CAPE valuations & TFLS

k6chris

Like many people, the funding of our retirement will come from a variety of sources; a couple of DB pensions each - phased in at different times, SP, savings, ISA, SIPP and a TFLS from one of the DB pension. Whilst it will vary over time, as DB and state pensions come on stream, around 25% of this funding will come from the non DB / SP sources. Some of that money is already invested in 4 funds under a SIPP wrapper, however shortly I will receive a TFLS that I need to do something with. (To save you the problem of asking, it was the DC part of an ex-DB pension and if I had used it to buy additional DB pension benefit the effective rate was 1.1%, so I took it as a TFLS!)

Currently CAPE valuations are high and indicating a likely effective return of -2.4%

https://www.gurufocus.com/shiller-PE.php

There are other indicators of high equity valuations too

https://www.gurufocus.com/stock-market-valuations.php

So my question is what strategy do I deploy to maximise the ability of my TFLS to do its job in helping to fund my retirement? Options are;

• Invest it at these 'over valued' levels and hope for the best?
• Put it in a savings account and cost-average invest over the next 3 (??) years
• Put it in savings and wait until the CAPE reverts back to its longer term mean value?
• Wait for a 25% (??) pull back and then invest?
• Ignore equities and do something else (property? P2P? Bonds??????????)

I do want to create a specfic plan that I follow, to try and avoid the never-ending wait or the bouncing between decisions based on fear or greed.

Welcome your thoughts (please).....

marlot

So if I try to simplify the question ... "I have a lump sum that I'd like to invest. Where would you recommend?" ... is that right?

k6chris

marlot wrote: »

So if I try to simplify the question ... "I have a lump sum that I'd like to invest. Where would you recommend?" ... is that right?

No, I'm more interested in people's thought processes about investing at time when CAPE levels are high. It's the approach to take, rather than what to invest in. I know the answer is always VLS60 to than question :rotfl:

DairyQueen

I think the forum experts may need a little more info. The OP indicates that s/he would choose to invest the lump sum in equities but is hesitant given current market valuations (especially US valuations).

The forum may need to know (at least):

a) Anticipated duration of the investment
b) Whether this lump sum is required to meet basic retirement expenses. How much risk is s/he prepared to take?

..... in order to comment.

I share the OP's concerns. Given that I am in the lead-up to drawdown (in 5/7 years) I decided to adopt a strategy whereby my lump sum is divided into three discrete portfolios (each with a different investment timescale). A higher percentage of the sum required to fund the first period of my retirement is therefore conservatively invested.

k6chris

DairyQueen wrote: »

The forum may need to know (at least):

a) Anticipated duration of the investment
b) Whether this lump sum is required to meet basic retirement expenses. How much risk is s/he prepared to take?

......A higher percentage of the sum required to fund the first period of my retirement is therefore conservatively invested.

Duration of investment - I'm 53 - DD of non-DB investments from 55, half of which which will cover gap until 67 when SP and another small DB pension come around and the other half from 55 until I depart this mortal coil.

DB covers basic living costs, so won't freeze or starve, but is needed to cover leisure activities, which is one of the reasons I want to retire early

Risk profile? Fairly conservative with money, but recognise that risk is required and the value of investements can go down as well as plummet. Looking for a plan that has some logic to help manage the risk.

DairyQueen - what do you count as "conservative investements?"

bigadaj

k6chris wrote: »

No, I'm more interested in people's thought processes about investing at time when CAPE levels are high. It's the approach to take, rather than what to invest in. I know the answer is always VLS60 to than question :rotfl:

Diversification will rarely lead to disaster so spreading across a range of asset classes seems wise.

I know the cape view makes equities look over valued but then pretty much everything is, it's just a function of avoiding a depression by maintaining zero interest rates for a decade, it's not that assets have done well it's that all currency is being devalued, the pound more than most.

I'd want to spread the sum across as many asset classes as possible, as well as equities then some in bonds, though real returns look limited, cash reserve, p2p, vct if you pay the income tax to get relief, etc etc

DairyQueen

k6chris wrote: »

DairyQueen - what do you count as "conservative investements?"

The usual caveat applies (i.e. no one-size-fits-all investment solution exists).

I have two years of retirement income in cash spread across a mix of: a) higher interest current a/cs and b) regular savings account. a) feeds b) and I replenish a) monthly from current income. The aim being to protect against inflation rather than achieve any growth.

I also have a higher (much higher) percentage of the capital I anticipate I will drawdown in retirement years 1 thru 6 invested in lower-risk, defensive, managed funds (corporate bonds, high dividend yielders, but currently light on gilts/government bonds). Again this is intended primarily to protect against inflation over a relatively short investment timescale - any growth above inflation would be a bonus.

The income I will need in later retirement (years 7 thru God knows) is proportionately more invested in equities - especially the chunk earmarked for age 80+. As has previously been mentioned, diversification is key to capital protection and my whole pot is pretty widely diversified across mostly developed markets. If I see a return of 4%+, above inflation and charges, in a good year I will be a happy bunny. If the portfolio loses 10% in a bad year then I can deal with that as I intend to keep that two years income in cash throughout retirement in order to avoid drawdown in bad years.

I will also add the max the government will allow for non-earners to my pension each year if tax relief is available (who knows?) after I retire. That could form part of the cash I may need as an alternative to selling in years that the markets take a hit.

I will review the strategy each year that the little, grey cells remain intact, and will move capital from higher to lower-risk investments over time. I also haven't ruled-out the possibility that the word 'annuity' may hold more appeal at some point.

Other investment groups are possibilities (as mentioned above) depending on your tax position, attitude to risk, amount of capital, how much time you wish to allocate to managing your dosh, etc., etc.