Pension fund split - should I move to a safer split?

MattyNeth

With all the news at the moment and the more than gloomy forecast for the coming years, is it wise to move to a safer split.

I'm 35 and have a total fund of about £40k split into the following: UK Gilts 35%, UK Equity Index 30%, Japanese Equity Index 10%, Euro Equity Index 10%, Emerging Markets Equity 10% and US Equity Index 5%.

I genuinely believe that stock markets are about to fall hugely (maybe up to 50%). I'm considering moving most of my equity to Gilts or Cash funds to end up with a rough 75%/25% split in favour of gilts/cash to equity funds. Then drip feed my monthly contribution of about £400 in a similar split.

Anyone agree/disagree with this strategy?

dunstonh

I genuinely believe that stock markets are about to fall hugely (maybe up to 50%).

What data have you got that suggests that? Most now feel the market is near bottom and there will be growth over the next year.

cogito

dunstonh wrote: »

What data have you got that suggests that? Most now feel the market is near bottom and there will be growth over the next year.

Who is most? It's not much more than a year since most people thought that house prices would keep on rising. Suppose banks stop lending. What would happen to the market then? But they wouldn't stop lending, would they?

Baz_2

MattyNeth wrote: »

With all the news at the moment and the more than gloomy forecast for the coming years, is it wise to move to a safer split.

I'm 35 and have a total fund of about £40k split into the following: UK Gilts 35%, UK Equity Index 30%, Japanese Equity Index 10%, Euro Equity Index 10%, Emerging Markets Equity 10% and US Equity Index 5%.

I genuinely believe that stock markets are about to fall hugely (maybe up to 50%). I'm considering moving most of my equity to Gilts or Cash funds to end up with a rough 75%/25% split in favour of gilts/cash to equity funds. Then drip feed my monthly contribution of about £400 in a similar split.

Anyone agree/disagree with this strategy?

I disagree, the time to do that was this time last year.

Now, is a time to invest in equities, as even it if falls a bit more, its still likely to get back to where it was eventually. i.e nearly 7000 within 5 - 10 years. (My opinion only and based on a long term view) Also the stock market already takes into account any available data

Once the banks have sorted themselves and written off their bad debts things will get back to normal. It will then be the units you have bought now that will increase the most. Just take on a long term view and drip feed into your plan.

I think you missed the boat and the horse has already bolted on your plan.

MattyNeth

What data have you got that suggests that? Most now feel the market is near bottom and there will be growth over the next year.

My view is based on the fact that we are about to enter a recession (growth last quarter was 0.0%, and the common consensus is the enocomy will contract next quarter). Ireland and Spain are already in recession and an article today suggest France is now in recession.The problems in the US we all know about.

Banks continue to refuse to lend to each other, and the bail out will not stop the flight to safety (UK Treasuries, cash, UK Gilts). The corporate bond market is collapsing (down >14% since Lehmans went down). As such investors will stop lending to companies, which leads to profit warnings, job cuts and liquidation. Do you think this bailout will simply mean the banks will turn the taps on? We are seeing a deflationary credit destruction which will mean the market will only go one way.

I disagree, the time to do that was this time last year.

Baz - You are right about that, should definitely have reviewed my pension earlier

It will then be the units you have bought now that will increase the most.

Agreed, which is why some (but not all) of my future monthly contributions will go into equities

dunstonh

My view is based on the fact that we are about to enter a recession

And what makes you think the stockmarkets are going to go down from this point because of that? The markets have gone down in anticipation of recession.

MattyNeth

and as the recession gets deeper and more prolonged the market presumably will carry on going down?

dunstonh

MattyNeth wrote: »

and as the recession gets deeper and more prolonged the market presumably will carry on going down?

Not necessarily. The stockmarkets do not perform like that. Pretty much all future earnings have been wiped off the value of many shares. Indeed, many are trading at discount. The markets were not in a bubble position (commodities perhaps the exception) prior to this decline. The FTSE is down around 28%. Thats not a lot for a crash (which typically occur once every 5 years).

Baz_2

Even if you did review your pension earlier there's no reason to believe you could have possibly foreseen what was to happen. All you can do is use the information you have available to you today to influence your decision as to the best route to take.

The markets have already taken into account the expected future position of the economy. If it continues to worsen and the markets have already expected that to happen, there will not be a fall as all the prices have already taken that expected fall into account.

Id stay where you are right now, as aggressive as you would be if you knew it was the bottom of the market right now. And invest more into it too, if you can afford too.

rich010273

As you've 20 years until retirement I personally wouldn't look to move pension funds into lower risk funds.
When 5 years from retirement i'd look to move funds to lower risk so stock market fluctuations don't affect your investments as much.

jamesd

MattyNeth wrote: »

I genuinely believe that stock markets are about to fall hugely (maybe up to 50%). I'm considering moving most of my equity to Gilts or Cash funds to end up with a rough 75%/25% split in favour of gilts/cash to equity funds. Then drip feed my monthly contribution of about £400 in a similar split.

If that is your belief then you should move to a position with little equity investment.

MattyNeth wrote: »

Anyone agree/disagree with this strategy?

Stock market declines in the UK fall into general groupings, the less severe ones falling in the 20% range and the more severe in the 45% range.

Then there's the single sustained drop of more than 75% that the 1930s produced. That was an exceptional event, but not one that is unable to happen again. However in that case lack of liquidity that was made worse by central bank actions was a large factor and on this occasion central banks are making huge interventions to maintain at least modest liquidity and show no signs at all of being reluctant to continue doing so for as long as required. They have also demonstrated a complete lack of willingness to let significant retail banks fail, another major problem in the 1930s.

We've already seen a 28% drop. Given the central bank actions I personally don't believe that we will see a repeat of the 1930s. That leaves the possibility of a total drop of 45%, 28% of which has already been seen.

My personal action was in April of this year to dramatically increase my pension contributions to a very high proportion of my total income, to buy at depressed prices, and I'm committed to doing so until April 2008 by plan rules. More recently I've switched some money from low volatility to high volatility investments, to buy more of the latter while they are at depressed prices (emerging markets...) and I expect to do so regularly over the next twelve months.

Longer term my general strategy is to boost contributions when markets are hurting and decrease them when they are booming. And to switch gradually from low to high volatility during the hurt times and from high to low during the booms. Nothing at all original in this, it's the classic way to benefit from volatility.

MattyNeth wrote: »

I'm 35

That seems to favour the approach of taking the view that prices are currently depressed and represent a buying opportunity even if it may take a few years to recover.

Personally I suggest reducing gilt holdings at present, on a one to two year plan. Demand for them is very high so you'd be getting good prices to raise money to buy volatile assets at depressed prices.

Your own plan seems to involve selling equities when prices are low and buying gilts when their prices are high. This is a recipe for capital destruction unless markets drop and stay dropped until you retire. That's very unlikely in the case of a 35 year old. It's also a classic description of how consumers lose money during market downturns.

Given your own opinion it seems more sensible for you to switch much of your current capital to low volatility investments, have your ongoing contributions going into high volatility investments and set up a schedule to gradually shift the capital from low to high volatility based on your prediction of how long the markets will take before they start to recover. If you believe the forecasts of a market rise during the period before the end of the new year you may want to do this capital switch gradually to benefit from any increase in equity prices.

In this way you reduce risk now but don't fully lose the opportunity to gain from the current prices if the market doesn't fall as far as you expect.

Note that my own risk tolerance is at a minimum high to speculative on the fund-only investment risk scale.