Is my plan ok?

d70cw6

Jaguar_Skills wrote: »

I am trying to get my head round this but struggling a little. Is there a simple analogy?

things that have halved in value are cheaper to buy.

redbuzzard

Jaguar_Skills wrote: »

I am trying to get my head round this but struggling a little. Is there a simple analogy?

You mean the last bit?

Say you have been investing for 6 months, then the market crashes and your funds' prices drop 40%. Should you be happy or sad? I'd say happy...you weren't going to sell your units anyway, and the following month your £600 will buy more units - say the units started off at £1 each, and dropped to 60p. Initially you would have been getting 600 units every month, but now you are getting 1000. So when the price eventually gets back to £1, you will be better off than you would have been had it stayed at £1 all the time.

Put another way - when you are a buyer, a lower price should be a good thing. When you come to sell, the opposite is true.

Look up "pound cost averaging" which is what you get when you make regular purchases as you plan to do. You might see articles that argue that the benefit is over-rated, don't let that worry you - they are comparing investing a lump sum with spreading the investment over a period, keeping the uninvested money in cash and incurring an opportunity cost. You are not making that choice, it will work for you - by investing the same amount every month, you buy more shares when they are cheap, and fewer shares when they are expensive - that sounds sensible to me.

Jaguar_Skills

Thanks guys.

So final question.

If I keep my payments £300 v £300 all the time is there a specific time frame where I should look to reduce equities?

redbuzzard

Jaguar_Skills wrote: »

So final question.

If I keep my payments £300 v £300 all the time is there a specific time frame where I should look to reduce equities?

Not a specific one, no.

The background to this phasing into bonds towards retirement is to do with mitigating the risk that, when you want to buy an annuity, the value of your fund has just crashed. If you had been retiring in say March 2009, and had all your funds in equities, then you might have been buying an annuity with 60% or less of the money that you would have had a year earlier - and that would lock you into a 40% lower pension as a result - for the rest of your life.

If you are in bonds, then your volatility is lower. You can still take a hit on the value but, for a technical reason, that should be offset more or less by an improvement in annuity rates (basically, if bond prices drop, then yields rise, and the annuity provider doesn't need as much of your money to provide a given amount of pension. IIRC the rule of thumb is that 15 year gilt yields are key to annuity prices.)

However - you are I think 29. You are a long way off retirement I assume, and you probably don't even know when that will be.

Secondly, you might not even want to buy an annuity, especially if rates are as unattractive as they are now. In round numbers, if you want an annuity to provide a modest £25k a year with an RPI link, then you need a million quid in your pension fund.

If you aren't buying an annuity then a lot of the reason for reducing volatility as you approach retirement goes away anyway.

If when you retire you are simply going to draw money from your fund, then you will want some cash, and some short, medium and long term holdings - some of your fund might not be needed for 20 years or more.

Incidentally - most company defined contribution schemes have a default "lifestyle" option which starts reallocating equities into bonds c 10 years from retirement, and into cash in the last 5 or so. Trustees are now worrying about this, because although originally designed to "look after" members interests it might not now be appropriate for a significant number - either because they don't plan to buy annuities or might retire much earlier/later than the age they have nominated (if any).