Balancing Equities / Bonds

bowlhead99

Alexland wrote: »

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.

He has $50-100bn, so he could lose 99.99% of it and still be fine.

On the topic of equity vs bond allocation, he's got in his will that most of his Berkshire shares will be sold off for (or just given to) charities or foundations after he croaks. But famously mentioned in his 2014 investor letter that for the residue left to his wife, he's left instructions for his wife's trustees to put 90% in index funds and 10% in bonds.

He's said that this is what a 'very high percentage' of people should do too. As he says, there's no way in the world if you've got plenty of money, you should let it be a minus in your life and fret over fees needed for wealth managers and advisers, and high brokerage commissions, and leeches knocking on your door for a piece of your pie.

Sure, that's fine if you've got enough wealth to not struggle or panic no matter what happens in the bad times for the economy or the markets.

The US outlook, which is why they're perceived as the most capitalist place on earth, is that everybody is either actually deservedly wealthy, or merely a 'temporarily disadvantaged millionaire' or whatever. If you're poor, it's embarrassing to admit it's your fault and that you couldn't be a millionaire in the end if you worked hard at it in the land of opportunity. So, people aspire to be a Buffett, and they swallow up the advice that riding a high equities rollercoaster is just fine as a wealthy person (or someone who probably deserves to be wealthy, which many middle classes feel they do).

Buffet later added some colour to his headline-making statements on indexing his wife's future and keeping it away from the advisers who might just see dollar signs when hearing she inherited a fortune:

"She's going to have more money than she needs", Buffett said. "The big thing you want is for money not to be a problem. And there's no way, if she holds the S&P -- or virtually none, absent something happening with weapons of mass destruction -- she [won't] have all the money she can possibly use."

That's all very nice, but copying the game plan of millionaires who already accumulated a fortune is not a copyable strategy for most, and we're not destined to have more money than we need. Especially when we all know Buffet didn't get his fortune from passively tracking an equities index with a token bond holding; he's one of the most famous active investors of the last fifty years.

Buffett doesn't care about potential huge drops caused by the market because he/ wife have more than they need. Even suggesting as much as 10% bonds is just a bit of a sop to those who would call him irresponsible if he'd said 100% equity was as normal and just as reasonable as a lower level of equities over the long term for the man on the street. But really the man on the street is probably ill-prepared for the volatility that 90% in equity offers.

It's difficult to assess what mix of equity vs bond is really reasonable for long term investment from current valuations. I tend to think that measuring your total risk on a bond percentage is overly simplistic - we know that over multi decade periods, bonds can't compete with the potential returns of equities: fixed income investing doesn't properly stand up to the ravages of inflation. So there is a case for having only a low bond allocation. But being equities-only can see you lose half your capital over a year or two, and very few are prepared to go through that unless they're *really* confident in their retirement plan.

We all have our own level of risk and return we look for, and between one person and another we have different perceptions of how to assess risk of a particular equity/ bond mix anyway. But we can do the maths and prove out that you can add some bonds to an equity portfolio, periodically rebalance, and end up with similar returns that you'd have got without introducing the bonds - while your volatility is improved. After a certain point you start to significantly erode the potential returns.

It can be useful to read and research where the 'efficient frontier' may lie and what you perceive to be your target level of risk and reward. The one thing I'd caution against, is taking all your cues from wealthy people.

That sounds silly, because wealthy people clearly did something right and maybe you can learn from them. But you have to accept that they made their money over different economic conditions than you did and may have achieved their wealth with returns that are no longer on the table. You may set yourself up for a fall if you aim to duplicate their achievements in a different time period, and copying a portfolio which works great for someone who's never going to run out of money, can produce some scary results.

BLB53

Buffett doesn't care about potential huge drops caused by the market because he/ wife have more than they need

...and I guess he has been able to accumulate this vast wealth because he had the temperament to stay in the game and not to care when there were huge drops in the markets...

kidmugsy

One retirement investment strategy would be that late in your career you become a government employee and build up a bit of DB pension. I've never seen the possibility discussed.

Do government-sector DB schemes commonly allows transfer-in of DC pensions? That might also be a way of outmanoeuvring the Lifetime Allowance for pensions, depending on the terms for transferring in.

Thrugelmir

Alexland wrote: »

I assume that's how Warren Buffet can afford to have such a high equities allocation at his age.

Berkshire Hathaway moved into the insurance business over 50 years ago. It was this that gave him the fire power to start taking strategic stakes in Companies. With the obvious abiliy to invest for the long term.

bowlhead99

kidmugsy wrote: »

One retirement investment strategy would be that late in your career you become a government employee and build up a bit of DB pension. I've never seen the possibility discussed.

IIRC a few forumites have done it usefully, without naming names we have had comments from people before about moving into university lecturing or government work in later life after jacking in an earlier career, as an alternative to retiring.

Getting a few years at premium salary on an FS scheme to bolster one's guaranteed income can be useful. If it's a career average salary rather than final salary scheme, the people in early stages of their career are penalised as they have rather a lot of those early cheap years, while the move to career average DB can be relatively more useful to those who only work under the scheme at the tail end of their career, banking the highest salary years having been recruited as a seasoned pro.

Do government-sector DB schemes commonly allows transfer-in of DC pensions? That might also be a way of outmanoeuvring the Lifetime Allowance for pensions, depending on the terms for transferring in.

Without looking at the small print of all schemes, the chance to join a new organisation and "buy in" to X years worth of service qualification under a DB program for fat cash, does seem to be discussed from time to time on the pensions board.

Alexland

bowlhead99 wrote: »

Without looking at the small print of all schemes, the chance to join a new organisation and "buy in" to X years worth of service qualification under a DB program for fat cash, does seem to be discussed from time to time on the pensions board.

Yes we see it discussed but its a shame there is no published 'best buy' table of short term government jobs where you can transfer in a large DC pot for significant DB benefit!

Alex

kidmugsy

Alexland wrote: »

it's a shame there is no published 'best buy' table of short term government jobs where you can transfer in a large DC pot for significant DB benefit!

Show us your entrepreneurial spirit!

C_Mababejive

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.

But there is a time to cut and run. EG RBS shareholders...but then by the time the small PIs got a whiff of danger, the big money had dumped their shareholdings..