Risk Scale versus lost potential..

SpeedSouth

Following on chucknorris post a little bit I suppose and the use of bonds in a portfolio.

So at present being 35 y/o and the sole earner in the house I contribute to both my pension and a S&S ISA.
The pension is a workplace one by salary sacrifice so put in 15% in their higher risk portfolio (knowing this will be at least 22 years before I can access it). When ever I've done the risk portfolio questionnaires I come out mid range. I understand the concept about losing money by saving in cash etc, but still I wouldn't be happy to see 60% wiped off my portfolio overnight (don't suppose many people would really).

That being said I invest my S&S ISA in VLS 60. When opening that it was a thinking of it may be used for pensions, funding kids down the line with cars, house deposits etc. At 35 and with the eldest only 5 I'd say we've got minimum 13 years before any truly large costs start to hit. Then again you read about the the balance that bonds bring to a portfolio with regards to reducing the volatility but in reality it doesn't really matter what it does in the next 15 years, its just what it is when it is cashed in..

Now hopefully that will become part of my retirement fund as well, so figuring it becomes part of the draw down phase it might/hopefully be invested for another 50 years or so.

I've also read dunstoh comments in the past that the majority of people invest over and above their risk scale, and given the 2 years or so I've been investing I've only experienced a minor blip August last year or before (can't remember which), it obviously does paint everything in rose tinted glasses I'll grant you.

What are other peoples take on how you determine, the risk you subject yourselves to for that of future growth or potential loss of growth by being to risk averse?

Alexland

Hi

Not really the answer to your question but if some of your ISA will be used for retirement have you considerd sticking the money in your employers pension or a LISA or a parallel pension for you or your partner? Do you get salary sacrifice or are you a higher rate taxpayer?

We are an average age of 34 and I currently run our ISAs at 60pc stocks (as we may want earlier access) and pensions and LISAs at an average of 75pc stocks but I would push them to 100pc stocks in a market downturn. I also hold some cash to take advantage of the next downturn.

But then I am older and have been invested through the dot com bubble and the financial crisis and see the advantages of occasional crashes.

It doesn't matter if valuations drop and you hold tight. I try and remind myself those are the prices others are selling at and the true value is in the rational price determined by earnings not the highly volatile share price.

Try reading up on the work of Shiller to help build your tollerence to market movements. It helps if you realise how mad everyone else is:

https://pensioncraft.com/animal-spirits-rule/

Alex

LHW99

If you have more than 10 years until you need to access the money and are adding to the amount regularly, as in your pension, then as Alexland says, market drops are things to look forward to, as they are the times you can get more shares / fund units for your money.
Before the dotcom bubble, there was the Russian financial crisis, Black Monday and when the UK crashed out of the ERM. These things happen every now and then.

bostonerimus

Your VLS60 allocation is a classical 60% stocks and 40% bonds. Historically that's been a good balance between risk and return. Google "efficient frontier". Whether 60/40 is good today is debated, but at age 35 and if you plan to be investing for more than 10 years it will probably do ok.

SpeedSouth

Alexland wrote: »

Hi

Not really the answer to your question but if some of your ISA will be used for retirement have you considerd sticking the money in your employers pension or a LISA or a parallel pension for you or your partner? Do you get salary sacrifice or are you a higher rate taxpayer?

Alex

I'm HRT but only just and on salary sacrifice, so do put enough into bring me back under HRT and a bit more so taking advantage of the 10% NI as well.

We contribute to my partners SIPP to the max allowed of £3600 each year already. My thinking at present is I will grow the ISA should we move house, or have an unexpected large expense, then as I reach closer to retirement I'll sacrifice my entire salary and live of the ISA to maximise the tax relief whilst remaining flexible at a younger age,

To my mind the amounts are the same doing it that way, I'll still get the growth now and then tax relief simply later in life..

I'll take a read of the link as well.
Thanks

Alexland

Assume you are contributing £2880 and HMRC are contributing £720 to bring the total to £3600 for a non earner - very good hopefully most will come out tax free.

Also worth checking any child benefit is in your partner's name so they get the NI credits towards state pension (I know a working man who thought it was helpful for him to complete the forms in his name to save his wife the hassle and so she missed the NI credits).

Hmm still worth considering LISAs as there is a 25% bonus and no tax to pay if you withdraw after 60. I am using mine to help my son with a house deposit (he will be 24 when I am 60) and any leftovers combined with my wife's LISA (which will come online 6 years later) to feed her pension while retired between the ages 54 (when I am 60) and 75.

No point planning to feed my pensions in retirement as I am probably heading for LTA issues unless I start reducing my contributions.

SpeedSouth

Yeah we invest £2880 then its taxed up to the £3600, so as you say pretty good value. Unless markets grow really well it will all be tax free, but then if we do end up paying tax means it would be worth a lot more than expected so wouldn't complain.

Yeah all CB is in her name.

The LISA/Pension/ISA split is another topic completely separate to the bond allocation, but it is one I've wondered about a few times. At present the pension via salary sacrifice given most is at lower rate tax would beat the LISA tax relief when I come to withdraw regardless of the tax free withdrawals (assuming the 25% tax free allowance stays in place).

Currently with employers contributions I put 20% in Pension, and 18% in ISA each month. I'll certainly open an LISA before I get to 40 and likely will do so for this tax year, but currently the pension beats it, and I am still keen to maintain the ISA as 25 years to retirement is a long way off..

Alexland

According to my spreadsheet, once you have made enough contributions to avoid higher rate tax and harvest the employer contribution, any additional contributions with basic rate tax and NI saving which then gets taxed at 15% on withdrawal (assuming the annual tax free income allowance is already used by the existing pensions, so 20% tax with 25% tax free) is about the same as the 25% LISA bonus with no further tax. But a LISA recycled into a pension between ages 60 and 75 would be a clear winner.