Portfolio Allocation: Critique Welcome

DairyQueen

bostonerimus wrote: »

ITs have been doing great over the last few years in a rising market with low borrowing costs. I also worry that in an economic contraction with higher interest rates they could see some nasty losses from price declines and drops in premiums and that would be very bad early on in a retirement income plan.

But wouldn't the same apply to most equity investments? Isn't a market correction just before or early in retirement one of the big risks of investing in the markets?

DairyQueen

Voyager2002 wrote: »

And quite an important gap!

While the price of a unit in a mutual fund is always its "net asset value (NAV)" calculated from the price of the shares that the fund owns, a unit in an Investment Trust (and to a lesser degree in an ETF) trades for a market price that may be higher or lower than its NAV. It may well be that the market likes the way that an IT is managed, and so the market price for a unit in an IT may be higher than the NAV, so it is said to be trading at a premium. Conversely, when the market price is lower than the NAV the IT trades at a discount.

Now, there may be some reason why the market favours the management of a particular IT, and so its price may rise even though the value of the underlying assets (the NAV) does not change much. In particular, an IT that trades at a steep discount may reduce its discount. This obviously helps the investor, but is a different kind of growth than an increase in NAV.

Understood. Thank you.
Am I right in thinking that the discount/premium may simply be the result of market sentiment? If so, is this different from shares priced at a relatively low/high P/E ?

Audaxer

DairyQueen wrote: »

But wouldn't the same apply to most equity investments? Isn't a market correction just before or early in retirement one of the big risks of investing in the markets?

I would think it is only a bigger risk just before retirement if you are planning to buy an annuity or take a lump sum. If you are planning keeping it invested throughout retirement, I'm not sure that a market correction or bigger equity crash is any more risky than at other times, especially if you hold a cash buffer.

bostonerimus

Audaxer wrote: »

That's true. I like passives, especially within multi asset funds, but I've also got an income portfolio of active funds as they are better for income. However if you had held a VLS60 or similar for the last 5 years, you could have taken at least 4% income each year by selling some capital, and still have had good capital growth. Not sure which would produce better total returns in the long term.

I take a total return approach to income... yield and capital appreciation. If I start taking regular income I'll deposit the dividends and take some capital gains from my roughly 70/30 index portfolio. But I'm being disingenuous as I'm a bit of a coward and I've arrange things so my day to day income comes from a final salary pension and a rental property. If the stock or bond markets crash I won't reduce my income.

bostonerimus

DairyQueen wrote: »

But wouldn't the same apply to most equity investments? Isn't a market correction just before or early in retirement one of the big risks of investing in the markets?

Yes, but the market correction can be amplified in an IT because of borrowing and premium/discount pricing. But if you just live on yield that shouldn't bother you much.

bigadaj

bostonerimus wrote: »

This is an interesting analysis of active vs passive in global bonds.....be aware of possible bias in the messenger :-)

https://pressroom.vanguard.com/nonindexed/The_activepassive_decision_in_global_bond_funds_11.26.2013.pdf

Couldn't get the link to work, however looking at the date it's probably from a time when they still had more funds under active management than passive.

Audaxer

bostonerimus wrote: »

I take a total return approach to income... yield and capital appreciation. If I start taking regular income I'll deposit the dividends and take some capital gains from my roughly 70/30 index portfolio. But I'm being disingenuous as I'm a bit of a coward and I've arrange things so my day to day income comes from a final salary pension and a rental property. If the stock or bond markets crash I won't reduce my income.

bostonerimus, just wondering, do you regularly rebalance your 3 fund portfolio? If not I assume that the percentage of equities has crept up over the years as you have made good total returns?

bostonerimus

bigadaj wrote: »

Couldn't get the link to work, however looking at the date it's probably from a time when they still had more funds under active management than passive.

Yes, sorry, a bizarre space appeared in the link, but I've edited and it now works in my original post and is also here

Link Here

It's from 2013, so a couple of years old.

username12345678

Audaxer wrote: »

I would think it is only a bigger risk just before retirement if you are planning to buy an annuity or take a lump sum. If you are planning keeping it invested throughout retirement, I'm not sure that a market correction or bigger equity crash is any more risky than at other times, especially if you hold a cash buffer.

My understanding is that 'sequence of returns risk' has the greatest impact in the initial years of retirement.

https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672

Audaxer

username12345678 wrote: »

My understanding is that 'sequence of returns risk' has the greatest impact in the initial years of retirement.

https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672

But I think that is only if you don't have a cash buffer to cover lean years. So if in the first year of retirement there is an equity crash and your retirement fund suffers a big loss, its best to be in a position not to need to withdraw anything until it gets back to profit. Accordingly whenever the crashes come in retirement, as long as you have sufficient cash to cover your income needs, the impact would be the same.