Next recession, trade wars, up to 50% portfolio losses

Prism

Type_45 wrote: »

The only figure we don't know is the upside of investing. But that's why I quoted Vanguard themselves. They said "3%-5%".


So we do know what the figures are. And I haven't made any of them up. It is what it is.

I know that you haven't made any of the numbers up. Someone at Vanguard has if thats what they claim. They don't know what the growth will be. It could be 10% for the next 5 years. It might be a 50% crash next year. It can't be predicted or planned for.

You can't invest based on some report by someone who claims to know what the future holds. Even is that someone happens to work for Vanguard

Type_45

masonic wrote: »

That 3-5% is probably a rate of return after inflation.

No, it's what Vanguard are saying we can expect for the foreseeable future before inflation is factored in.


They even said that we are entering a "pay back" phase for recent year's high interest returns.

bowlhead99

Type_45 wrote: »

Point remains though:

Invested: 3% upside, 30% risk.

Banked: 1% upside, 0% risked

Do the math.

Time to stop your trolling. You told us before what we all know to be true, which Coldiron kindly reminded us earlier in his quote of you in post 179. Investing is not a zero sum game, the giving of riches from the fortunate to the unfortunate. In the end, all of us diversified investors make money because the global economy becomes more productive and valuable and we own a piece of it.

You say the 'upside' is 3% and downside is -30%. Clearly on that basis there is no point in investing, if both have equal chances, but that is not the case.

Of course, the upside is not only 3% - it is many times that. The figure of 3-5% is already using some probablistic determinations that look at good scenarios and bad scenarios and say that on average the return is PLUS 3-5%, even though actually this year we could see +10% or +20%, though something more moderate is likely and temporary losses are possible.

Whereas with the bank account the good scenario is 1% and the bad scenario is 1% (because in a bad scenario FSCS pays out your capital and unpaid interest).

So, the normal/expected scenario for investments is a figure which is in excess of CPI and for a bank account at the moment the normal/expected scenario is substantially lower than CPI. The UPSIDE of investment is a figure many times CPI, and the downside is getting a short term return much lower and having to wait through a revovery until you get to that longer term figure comfortably in excess of CPI.

Type_45 wrote: »

We do know some of the numbers:

- We know that banking money has 0% capital risk.

- We know that in the Credit Crunch some portfolios lost 50% of their value. So 30% in another crash is pretty safe and not even a worst-case scenario.

- We know what interest banks pay. It's 1%-1.3%.

The only figure we don't know is the upside of investing. But that's why I quoted Vanguard themselves. They said "3%-5%".

You know very well they did not say that 3-5% was the 'upside', the very best you could get over a multi-year period. That was an expectation they were giving you of taking the rough with the smooth. With the bank deposit, the expectation you have of taking the rough with the smooth is 1% according to your source, while with Vanguard the expectation of taking the rough with the smooth is 3-5%.

So we do know what the figures are. And I haven't made any of them up. It is what it is.

You have completely misrepresented them by saying that the best you could get, the upside potential of a stock market/debt blended investment is 3%, while the worst you could get is 30%, implying some average would be lower than negative 10% and as such would be a silly risk to take when you could just bank the 1% profit on a bank account and not worry that you were losing money in real terms against inflation.

In fact, the possible upside on a stock market investment is many tens of percent, perhaps over 100% in sterling terms because nobody knows what will happen to the strength of sterling in the next year or two. But you are saying the 'upside' potential is 3% which is misleading when it is not the 'upside', rather, 3% is the bottom end of a 3-5% expectation, per your own expert source. While the middle of your expectation per your bank account source is 1-1.3%

Type_45 wrote: »

No, it's what Vanguard are saying we can expect for the foreseeable future before inflation is factored in.

So, it's not the upside potential of going that route, it's the expectation of going that route, and includes the several years of upside of +5%, +10%, +20% and more, combined with the occasional -10 or -20 or -30% to bring us back down to earth, giving us WHAT WE CAN EXPECT as being 3-5% before inflation is factored in, whereas the bank is offering 1% to 1.3% before inflation is factored in.

ValiantSon

Type_45 wrote: »

No, it's what Vanguard are saying we can expect for the foreseeable future before inflation is factored in.


They even said that we are entering a "pay back" phase for recent year's high interest returns.

As I've already said, I read the article to which you refer, and you are misrepresenting what it said. The 3-5% return was stated as after inflation. Their expectation (which could easily be wrong - as they acknowledged) was that returns over the next decade may average out at 3-5% above inflation.

Nobody has accused you of making the figures up (although you have misrepresented the Vanguard ones, as I pointed out further up-thread), but rather of not understanding the markets, and being far too trusting of some bloke on Twitter.

Again, feel free to put all of your wealth into sub-inflation bearing deposit accounts, and watch your spending power erode, but don't expect the rest of us to follow suit, or to agree with you.

masonic

Type_45 wrote: »

No, it's what Vanguard are saying we can expect for the foreseeable future before inflation is factored in.

They even said that we are entering a "pay back" phase for recent year's high interest returns.

If what you say is true, Vanguard would be wrong and we have over a century of data backing up the view that equities portfolios deliver, on average, annualised returns of around 5-6% after inflation. But this could be higher or lower over any specific time period, or depending on what you are invested in. No expert or authority can give you a projection that can be relied upon. This is a view Vanguard itself agrees with, and they give a more reasonable guestimate for the 60:40 equities/bond fund you are interested in:

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-success/what-return-can-i-expect
"Predicting short-term price moves is guess work
Switch on any 24-hour news channel and you're likely to hear a commentator confidently predict short-term stock returns. Minutes later another investment professional could come up with a very different outlook. Who's right?

At Vanguard we don't believe in trying to predict short-term price moves. It's guess work. In the short term, prices are driven primarily by news, and by its very nature, we can't know the news before it happens.
...
What will the market return be?
At Vanguard we don't think giving specific forecasts for market returns is the right approach. It gives a false sense of certainty. We believe it's more sensible to think in terms of a range of estimated returns over longer periods. For example, our current view is that a 60% equity and 40% bond portfolio is most likely to provide a return between 2.2% and 7.5% for the ten years to December 2026"

NB: Vanguard does not state whether those figures are nominal or real returns, but by convention, they are likely to be real.

So my point stands, that cash saving accounts are quite risky places for putting money that you intend to invest for the long term, as you are almost guaranteed to lose money in the short term and if inflation picks up significantly, there is a risk of significant loss of spending power that will not be rapidly recovered as it may in the case of equities-based investing.

kidmugsy

masonic wrote: »

that cash saving accounts are quite risky places for putting money that you intend to invest for the long term, as you are almost guaranteed to lose money in the short term and if inflation picks up significantly, there is a risk of significant loss of spending power that will not be rapidly recovered as it may in the case of equities-based investing.

Over long spells in Britain cash holdings have beaten inflation. Since the people publishing such figures are investment managers they probably mean Treasury Bills when they say "cash". The retail investor can routinely get higher interest rates than Treasury Bills pay, so the retail investor is likelier than the investment manager to have beaten inflation by holding "cash".

The argument for equities is based on the fact that in the past they have returned more than cash in the long term even though they may have lengthy periods of loss, and sometimes substantial loss. Boosters of equities usually quote results only for (at most) the US and UK, which should make people suspicious. They would be right to be suspicious - many other developed countries have distinctly worse records.

Will our future be like our past? Like Japan's past? Like Italy's past? Like Austria's past? Like Belgium's past? France's? Germany's?

Nobody knows and nobody can know. There isn't even a vaguely analogous case in the past because 5000 years of history reveals no period with interest rates as low as they have been in the last decade.

All you can say is that if the future resembles the past in the UK then equities may be expected to return more than cash if you wait long enough. Whether 'long enough' will occur in the investor's lifetime God alone knows. Whether the investor, horrified by large and persistent losses, will panic and sell his equities is hard to predict. Whether there's any reason to suppose that the UK of the future will resemble the UK of the past is entirely uncertain.

Investing in equities is a risk game. Holding none is risky. Holding lots is risky. Faites vos jeux.

masonic

kidmugsy wrote: »

Over long spells in Britain cash holdings have beaten inflation. Since the people publishing such figures are investment managers they probably mean Treasury Bills when they say "cash".

I quite agree. But I'm not turning to investment managers for the returns on cash. The difference between cash and equities is that cash returns can be known to some degree of accuracy in advance. Currently they are trailing inflation by at least 1% (with the exception of the promotional deals offered on a limited sum, which I wholeheartedly encourage everyone to take advantage of).

The problem with holding cash in recent times is that interest rates have been disconnected from inflation, which is a significant departure from history. I have little to no confidence interest rates will rise in line with inflation should inflation rise in line with events such as the purported trade wars being discussed in this thread.

So I doubt the premium UK savers have historically enjoyed vs Gilts will be maintained - those lucky enough to hold ILSC have a limited amount of cash that certainly will hold its value vs inflation, but for everyone else, who has exhausted the "easy money" offered on a few thousand pounds held in current accounts and regular savers, the inflation risk is real.

Investing in equities is a risk game. Holding none is risky. Holding lots is risky. Faites vos jeux.

I agree. The key, as always, is diversification - and not letting newspaper headlines or commentary from the investment industry sway your investment decisions.

Sally57

Is there not an argument to hold some bonds (whether Strategic, High Yield or Corporate) as well as a cash buffer? I hold Artemis Strategic Bond and feel this fund does the job for me in wealth preservation but I also have a good cash buffer in the best bank accounts available. Although, I'm still about 70% equities to my 30% bond & cash buffer.

masonic

Sally57 wrote: »

Is there not an argument to hold some bonds (whether Strategic, High Yield or Corporate) as well as a cash buffer? I hold Artemis Strategic Bond and feel this fund does the job for me in wealth preservation but I also have a good cash buffer in the best bank accounts available. Although, I'm still about 70% equities to my 30% bond & cash buffer.

While bonds do have some correlation with equities, they tend to hold their value to a greater extent than equities during economic downturns, so I believe they have value as part of a portfolio. For those investing in SIPPs and ISAs, they are a necessity given the difficulty moving money in and out of these. All three of the types of bond fund you mention tend to outperform cash during the good times (i.e. the majority of the time) and strategic bond funds in particular have demonstrably held up quite well during the last major stockmarket crash.

However, in the current interest rate environment there is some additional risk, in that interest rate rises would lead to capital losses in bond funds. To some extent this is priced in to long dated bonds, and it's hard to conceive of a scenario in which a situation that would cause a stockmarket crash would at the same time prompt a sharp rise in interest rates, given recent monetary policy, but the risk nevertheless exists. Personally, I hold some bonds, but have made use of P2P investments and cash to reduce my holding vs what I might have held ten or fifteen years ago.

Sally57

masonic wrote: »

While bonds do have some correlation with equities, they tend to hold their value to a greater extent than equities during economic downturns, so I believe they have value as part of a portfolio. For those investing in SIPPs and ISAs, they are a necessity given the difficulty moving money in and out of these. All three of the types of bond fund you mention tend to outperform cash during the good times (i.e. the majority of the time) and strategic bond funds in particular have demonstrably held up quite well during the last major stockmarket crash.

However, in the current interest rate environment there is some additional risk, in that interest rate rises would lead to capital losses in bond funds. To some extent this is priced in to long dated bonds, and it's hard to conceive of a scenario in which a situation that would cause a stockmarket crash would at the same time prompt a sharp rise in interest rates, given recent monetary policy, but the risk nevertheless exists. Personally, I hold some bonds, but have made use of P2P investments and cash to reduce my holding vs what I might have held ten or fifteen years ago.

Thank you for your input it is most appreciated and I agree with all your comments. However, I don't quite understand your comment " For those investing in SIPPs and ISAs, they are a necessity given the difficulty moving money in and out of these" so please can you explain to a simpleton.