Starting a pension at nearly 40.

jamesd

PipPip, the key fact with gambling is that on average you lose money and that's what the system is designed to cause you to do. With long term investing on average you make money and that's what the investing system is intended to cause.

If you look at appendix C of the First Report of the Pensions commission figure C.10 shows that there were only two twenty year periods in the range 1899-2003 where investors using UK equities (shares) lost money after inflation on average and those were one loss in the range zero to minus two percent and one in the range minus two to minus four percent. The mean and median were both 5.5 percent after inflation. In the period since 1977 the worst performance was plus six percent, the mean was 10.7 and the median 11.2%. All after inflation.

Figure C.9 shows the results for periods of just five years. Much more variation there and the worst case was one period where the drop was in the -18 to -20% range. Even so, around two thirds of the five year periods also ended up positive after inflation and the best three gained by a higher percentage than the worst one lost by.

Figure C.11 shows the same but for fifty year periods. The worst ten of them had gains of two to four percent after inflation, the mean was 5.5% and the median 5.2%. This one says that for those starting retirement planning today it's unlikely, based on past results, that you're going to do anything other than well from investing.

Investors who are making regular contributions get to start a new five and twenty year period with each month's contribution so they are likely to end up getting close to the average result.

That's a good deal better than gambling.

Linton

PipPip wrote: »

Do people really believe that buying stocks and shares, even if you buy a balanced portfolio is not "gambling"? Come off it, of course it is. You are putting your money into a place where the future value is completely unknown and is subject to a vast array of variables. In addition, the odds are stacked in favour of large players with inside information and the ability to play with derivatives. Its gambling.

Investment is based on two premises....

1) On average the world economy is increasing in value, some parts more than others. By investing you can latch onto that increasing value.

2) BUT any particular investment is very volatile and may become of little value in the long term.

So the skill in investing is to get take advantage of (1) without the disadvantage of (2) and without the money to buy everything.

This you achieve by diversification of investment sectors so that one failure in one area doesnt break the bank, and by balancing so that when one investment does unusually well you transfer some of the gain into areas that are currently doing less well.

This process takes say 5-10 years to work reliably because the long term effect of (1) may, in the short term, be less than the effect of (2).


So in a sense it is gambling, but gambling on factor (1) which has been the case since the start of the industrial revolution and doesn't depend on inside knowledge. If factor (1) suffers a long term failure then I suspect my investments will be the least of my problems. That's the time for Gold, lots of lovely Gold!!

PipPip

Thanks for the replies, so we in agreement, investing is gambling. Look, I'm not saying its bad or its wrong or that over the long term value will not be created, but you are gambling. The concept of the odds being stacked for or against you depends on how much knowledge you have. The ordinary guy certainly does not have the knowledge to stack the odds in their favour. Timing is also key: the timing of your returns will be during your lifetime, which is short in relative terms, so there is also an element of pot luck here. I work in corporate strategy for a major global financial services company and part of my every day working life is chasing after that elusive "shareholder value". In my work we talk about the placement of the businesses enormous but still limited supply of capital as "bets". So the underlying placement of capital by the institutions that you rely on to create value is in fact a series of bets and is viewed as such by management. Its gambling, controlled gambling, but still gambling.
Not to be too controversial but quoting returns over a period during which we have had missive leaps forward in industrialisation, technology, a couple of world wars and the subsequent post war booms is in my view totally irrelevant. The modern world is one in which technology means capital markets react faster, are subject to much distortion by hedge funds and in which short termism is rife within major corporates (meaning that as soon as shareholder value is created management are seeking to cash in via disposal of the business). I will invest in equities via my pension and directly as I am prepared to gamble, but my expectations for long term returns are extremely low indeed and I would not look at the past 100 years as a guide.

PS. You could say that I am somewhat familiar with the concepts of diversification. Linton your explanation is somewhat too simplistic, not every individual investment is volatile as I'm sure you know. However, the credit crunch highlighted that systematic correlations were not well understood by the geniuses that work on modelling balanced portfolios. In my own organisation we had to drastically change the correlation factors we use to model our risk based capital requirements. Even our brightest actuaries were way off in their modelling, which uses 100 years plus of data.

margaretclare

One other point is that, for the purposes of your personal pension planning, you do not HAVE to take it at the same time as the state pension. If, for example, you decide to carry on working after state pension age or for any other reason you don't need the money immediately, you can go on contributing to a pension up to age 75. Even if you don't contribute you can leave it alone and allow it to grow for longer.

Batchy

Jet wrote: »

Thanks for the replies and the links - really interesting stuff and I can see I really do need to put quite a bit away. I think maybe I should go for a combination of ISA and pension. I don't plan on "failing" as someone suggested, but I do keep an open mind and am naturally cautious. Never defaulted on anything in my life and having my mortgage paid off is a big acheivement and I am now going to concentrate on making sure that I'm not destitute in my old age, but I am also realistic and realise I'm not going to be sunning myself in the caribbean every weekend on the sort of pension I am talking about. I'm certainly not a big earner and I doubt if many people on my income would even consider a private pension - certainly none that I know of!

The way I see it, the more I can put away, the better lifestyle I should be able to have in old age. The thought of solely relying on the state pension (which may not even exist then) is a scary one.

Im sure people will disagree with me, but be careful, depending on what you contribute and what your entitled to, you could put 100 per month in a pension for the rest of your life and only end up being as well off as someone who never paid anything in, and gets pension credits up to 130 per week instead.

its just a thought, but your either in or your out, if your in then go for it, if your not, just save in an ISA. Even some not so honest people would put it in their kids bank account, so its not taken into account when your older for means assessed benefits. Not sure what the limit is, but still, least you keep your flexibility should you need the money for whatever reason!

Linton

PipPip wrote: »

Thanks for the replies, so we in agreement, investing is gambling.
....

Well, there is gambling and gambling. I suppose you could regard crossing the road as mere gambling but with a very good chance of success. If that is what you mean, I guess we can agree - but I am not sure it is very helpful in deciding how to manage your life.

When people use the term gambling they generally mean a reasonably high chance of failure and to call investing gambling would put it in the public mind as a comparison with roulette, horses or whatever. I would put sensible investing as being much closer to crossing the road, and really not greatly more of a gamble than anything else you can do with your money, including storing it underneath your bed.

TMFTP

Investing in, say, stocks and shares is gambling. BUT there are simple things you can do to mitigate risks.

1 - If you ONLY invest in FTSE100 shares, you're investing in bigger, generally more stable companies than you would be if you just put every listed company from every country in the world in a hat and pulled one out. Which is what my wife seems to think is an appropriate way of picking a horse for the National every year... Ho hum.

2 - If you invest in 10 companies instead of just 1, you are reducing the risk of losing everything.

3 - If you invest in a Fund, the fund manager invests your (and a lot of other people's money) to hopefully achieve greater returns than a single investor might get. Again, if one company goes bust, you don't lose everything.

4 - If you invest in a range of funds, you dilute the risk even more.

None of these 4 things are beyond the ability of the average Joe, and are a way to expose yourself to the "gamble" of investment whilst minimising some of the risks.

But there is always a risk:reward balance to be struck. If you're in a range of funds and that miracle penny share becomes worth £100 each - you're going to see a relatively small increase compared to if you'd invested £50,000 in it alone.

PipPip

TMFTP wrote: »

Investing in, say, stocks and shares is gambling. BUT there are simple things you can do to mitigate risks.

1 - If you ONLY invest in FTSE100 shares, you're investing in bigger, generally more stable companies than you would be if you just put every listed company from every country in the world in a hat and pulled one out. Which is what my wife seems to think is an appropriate way of picking a horse for the National every year... Ho hum.

2 - If you invest in 10 companies instead of just 1, you are reducing the risk of losing everything.

3 - If you invest in a Fund, the fund manager invests your (and a lot of other people's money) to hopefully achieve greater returns than a single investor might get. Again, if one company goes bust, you don't lose everything.

4 - If you invest in a range of funds, you dilute the risk even more.

None of these 4 things are beyond the ability of the average Joe, and are a way to expose yourself to the "gamble" of investment whilst minimising some of the risks.

But there is always a risk:reward balance to be struck. If you're in a range of funds and that miracle penny share becomes worth £100 each - you're going to see a relatively small increase compared to if you'd invested £50,000 in it alone.

You quote the accepted theories. The recent crisis illustrated that point 2 and point 4 are not as reliable as people thought as there are systematic correlations that were not well understood by anybody. If all shares have a degree of correlation the diversification benefit is weak. The crisis highlighted correlations not only between shares but between shares and corporate bonds, ruining some perfectly good diversification theories. Point 3: the idea is normally to achieve scale rebates from fund managers rather than achieve better returns than an individual, although many fund managers believe that they can. The facts do not substantiate these beliefs. The pooling advantage is in reality the economies of scale on rebates.

Like I said I will invest in equities (partly due to lack of alternatives) but I am cautious about the returns, believe that the benefits of diversification are weaker than people think, believe that the IFAs and the fund managers that think they are fund/stock picking experts are not, since they are gambling and some will win, some will lose.

margaretclare

Batchy wrote: »

Im sure people will disagree with me, but be careful, depending on what you contribute and what your entitled to, you could put 100 per month in a pension for the rest of your life and only end up being as well off as someone who never paid anything in, and gets pension credits up to 130 per week instead.

This is an attitude of mind. There are people who are happy with the thought that they'll be living on means-tested benefits - pension credit - for the rest of their life, which could be a very long time. People are commonly living to 100 now, and keeping reasonably active while doing so.

There are others - DH and I are the second type - who prefer to know that we're living on the results of our own efforts and don't have to rely on means-testing. We make our own choices. In our mid-70s now, we're still saving because we don't know what we'll need in time to come but recent experience has convinced us that it's always better to have a little extra money to do what you want and buy what you need.

its just a thought, but your either in or your out, if your in then go for it, if your not, just save in an ISA.

The difference between saving in an ISA and saving in a pension scheme is that the taxman adds to your pension contributions and this increases the amount being invested. E.g. if you put in 80p the taxman adds the basic tax rate - assume that is 20%, you then have £1 in your fund to grow. In a cash ISA you don't get a contribution from the taxman.

Even some not so honest people would put it in their kids bank account, so its not taken into account when your older for means assessed benefits. Not sure what the limit is, but still, least you keep your flexibility should you need the money for whatever reason!

You said it. Not so honest people. I hope this is not what you're advocating here.

dunstonh

m sure people will disagree with me, but be careful, depending on what you contribute and what your entitled to, you could put 100 per month in a pension for the rest of your life and only end up being as well off as someone who never paid anything in, and gets pension credits up to 130 per week instead.

getting £130 in pension credit has to be rare and may not even be possible. Whats the figure now for a single person? about £7000 including state pension?

So, someone paying in £100pm for 30 years in real terms is not even be close to qualifying. But then they wont be living on £7000 a year either.

It's a choice. Do you plan to fail and be poor in retirement and live at or below the breadline or plan to do something about it.

its just a thought, but your either in or your out, if your in then go for it, if your not, just save in an ISA. Even some not so honest people would put it in their kids bank account, so its not taken into account when your older for means assessed benefits. Not sure what the limit is, but still, least you keep your flexibility should you need the money for whatever reason!

Saving into an ISA does more damage for pension credits than a pension does with income. Capital is hit harder on the means test than income.