How risk averse are you?

EdGasket

economic wrote: »

equities should prove to be safer then bonds in due time. bonds have peaked. equities will be the new safe haven once bonds start to collapse.

I think it is rather simplistic to refer to equities as a 'safe haven'; you can loose an awful lot on equities. I agree with your sentiment on bonds though they can still be useful if you pick short-dated ones.

Linton

It's a bit misleading to use one figure for degree of risk aversion. With a bit of analysis and planning one can do better. For a retirement divide your requirements into meeting needs, wants, and wishes. It seems very sensible to be pathologically risk averse on needs - even if it were possible I wouldnt sell my State Pension for any amount of money. Then one could take a measured risk to cover wants, and go high risk but well diversified on money available for wishes.

enthusiasticsaver

It does seem as if whatever we decide there is an element of risk either by losing capital or inflation making our cash worth less in a few years time. When I started my s and s isa I went for a highly diversified, mixed equities/bonds, low charge index tracker fund. I put a large capital amount in just at the high and it has only just got back to what I paid for it so I have now resorted to drip feeding to hopefully avoid buying at the wrong time. My reasoning in keeping so much cash is we will have an £8k per annum shortfall between our retirement income and salaries until state pension kicks in. 7 years times £8k is around the amount we have and that is a simplistic way of looking at it but I know you cannot just get money out of an investment pot when you want it without risking consolidating losses if the market is low.

Pincher

enthusiasticsaver wrote: »

I recently saw an IFA


We both filled out separate risk profiles which IFA sent us and have both come out as cautious.


I am therefore wondering what he will suggest we invest in as surely most investments he deals with has an element of risk.

I can't imagine anybody nearing retirement ever put down gambler.


They say they tailor for your needs, but all they have to do is buy units in three different funds, supposedly high risk, medium risk and low risk, in the proportions you write in three boxes, and they have justified their fee.


The risk profile must be so similar, they might as well do a 65 Generic Special Fund, and put everybody on it. Obviously, the investments would have 10% high risk, 30% medium risk, and 60% low risk, or some such proportion. Buying just one fund should save on dealing charges.


Such a streamlined operation could be the Ryanair of the retirement business.

BananaRepublic

Pincher wrote: »

Such a streamlined operation could be the Ryanair of the retirement business.

If almost everyone does the same, it will have an impact on the market. For example, if everyone buys into a passive FTSE 100 tracker, that puts a barrier on entry to the FTSE 100, as most people do not want to buy non FTSE 100 stocks, but conversely it may artificially keep a company in the FTSE 100.

One might simplistically think this would reduce volatility too. But equally it could actually increase volatility due to a positive feedback mechanism i.e. a non tracker fund sells lots of shares, the price drops, this forces some trackers to sell some shares, which causes the price to drop further, and so on until some sort of equilibrium is reached. The net result is that a small price drop can trigger a large price drop.

The ownership of shares being largely in private hands is a feature of the US market:

http://www.businessinsider.com/chart-stock-market-ownership-2013-3?IR=T

I seem to recall the markets were much less volatile 15 years ago, on a day to day basis, but maybe my memory is faulty.

Linton

Pincher wrote: »

.....
The risk profile must be so similar, they might as well do a 65 Generic Special Fund, and put everybody on it. Obviously, the investments would have 10% high risk, 30% medium risk, and 60% low risk, or some such proportion. Buying just one fund should save on dealing charges.


Such a streamlined operation could be the Ryanair of the retirement business.

Real life is a little more complex than this. Each person will have different requirements. For example ongoing income from investments may be a major consideration. A range of investments of varying risk may be highly desirable - as for example in the OPs sensible desire to have several years income availablein cash. Other people may set aside a fixed amount long term for care. The requirements may well change over time. People with fixed rate annuities will have an increasing need to supplement their income becaiuse of inflation. etc etc.

grey_gym_sock

Glen_Clark wrote: »

IAll the ingredients for inflation, money printing,

all the evidence (and some plausible theories - though of course you can always find a theory to support any idea, and another to support the opposite idea) says that QE doesn't lead to high inflation. we started QE in 2009. where's the inflation? japan started in 2001, and is still at it. they have the same 2% inflation target as the UK, and they just can't get it up.

rising debts,

see below.

commodity prices below cost leading to scaling back production and tightening supply, are all with us.

you're describing the commodity cycle. wherever we are in the cycle, either we have commodity inflation now, or we can expect it to come around later. so this is not saying anything special about the present situation.

If the Government tries to keep wages down they have to make it up with housing benefit because they have pushed housing costs up so high.

this is wasteful. but housing benefit costs £20bn or so a year. suppose their bad housing policy eventually adds £5bn to that. that's a small addition to total government spending. so not a big effect on overall government finances.

The Government needs high inflation to default on debts it can't pay.

if you count 2% inflation (the official target) as high inflation, i might agree. the government can borrow at 1% or 2%, so 2% inflation would be enough to leave them paying a negative real interest rate.

the fact that the government can borrow so cheaply at the moment implies that "the markets" think they could safely borrow more. and (IMHO) they should borrow more, in order to invest in housing, infrastructure, clean energy, etc.

When these ingredients combine to produce another bout of high inflation we will wonder why we didn't see it coming. It will all look so obvious with hindsight.:o

i think you're fighting the last war. the current problem is debt deflation: excessive private sector debt, leading to low consumption, as households devote a larger percentage of their income to paying interest and rent the non-productive sectors of the economy (mainly meaning: finance).

Linton

BananaRepublic wrote: »

If almost everyone does the same, it will have an impact on the market. For example, if everyone buys into a passive FTSE 100 tracker, that puts a barrier on entry to the FTSE 100, as most people do not want to buy non FTSE 100 stocks, but conversely it may artificially keep a company in the FTSE 100.

One might simplistically think this would reduce volatility too. But equally it could actually increase volatility due to a positive feedback mechanism i.e. a non tracker fund sells lots of shares, the price drops, this forces some trackers to sell some shares, which causes the price to drop further, and so on until some sort of equilibrium is reached. The net result is that a small price drop can trigger a large price drop.

The ownership of shares being largely in private hands is a feature of the US market:

http://www.businessinsider.com/chart-stock-market-ownership-2013-3?IR=T

I seem to recall the markets were much less volatile 15 years ago, on a day to day basis, but maybe my memory is faulty.

More than 50% of the UK share market is held overseas, a number that has been steadily increasing over time. It would seem likely that in general foreign ownership is more volatile than investment in a home market. The private UK holdings of UK shares is 12% so the majority of shares held in the UK are owned by institutions and companies. The decisions of private investors are not the main driving force in UK share movements. See here for more data

N1AK

enthusiasticsaver wrote: »

Interesting. I would say 85% in equities would be risky? I get what you say about inflation though.

Unfortunately that rather depends on both your priorities and your perspective. Someone who is high risk (unless you take that to mean gamble it all on a single hand of poker types) is probably risking a tiny chance of being considerably worse off (perhaps as little as 2% chance of being 10%+ worse off) vs a risk averse investor.

If you know you are going to be ok in retirement then what might be relatively 'risky' investments to other people might seem safe to you if the potential loss is small enough that it won't matter.

BananaRepublic

Linton wrote: »

More than 50% of the UK share market is held overseas, a number that has been steadily increasing over time. It would seem likely that in general foreign ownership is more volatile than investment in a home market. The private UK holdings of UK shares is 12% so the majority of shares held in the UK are owned by institutions and companies. The decisions of private investors are not the main driving force in UK share movements. See here for more data

Thanks, I'm aware of that. Incidentally, I would class the pension and much of the unit trust holdings as private, in that private individucals effectively own the assets, albeit through a collective investment. So UK private holdings are higher, maybe ~25%.

Odd though that the US market ownership profile is so different.