Question about how (pension) funds work

Neverland

dunstonh wrote: »

We are talking conventional investments. do you see any reference to reference to commercial property by the OP? You are just being pedantic.
wrong.

Just factually correct, which is more than you seem to be able to manage

I hope you do better when people pay you for your advice

Neverland

SallyG wrote: »

I'm with Scottish Widows - for sheer ineptitude in investment and admin. I think they're unbeatable.
If anyone can suggest a pension fund that will grow my fund by more than 6% per year without making stupid errors I would be most grateful.

With 10 year government bonds in UK, US and germany yielding just over 2% you can't get 6% a year without taking risks

An equity fund tracking something like the FTSE world index might get you an average of 6% per year from capital growth and dividends after fees, but only if you have a 15+ year time horizon for things to average out

Otherwise you might be better off looking for a lower return and making higher contributions

antio

Thanks to those who've actually tried to reply to my original question, but for the rest, can you please stop the bashing, I was trying to read other threads on here as well and it's getting annoying.

I don't have an IFA; while I respect their work, I like -and am comfortable- doing the research myself.

My SW pension is a stakeholder one, so small charges but limited range of (mostly their own) funds. Aegon charge more, but have a wider range and have so far performed better (after charges). It's not always a clearcut answer, so please don't try to give me one - I prefer to understand how things work rather than a do this/do that answer.

And, back to my point, my original question was... how do pensions grow? Both pensions allow me to switch funds, but most people wouldn't actively do that. Just leave them alone and they will eventually (hopefully) give an acceptable return? Some funds also pay dividents, what happens with pension funds? Do they ever compound? Again, it's probably a silly question, but noone has actually answered it so far.

Thanks,
Anthony

Rob_192

Anthony

If you're looking for a really simple answer then here it is.

Funds are no more than a basket of investments which a fund manager chooses to suit the given aim of that particular fund. In the case of shares, there will be the usual gains from dividends and from growth. Dividends are collected and roll up within the fund and in the usual way, a fund manager will reinvest the dividend income. The unit cost of the given fund will therefore increase due to the rise in share price and the income from dividends. The way you make your gain, in the case of a typical OEIC fund is by buying in at a given value and then selling up at a hopefully higher value. So yes there is a compounding effect due to divident income, but theres a lot more to it than that.

gadgetmind

Neverland wrote: »

Pensions generally seem to perform worse than ISAs because they are loaded with charges from fund managers and IFAs

What are you smoking?

I have ISAs and pensions that invest in exactly the same assets* and are held on exactly the same platform. Their returns and fees are identical, and all that differs are the contribution limits, the taxation and the access.

* - Yes, the SIPP does have more options regards assets, but few make use of them, and having more choice doesn't make pensions worse.

dunstonh

Just factually correct, which is more than you seem to be able to manage

Factually incorrect. Just like many of your other posts.

My SW pension is a stakeholder one, so small charges but limited range of (mostly their own) funds.

Stakeholders were cheap in 2001 but a decade later and they are now largely a niche product as personal pensions are usually cheaper for most people (they offer the stakeholder range as well as external). SW's options are particulary interesting and are looking long in the tooth now compared to alternatives. Their retirement account is better but that isnt my cup of tea personally but nothing actually wrong with it.

Aegon charge more, but have a wider range and have so far performed better (after charges).

aegon's contracts should be cheaper if you are looking at the whole of market options currently available.

Internal fund performance tends to be poor on the equity side but better on the fixed interest and property side. Insurance companies "generically" have never really been good at equities (exceptions apply).

Both pensions allow me to switch funds, but most people wouldn't actively do that. Just leave them alone and they will eventually (hopefully) give an acceptable return?

If you are a lazy investor you should go with a portfolio fund or a governed investment solution. If you pick single sector funds and then ignore them that is bad investing as they will go out of sync and typically get higher risk over time.

how do pensions grow

The pension is just a container for your investments. The investments will have a price which fluctuates daily. Some investments generate income and that income can be reinvested to either buy more units or is factored into the unit price.

Exactly the same as they do on ISA.

hugheskevi

I managed to get that 33% by investing in a fund, then selling when I saw some meaningful returns, then investing in a different fund and so on. This could be in the space of a few days/weeks/months for each buy/sell cycle.

My question is this:

How does that happen with pension funds?

Every fund will have a mandate. That mandate might be that it invest in small UK companies, or it might be that it invests in companies based in emerging markets, or it might that it invests in a balanced range of different asset classes.

The fund manager will decide on investments according to the mandate. What he will not do is exercise any judgement about timing, ie, move the entire fund into cash for a month in anticipation of a fall.

It is your selection of funds, and decisions about when to buy/sell them that determine whether you are in or out of the market, and what market you are in.

But any fund will go up and down and up and down... do I just hope it will 'generaly' go up?

Over time, you would expect funds to go up in line with some long-term rate of return (which will be different for all asset classes and funds), but the progress will be erratic.

Do returns get somehow compounded? When I invest myself, I 'compound' money by selling when the time is right and buying something else.

The returns are compounded, but not in the normal sense of compound interest. Simply, the returns remain invested, so you get returns on the returns, ie, compounding.

Be careful about 'selling when the time is right' - many would argue that markets cannot be predicted, so success about when to buy in and out is a lottery. I think that is true on a daily basis, although long-term it is clearer which asset classes are over or under price (ie gilts look very over-priced at the moment - whilst they may or may not fall, it does mean there isn't any upside to them.).

Had I kept it in the same fund, it would eventually go down at some point, no? If I keep my money in the same pension fund will it -in the long term- keep going up and hopefully give me a return of say >6% a year?

The risk free rate of return would be what you would get on a gilt if you bought that and held it to maturity. At the moment, you would get about 2% p/a on a 10 year gilt. If you want more than that, you have to accept greater risk for greater reward (risk in its widest sense, eg, default risk, investment risk, etc).

Year-on-year you would see volatile returns, and losses, but over a long-term you would expect to see returns settle into a long-run trend. 6% per year might be about right, but it depends on the level of risk...more risk=more volatility=higher expected reward.

Or would I need to 'manage' it myself?

Depends. There are funds which are designed not to require any action, eg, a balanced managed fund with lifestyling that invests in a variety of asset classes and moves into safer assets as you approach retirement. That wouldn't require any management.

Or you can choose your own selection of funds to create a portfolio, eg, a mix of US equities, Asian equities, etc, etc - such a portfolio would need managing, even if that is just rebalancing over time, but probably more thought than that.

Some funds also pay dividents, what happens with pension funds?

Dividends can be re-invested, or directed to a cash fund depending on the type of pension to be invested in something else. So they effectively compound.

atush

Pensions grow when the underlying assets do. Via a combination os dividends (which are reinvested) and capital growth of the asset. This can be reduced by the level of charges.

if the SW is underperforming iti si probably due to the actual fund (rather than overal pension) charges and the poor choice of underlying assets. As said before, some companies restict you to their own funds which doesn't tend to be a great choice (but can be better than not having a pension at all).

In your case, you seem to be a fairly savvy investor so I would transfer out of the SW one and into a sipp and run it yourself?

antio

First of all, thank you for the most detailed answer - covers all my questions in the best possible way! Amazing! :T

hugheskevi wrote: »

Be careful about 'selling when the time is right' - many would argue that markets cannot be predicted, so success about when to buy in and out is a lottery. I think that is true on a daily basis, although long-term it is clearer which asset classes are over or under price (ie gilts look very over-priced at the moment - whilst they may or may not fall, it does mean there isn't any upside to them.).

Absolutely. What I meant by 'when the time is right' was 'when I got the return I aimed for'. That could be after 5 days or 5 years and it's probably been beginner's luck in my case (+ a bit of research). I've had some bad losses investing in shares (average -55%), but it was a small £ amount, so I've given up on shares - I don't understand/can't predict the market and it's expensive to invest in! But it looks to me funds are different, in that if you are willing to hold a fund long-term, you have more chance of eventually rebounding after a period of bad performance.

Anyway, it's time to reconsider what I do with my SW pension, I need a pension for tax and 'safety' purposes, but want slightly better returns. By the way, I had invested in both 'high-risk' and 'low-risk' funds but all had pretty low (or negative) returns. Top one was Fixed Interest, at an average 7.38% over 5 years!!

Thanks again!