What % of your portfolio are active vs passive funds?

Linton

MaxiRobriguez wrote: »

Yes it is isn't it. Well done me. Sigh.

But the original point still stands in that investors with a very long term horizon should ignore short term volatility when it comes to choosing investments. Selections should be based on growth potential.

That sounds logical but particularly when ones investment returns become exceed ones contributions emotion becomes important. The ability to sleep soundly at night is worth something as is the warm fuzzy feeling you get when you realise that no matter what, the stress of work does not really matter.


The largest risk to investors is themselves so you need to understand your own psychology and dont put it under pressure.

bowlhead99

MaxiRobriguez wrote: »

But the original point still stands in that investors with a very long term horizon should ignore short term volatility when it comes to choosing investments. Selections should be based on growth potential.

Picking something with sufficient growth potential rather than on maximum growth potential, is what would lead someone to invest in something other than the maximum volatility option.

The slide from long term to short term in 'how long until I need to access the proceeds' can be quite gradual and at some point may catch you by surprise when you notice how little time you have left.

Simplistically, at some point you'll say: "hmm, I started on this long term 25 year path, 15 years ago. Now there is only 10 years left. I should not be in the riskiest asset class. Let me dial down the risk now. But if you are in volatile assets such as a global equity fund, which can crash 60% over a year or two from peak to trough, it is somewhat haphazard whether that point fifteen years from now is one where you have £1,000,000 or £400,000, or something in between, even though the average is £700k.

If you're not actually at the extreme when you make the switch, perhaps you may be going into your 'safer' phase with £500k or £900k to play with, which feel like radically different positions. If what you actually need to feel comfortable with that phase of your life is a start point of £600k, you might be better looking at a blend of returns which gives you extreme positions of £600 to £700k rather than £400-1000. It's a worse return on average, but more 'suitable'. This is because in that scenario you would see 400 or 500k as real failures and with only ten more years to go, may feel it was no longer appropriate to have all your money in highest risk assets to chase the return you had hoped to get, so might need to settle for that low end of the scale, which was unexpected but not impossible.

In other words, what seem now like open ended long term investing plans with no particular targets, can perhaps be modelled and honed until you pick somewhere on the efficient frontier that you are ok with, rather than shooting for the moon.

bostonerimus

Linton wrote: »

In my case being retired the objective is to achieve a particular income for the rest of my life. I choose to put nearly 30% of my money into a wealth preservation portfolio that I intend to match inflation with a low chance of returning significantly more or significantly less. Increasing my income beyond the objective would not increase my happiness because I would have nothing worthwhile to spend it on. Failing to meet the objectve would cause major unhappiness. So decreasing the Wealth Preservation % to provide a higher return would be irrational even if it meant ending up with a larger estate on death.

Asset allocation in retirement has to be tailored to personal circumstances. Linton needs to protect some money from the worst of market conditions, as most people do, and so uses a "wealth preservation" fund. My "wealth preservation" strategy is that I have a DB pension and a rental property so I can be quite aggressive with the rest of my portfolio. I do keep a couple of years spending in cash for cash flow purposes and so that if I have a large expenditure I don't have to sell into a down market to cover it.

to_jackie_too

MaxiRobriguez wrote: »

The equity/bond split made sense when bonds were very profitable. They're not anymore. Multi-decade investors therefore should be looking elsewhere.

You're making a prediction here: low returns from bonds over a multi-decade period starting now.

Or perhaps that should be: much lower returns than equities for bonds over a multi-decade period starting now.

Either way, the problem is that you may well be wrong.

Long-term bonds could go even higher if interest rates go even lower (including going negative).

OTOH, short-term bonds could give higher returns than their current yields to maturity, because if interest rates rise, then short-term bonds can be rolled over when they mature into new short-term bonds which will yield more.

Then again, bonds generally may indeed give low returns over the next few decades, but equities may do as badly as bonds, or worse. In any period in which equities and bonds give similar returns to one another, a portfolio which includes both, and is regularly rebalanced back to a defined allocation, may well have higher returns than either equities or bonds do by themselves.

Or at least: not much lower returns, and with much lower volatility. And lower volatility doesn't only help psychologically: as bowlhead has said, it also makes a portfolio less vulnerable to sequence-of-returns risk when it starts to be drawn down (e.g. in early retirement).