Don't multi-asset funds have an inherent flaw?

MaxiRobriguez

londoninvestor wrote: »

You can find a good few presentations of the idea, but here's one:
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

This one looks at the effect of both "active" strategies (increasing allocation only when prices are low") and "passive" (increasing allocations steadily according to a predefined strategy). (NB that doesn't mean investing in active vs passive funds.)

I'm not fully convinced, but there has been a fair amount of research indicating this is a useful strategy.

Thanks.

I tend to think about retirement needs as reducing risk, whereas early stage career is about creating growth. There's two main risks with retirement: Early wipeout, and living longer than you budgeted for. I can buy the concept of increasing equity allocation to protect against the latter but logically would seem to increase former risk, especially when all metrics are flashing warning signs at the moment?

In a normal market, I suspect the answer lies not in moving majority allocation from equities to bonds as approaching retirement, but to build and then maintain a 3-5 year cash allocation, using equity growth to top up what you take out to live off. I would not be comfortable with 100% equities in retirement if that was my retirement living money.

Thanks for the link though, I will research the research!

Audaxer

trustab wrote: »

Given the huge popularity of multi-asset on these forums, I guess I must be missing something. What is it?

I think if you had £100k invested with 60% in a VLS100 and 40% in a Vanguard Global Bond Index fund you could maybe achieve the same as £100k invested in a VLS60. The difference is that it wouldn't be automatically rebalancing every day like the VLS60. Say after a year the VLS100 had fallen 20% and the Bond fund had risen 2%, your portfolio would have fallen 10% to £90k. However due to the VLS60 constantly buying back the equities as they were falling in price I'm not sure whether that would result in the VLS60 falling more or less than 10%?

masonic

Audaxer wrote: »

I think if you had £100k invested with 60% in a VLS100 and 40% in a Vanguard Global Bond Index fund you could maybe achieve the same as £100k invested in a VLS60. The difference is that it wouldn't be automatically rebalancing every day like the VLS60. Say after a year the VLS100 had fallen 20% and the Bond fund had risen 2%, your portfolio would have fallen 10% to £90k. However due to the VLS60 constantly buying back the equities as they were falling in price I'm not sure whether that would result in the VLS60 falling more or less than 10%?

Infrequent rebalancing can often magnify gains during rising markets and reduce losses during falling markets. However, it does so by shifting your asset allocation to either increase or decrease your exposure to risk respectively.

Since you can't know what's going to happen next, waiting to rebalance for this reason is not a rational decision.

Audaxer

masonic wrote: »

Infrequent rebalancing can often magnify gains during rising markets and reduce losses during falling markets. However, it does so by shifting your asset allocation to either increase or decrease your exposure to risk respectively.

Since you can't know what's going to happen next, waiting to rebalance for this reason is not a rational decision.

If rebalancing every 6 months or annually does magnify gains during rising markets and reduce losses during falling markets, would that not be more beneficial than having a multi asset fund? I think most investors with single sector portfolios are advised to rebalance that way.

Tom99

Audaxer wrote: »

I think if you had £100k invested with 60% in a VLS100 and 40% in a Vanguard Global Bond Index fund you could maybe achieve the same as £100k invested in a VLS60. The difference is that it wouldn't be automatically rebalancing every day like the VLS60. Say after a year the VLS100 had fallen 20% and the Bond fund had risen 2%, your portfolio would have fallen 10% to £90k. However due to the VLS60 constantly buying back the equities as they were falling in price I'm not sure whether that would result in the VLS60 falling more or less than 10%?

[FONT=Verdana, sans-serif]In order for £100k to fall 10% to £90k if the 60% equities fell 20% to £48k the bonds would increase 5% to £42k.[/FONT]
[FONT=Verdana, sans-serif]If VLS60 balance only once at the end then £6k of bonds would be sold for £6k of equities resulting in £54k equities and £36k bonds, total £90k in 60/40 ratio.[/FONT]
[FONT=Verdana, sans-serif]But if the fall and rise is constant throughout the period and rebalancing took place more than once then the end result would be that VLS60 was worth less than £90k.[/FONT]
[FONT=Verdana, sans-serif]The reason is that as the equities fall from their initial value of £60k they are constantly topped up with further equity purchases, at a lower price yes, but also at a price which continues to fall.[/FONT]
[FONT=Verdana, sans-serif]With only the one rebalance at the end all the require equities can be bought at 48 whereas a constant rebalance would have bought equities at 58,56,54,52,50,48 etc all of which will end up only being worth 48. [/FONT]

Linton

Audaxer wrote: »

If rebalancing every 6 months or annually does magnify gains during rising markets and reduce losses during falling markets, would that not be more beneficial than having a multi asset fund? I think most investors with single sector portfolios are advised to rebalance that way.

It surely depends on the timescale of the boom or bust. If you rebalance during a boom you will then benefit during the subsequent bust. But you pay for it by missing out on extra returns until then. If you rebalance during a bust you will increase your gains in the subsequent boom but increase your losses in the meantime.



The argument against too frequent rebalancing is that you could be overtrading by continually reacting to minor temporary price variations so taking up your time and possibly increasing your costs to little benefit. It would be better to rebalance whenever your allocations move more than some predefined %. However it is probably easier to remember to check on a fixed date.



The purpose of rebalancing isnt to maximise your returns but rather to control your risk. If you wanted to maximise your return you would go for 100% equity. Rather having decided at some point that say 60% equity is right for you surely it is logical to avoid letting the allocations drift to 70% equity. If you were to be happy with 70% equity why go for 60% equity in the first place?

londoninvestor

Linton wrote: »

The argument against too frequent rebalancing is that you could be overtrading by continually reacting to minor temporary price variations so taking up your time and possibly increasing your costs to little benefit.

Yes, and the multi-asset fund has much lower trading costs as a % of its assets - so it makes economic sense for it to rebalance more frequently.

londoninvestor

MaxiRobriguez wrote: »

I can buy the concept of increasing equity allocation to protect against the latter but logically would seem to increase former risk, especially when all metrics are flashing warning signs at the moment?

So the rationale that researchers tend to quote is that you want a lower allocation at the start of retirement to mitigate the risk of a bad few years, but later you want more equities to capture the long term return and ensure your portfolio isn't dragged down by a lower equity allocation.

This needs a deeper dive though. (Hence why I say I'm not convinced.) The obvious rejoinder is that if you retire at (say) 50, and you should drop your equity allocation to (say) 60% because a higher allocation means you might have run out of money by the time you're 67... then why doesn't a higher allocation at age 70 leave you at the risk of running out of money by 77?

You would expect this "rising glide path" strategy to look good if, broadly speaking, periods of low returns alternate with periods of high returns. That's an intuitive attractive concept, but I do worry whether the results are distorted by the particular historical periods being looked at. (Counter-counter-point: all retirement strategy research really depends on some historical data.)

Now, a secondary reason might be that as you reach an older age, you're really thinking about how to maximise your children's wealth after you die, which again would make a higher equity allocation sensible, since your timescale becomes longer. However, that's not the only reason proposed for doing this. If you look at the charts in the article I linked, the "rising glide path" scenario is also favourable when your "final value target" is zero, i.e. you don't care whether you leave any money behind you.

In a normal market, I suspect the answer lies not in moving majority allocation from equities to bonds as approaching retirement, but to build and then maintain a 3-5 year cash allocation, using equity growth to top up what you take out to live off

So I sort of see "non-equity", whether it's cash or bonds, as one asset class. And for most sensible asset allocations and withdrawal rates, it easily covers 3-5 years' spending. For example if you hold 80% equity and withdraw at 3.5% - which isn't particularly conservative - your non-equity assets add up to 20 / 3.5 = 5.7 years' worth of withdrawals.

bostonerimus

MaxiRobriguez wrote: »

Why do you want your equity allocation to rise as you get older within retirement?

There's been a few studies that claim that it optimizes risk and reward. The gist is that early in retirement you need a good cash and fixed income allocation to survive market down turns. As you get older and your money won't have to last as long you can afford to take more risk (ie have more equities) and that becomes a better strategy if you want to maximize your spending or legacy. I'm also lazy and a bit curious as to what will happen so I've simply stopped rebalancing.

nrsql

Another option aligning to your original post but utilising just the Vanguard lifestrategy funds:

Start off with the 100% equity fund in your younger days.
As you get older put more and more into the other funds. Eventually you will be investing solely in the 20% fund.
There are 5 funds so maybe move from one to the next each decade
This means you will be getting increased exposure to bonds without necessarily having to sell anything and the increased investment level as you age should take care of the balance.
When you do have a need to sell decide how much equity and how much bonds and choose the fund appropriately.
You could do a similar thing by using just the 100% and 20% and adjusting the percentages invested.

You might end up overweight in equities due to the growth of the initial investments in spite of the lower inputs but that could be reviewed.