Inflation protection pension investment options?

michaels

GDB2222 wrote: »

In the long term equity dividends have grown at the inflation rate plus around 1%. Currently UK equities are priced at around 30 x dividends, so even if the dividends do continue to grow you are at risk of volatility if the pricing formula changes to say 15 x or 45 x.

And the other thing to worry about is that the P/E on the FTSE100 is around 30, which is historically very high. Dividend cover is only around 1.

Problem is efficient markets theory says you shouldn't base current investment decisions on past performance, and thus the current 'overvaluations' are no more likely to revert to the long term mean than to increase. Thus saying I will now sit out of the equity markets until levels are more 'normal' is just a likely to mean a loss as a gain. On the other hand, putting the funds into anything else means you are then running an inflation risk.

Heads you lose, tails they win.

bostonerimus

michaels wrote: »

Problem is efficient markets theory says you shouldn't base current investment decisions on past performance.

EMT just says that prices are a true reflection of all the available information. It's got nothing to say about how you invest your money. Part of my approach is to look at as much historical data as possible over the entire market and hope that if I stay invested for long enough and I'm diverse enough I'll get the long term average return and stand and deviation of past markets. So I use past statistics to guide my asset allocation.

michaels

bostonerimus wrote: »

EMT just says that prices are a true reflection of all the available information. It's got nothing to say about how you invest your money. Part of my approach is to look at as much historical data as possible over the entire market and hope that if I stay invested for long enough and I'm diverse enough I'll get the long term average return and stand and deviation of past markets. So I use past statistics to guide my asset allocation.

But if historic orices provide information that might help predict the future then that information would be priced in, for example if the markets were more likely to 'revert to mean' than to increase further there would be an obvious profitable strategy and so the market would move in anticipation.....

Thrugelmir

GDB2222 wrote: »

Dividend cover is only around 1.

Seen that highlighted on a number of occasions recently. Dividend cover has fallen significantly over the past 7/8 years. With a number of larger companies funding dividends by increasing borrowing rather than being paid out of self generated free cash flow.

bostonerimus

michaels wrote: »

But if historic orices provide information that might help predict the future then that information would be priced in, for example if the markets were more likely to 'revert to mean' than to increase further there would be an obvious profitable strategy and so the market would move in anticipation.....

I don't understand what you're saying.

bigadaj

Thrugelmir wrote: »

Seen that highlighted on a number of occasions recently. Dividend cover has fallen significantly over the past 7/8 years. With a number of larger companies funding dividends by increasing borrowing rather than being paid out of self generated free cash flow.

Which sort of makes sense when they can borrow at the levels they can.

People are also desperate for income with little regard to sustainability or risk, so the board do very well out of the strategy.

bigadaj

michaels wrote: »

But if historic orices provide information that might help predict the future then that information would be priced in, for example if the markets were more likely to 'revert to mean' than to increase further there would be an obvious profitable strategy and so the market would move in anticipation.....

Markets aren't that efficient, or at least some of the players in it aren't.

By your reckoning lehmans would have foreseen all of the issues and would still be trading away happily.

Thrugelmir

bigadaj wrote: »

By your reckoning lehmans would have foreseen all of the issues and would still be trading away happily.

Barclays traded Lehmans out at a profit.

For the record the US treasury had no legal authority (15th September 2008) to put Government money into the bank at the time of it's collapse. This changed on the 3rd October when legislation was passed which provided billions of $ in TARP financing.

michaels

bigadaj wrote: »

Markets aren't that efficient, or at least some of the players in it aren't.

By your reckoning lehmans would have foreseen all of the issues and would still be trading away happily.

Nope, by my reckoning if Lehmans knew what they were doing then their difficulties must not have been predicable as otherwise they would obviously taken steps to avoid it.

Malthusian

bigadaj wrote: »

By your reckoning lehmans would have foreseen all of the issues and would still be trading away happily.

Lehmans != the market.

Efficient market hypothesis does not say that all participants in the market are geniuses. It says that some market participants are morons who will buy too high, and other market participants are morons who will buy too low, and in aggregate the market price will stabilise at a level that takes into account all available information.

Remember that the efficient market hypothesis does not mean "the market price is the right one", it means "the market price takes into account all available information instantaneously".

Similar to how the classical model of supply and demand does not claim that no-one ever overpays for a product or that no-one ever underpays; it says in a market with a sufficiently large number of participants, some people will overpay and some underpay and it balances out at the market price.