Newcastle as they were taken over and the data would have been distorted. I did an equal split into the remaining shares.

    Total return since: (with dividends reinvested but ignoring charges on repurchase for the shares - that gives Ed a bit of an advantage. Funds are using retail annual management charges)
    20-04-2005 (when post was made)

    Ed's shares = -3.0%
    UK Equity Income sector average = +16.9%
    UK All Companies sector average = +24.9%
    UK Equity & Bond Income sector average = +15.4%
    Inv Perp High Income = +40.7% (showing this as it was top selling fund through IFAs at that time)

    I also did a risk scatter graph to see how the risk compared (high number is higher risk):

    Inv Perp High Income 12.5
    Ed's Shares 10.9
    UK All companies sector average 10.9
    UK equity and bond sector average 7.4
    UK Equity Income sector average 10.6

    Nothing unexpected there. Inv Perp high income is well known to be at the higher end of the risk scale for equity income funds and Eq and Bond is typically lower risk.

    So, you can see from that data that picking direct investments and paying less in charges doesn't suddenly mean you will make more money than unit linked funds and picking of direct investments has no impact on risk itself as its the underlying assets that carry the risk. A fund of 35 shares carries the same risk as you holding the same 35 shares directly to the same weighting.

    I didn't expect Ed's selection to be as bad as that for performance. I know we all pick bad investments from time to time so in an attempt to help Ed I extended the timescale back to 24/04/1997 (earliest data available based on that spread.

    Ed's shares = +64.3%
    UK Equity Income sector average = +101.1%
    UK All Companies sector average = +87.4%
    UK Equity & Bond Income sector average = +88.7%
    Inv Perp High Income = +227.5%

    Unfortunately, that doesn't appear to have helped. Although there was a brief period in 1998 where Ed's spread did well and would have been best spread if you had invested in 97 and fully encashed about 10 months later before it took a turn for the worse and never really recovered.

    At least Ed would have been satisfied that she paid lower charges than the other options. Although those with 50% higher returns after charges wouldnt agree.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    The above post should be ignored as it's not a valid comparison of the performance of a High Yield Portfolio.Here's the latest update on this style of investing for anyone interested.:

    Motley Fool

    It is true to say that equity income investing - whether in unit trusts or direct holdings - has been harder hit than the overall FTSE in recent months, because the bad news has tended to impact banks, retail and housebuilders, all of which tend to be good dividend payers, while the FTSE has been propped up by oil and mining companies, not many of which (other than BP and Shell) tend to feature in HYPs as they pay below market yield.

    However anyone living off dividend income will have seen substantial rises by many constituent companies this year, with the overall portfolio income increase running in the double digit area, well ahead of inflation.The strategy is designed to pay a rising income - so that's what's important: volatily on the capital side is to be expected with all equity investing.
    Trying to keep it simple...;)
  • dunstonh
    dunstonh Posts: 119,641 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    The above post should be ignored as it's not a valid comparison of the performance of a High Yield Portfolio.Here's the latest update on this style of investing for anyone interested.:

    Why should it be ignored? You posted it in one of your posts telling someone how they should invest. I doubt those that read that thread ignored your post.

    You tell people all the time what to do. How do they know which one of your posts should be acted on and which should be ignored because you are wrong?
    Here's the latest update on this style of investing for anyone interested.:

    Motley Fool

    Have you noticed how they compare it against the FTSE100 index. How is that a valid comparison? A index doesnt get dividends, its effectively a total in value of shares. They really ought to compare it to sector averages on funds and the common sense sector would be UK Equity Income sector as that is where they HYP would be if it was a retail fund.
    It is true to say that equity income investing - whether in unit trusts or direct holdings - has been harder hit than the overall FTSE in recent months

    The timescales shown cover 3 years and 11 years. Not what you generally call "recent months"
    However anyone living off dividend income will have seen substantial rises by many constituent companies this year, with the overall portfolio income increase running in the double digit area, well ahead of inflation.The strategy is designed to pay a rising income - so that's what's important: volatily on the capital side is to be expected with all equity investing.

    Fair comment if that is the aim. So, I went back into Financial Express and changed the data from total return (with dividends reinvested) to share price/unit price only with divs paid out. Since 24th April 1997 these are the figures:

    Eds Shares: +1.0%
    UK Eq & Bond 37.9%
    UK Equity Income 58.3%
    UK All companies 76.9% (remember this is not really a yield paying sector so you can disregard this somewhat. Although you could have made capital withdrawals to reduce your income tax liability and utilise your CGT allowance if held in unwrapped form making it very tax efficient as well as still beating Eds shares.

    So the portfolio value has grown by less than inflation and the current average yield on those shares is 9.62% gross. Not a bad yield as it happens but nothing there is well into double digits and the capital has lost value in real terms unless you take less income out and reinvest some of it. However, that would incur frequent monitoring and purchasing of shares which of course incurs time and charges.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • cheerfulcat
    cheerfulcat Posts: 3,400 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    whiteflag wrote: »
    This post was made by Edinvestor on another thread and I cant understand how holding direct investments in a pension reduces risk. Equally I cant understand how lower costs reduce the risk?

    Hello, whiteflag

    Having looked at the thread you refer to, I think that Ed may be viewing drawdown in the way that both she and I look at taking income from an investment bond - the risk is that one may end up eating into capital if the returns are lower than the income taken. Charges will be taken out of investment returns, so lower charges = lower risk.

    I understand your and dh's frustration at amateurs' investing attempts but some of us have been once badly bitten and are certainly twice shy. This doesn't excuse wholesale rejection of the financial industry and all of its works but may explain it.

    EDIT: Thanks to the IFAs for spending your time posting here.
  • whiteflag_3
    whiteflag_3 Posts: 1,395 Forumite
    cheerfulcat - thanks for that

    I stopped posting as I got fed up with the whole anti IFA thing - so glad there are people like you around who can see we are here only to try help.:blushing:
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    dunstonh wrote: »
    Why should it be ignored? You posted it in one of your posts telling someone how they should invest.

    You have ended up looking at 9 shares.The absolute minimum in an HYP is 15 (diversification is a major factor in reducing risk) and anyone with a fairly large sum to invest would have more like 25 shares - beyond that level the amount of risk reduction you achieve by increasing the number of shares (eg in a fund)is very small.

    The comparison with the FTSE100 is quite reasonable as the portfolios show income and capital separately and the shares chosen are all large cap.

    In the sample you quote , you ignore a couple of shares that have been taken over because "the data would have been distorted". So you omit the very substantial capital gains made by the HYP portfolios via the takeovers.Sorry, but your "comparison" doesn't reflect reality at all. Readers should look at the portfolios on the Fool where all the figures are properly collated and presented, unlike the effort we see here.
    Trying to keep it simple...;)
  • Dick_here
    Dick_here Posts: 1,605 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    I wonder if dunston is Ed's IFA in real life... ;)
    Hi, we’ve had to remove your signature. If you’re not sure why please read the forum rules or email the forum team if you’re still unsure - MSE ForumTeam
  • dunstonh
    dunstonh Posts: 119,641 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    You have ended up looking at 9 shares.The absolute minimum in an HYP is 15 (diversification is a major factor in reducing risk) and anyone with a fairly large sum to invest would have more like 25 shares - beyond that level the amount of risk reduction you achieve by increasing the number of shares (eg in a fund)is very small.

    Right so you are now paying dealing charges on 25 shares and requiring more time to research and monitor. Diversification is of course a risk reduction but then that is where funds really come into play.
    In the sample you quote , you ignore a couple of shares that have been taken over because "the data would have been distorted". So you omit the very substantial capital gains made by the HYP portfolios via the takeovers.Sorry, but your "comparison" doesn't reflect reality at all. Readers should look at the portfolios on the Fool where all the figures are properly collated and presented, unlike the effort we see here.

    2 shares are not going to make much difference to the figures. As it happens, according to MF, those two shares were at the bottom end of the performance so it could well have dragged your figures down more.

    Its very easy for you to dismiss my figures. However, they are factual on the basis of those included and the two left out (as they are no longer listed). Your post that recommended people buy those shares contained no data at all.

    You want everyone to DIY. There is nothing wrong with doing DIY if you are up to it. However, when you tell them that its not risky and that it saves money and that means you will make more in your returns you are misleading people.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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