Balancing Equities / Bonds

System

Ceme3000 wrote: »

How would you feel if 50% of your investments are wiped out tomorrow, and it takes 2 years to recover? Just decide what risk you are happy with and invest accordingly.

Unless you have to sell them you'll have lost nothing. The only people who lost in the crash in 2008 were those who panic sold.

BLB53

The only people who lost in the crash in 2008 were those who panic sold.

Which is what many investors would have done...I can say from my own experience that it is very difficult to remain calm and level headed when everyone is running for the hills...we are essentially herd animals and there is a strong instinct to cut your losses and not lose everything.

Ceme3000

BLB53 wrote: »

Which is what many investors would have done...I can say from my own experience that it is very difficult to remain calm and level headed when everyone is running for the hills...we are essentially herd animals and there is a strong instinct to cut your losses and not lose everything.

That was my point really. If you are the sort of person who would worry and have sleepless nights over your 'paper' loss then a higher risk approach is not for you.

SeniorSam

I was advised some time ago that the older you are, the more security you needed in 'save' areas such as Bonds and fixed income. I have tended to follow that advice but in a recent 'jiggle' of my funds in April (only have funds for safety), the safe investments of 40% in Bonds is a read downer. Both Artemis UK Equity and Strategic funds have lost (on paper) -2.69% and -1.44%, which is a lot on £89k.

Having retired at 70 and now 77, I am considering a reduction in both to more Global Equity funds as they seem to be moving well at over 11% in the last couple of months.

Should the markets change, there are enough reserves to handle a 20-30% drop for a couple of years, but I doubt such a drop would occur. Just keep enough to not be reliant on the equity investments if necessary.

ams25

Another way of looking at this is to have enough in safe(r) / low volatility investments (including cash, bonds, private/state pensions/ annuities) to cover your expenses for 5-10 years, depending on your attitude to risk and willingness to be flexible in a market downturn.

So, if you need £20k per annum, have £8k state pension and £3k DB pension, then keep at least 5 x the balance (20-8-3)= £45k in safer investments.

The rest can be in equities as you have at least 5 years of expenses covered, so can hopefully ride out a bear market cycle before you need to sell any equities.

The other point to consider is that the first 5-10 years of retirement, including just before, is the period where you are most vulnerable to sequence of returns risk (taking too much money out of a declining portfolio such that it can't recover enough to maintain spending). Some retirement planning gurus (eg Wafe Pfau, Michael Kitches) suggest you have the lowest exposure to equities during this period with a rising equity allocation as you (hopefully) move past this danger zone.

This is my approach: from 80%+ equities before i quit working, I am now around 50% (2 years into retirement) and will gradually increase the equity allocation again over time to around 70%, maybe more. So while right now the 100% - age is not actually far off, in a few years it will be.. and moving in the opposite direction.

Reluctantpensioner

The following is discussion, not advice.
However, I am 64 and retired, so is a highly relevant topic.

If you dig around on the web on this question you'll find a lot on it.
With most saying 100-age is outdated.
You will find: 110-age and 120-age mentioned quite a bit.
You will even find interesting arguments that equities should increase in later retirement.

Some discussion points:
1) people are living longer and need to fund a longer retirement.
2) "fixed" investments are not that fixed any more.
4) many "retirement plans" (lifestyle/glidepath etc) are designed around a pre-2015 "big bang at 65 when you MUST use it all to buy an annuity. And it had better not have fallen".
These typically phase out equities to zero by retirement.
3) This thinking is IMHO obsolete but still very present. I think the investment industry needs a major re-look at the topic of investment DURING retirement - which is likely to be longer than investment before retirement.

Here is a thought experiment for you.
We are told that for "safe" use of equities we should invest for ten years.
You retire at 65.
You need to plan for the pension pot to last thirty years.
Split this into three pots: now, ten years and twenty years.
So: 66% equity is indicated?
Note: use of integral calculus would be interesting here.

BLB53

use of integral calculus would be interesting here

... was following up to this point...

Reluctantpensioner

use of integral calculus would be interesting here

BLB53 wrote: »

... was following up to this point...

Ignore that bit, doesn't add anything.

Yeah sorry about that, memories from math class from 40 years ago.
My "experiment" split retirement into 3 ten year chunks. You could also split into 6 five year chunks, 30 one year, etc ... The result would get more accurate (but more complex to calculate) as you did.
Integral calculus could give you an answer assuming each period was infinitesimally small.
(As I said, c. 40 years ago, I know the process to use but couldn't actually do it now).

username12345678

For me the answer was to be honest with myself about how much in £ I could accept losing from my SIPP without it causing undue stress.

From there I worked on the average bear market peak to trough of around 35% (2000-03 and 07-09 were closer to 50% in real terms) and structured my equity/fixed income ratios accordingly.

I'm sat around 50% equities, 25% fixed income, 10% absolute return, 10% cash, 5% property.

To put that in to context i'm 45 but will be more than happy with 3% withdrawal rate on current balance so i'm not looking to shoot the lights out.

Alexland

username12345678 wrote: »

For me the answer was to be honest with myself about how much in £ I could accept losing from my SIPP without it causing undue stress.

Another idea would be to try and have sufficient excess wealth in retirement that it wouldn't matter if your portfolio halved as it wouldn't affect you living standard. I assume that's how Warren Buffet can afford to have such a high equities allocation at his age.

Alex.