90-100% equities for those already retired

chucknorris

David_66 wrote: »

I’ve just been reading this post https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/

People on the forums generally seem to go for an equity mix something like VLS60 when they are retired rather than VLS100 as the much higher volatility of VLS100 means that when the next crash happens it would tend to drop a lot lower and so you are eating into your capital more as you withdraw for those years before it recovers.

Don’t the examples in the link show that over 30 years VLS100 would still work out better for a retiree than VLS60 as the increased performance over time would more than make up for withdrawals eating into capital during a market crash, even if the crash happened early on after retirement.

The problem is that during the 30 years of retirement:

1. Your ability to invest further after a correction (and take advantage of lower prices) is going to be almost non existent, so you are simply stuck waiting for a recovery when a correction occurs.

2. Whilst waiting for the recovery you are going to have to sell units at a much lower price to use for retirement income.

I'm not a bear, I spent decades being all in on investment property, then I started investing in equities. But now that I am 60 years old I have started investing in bonds, because as I describe in 1 above, my ability to invest after a correction is limited (and will worsen as I age). It makes more sense for me now (at my age) to start diversifying into less less risky investments. But I will still hold some investment property and more in equities as well as bonds to maintain portfolio diversity.

MK62

David_66 wrote: »

The VLS100 lost 14% of it’s capital whereas VLS60 only lost 9.3% and is now £14,000 better off than VLS100, the question is will the likely higher returns of VLS100 in-between crashes more than make up for that 4.7% £14,000 difference over a period of 30 years, If I’m reading the article linked in my original post correctly the author is suggesting it’s very likely it will unless there are crashes a lot longer or more frequently than there have been historically.

Interesting, and it illustrates the point, but it is unlikely that there will be only one "crash".........may only be one of that magnitude, but there'll likely be others.

The bottom line is that, sat here today, we simply don't know if VLS100 or VLS60 will win "the race" in a drawdown scenario......the timing of that 50% crash would be important, so could the time taken to recover from it - the impact from it happening in say year 2, would be greater than in year 28.......and there is simply no way to predict that today.

Personally, I think it would be more prudent to plan for an early occurence, but that does run the "risk" of missing out on potentially higher returns......probably the circle most investors struggle to close really.

Prism

I generally agree with the article and plan to follow a similar allocation. Also, at times (like now) holding cash isn't a bad thing and can be used in combination with or instead of bonds. Gov bond yields are lower than savings accounts at the moment. Saying that, its still possible gov bonds will price even higher if there was an equity crash.

David_66

MK62 wrote: »

Interesting, and it illustrates the point, but it is unlikely that there will be only one "crash".........may only be one of that magnitude, but there'll likely be others.

Yes I'm presuming there will be multiple crashes during that 30 year period as there have been in the past.

Does the linked article show that even with those multiple large and small crashes historically even if you went into drawdown retirement just before a major crash you would have been better off over the 30 years with 100% equity compared to 60%?

MK62

Does the linked article show that even with those multiple large and small crashes historically even if you went into drawdown retirement just before a major crash you would have been better off over the 30 years with 100% equity compared to 60%?

Its unclear tbh......you'd need to analyze the actual data, rather than a couple of graphs......and then translate for a Sterling based investor......

To get a real feel though, you can't just focus on the fact that "on average" you might have been better off in 100% equities......you also need to understand the times you wouldn't have been, and how badly you'd be affected if caught in a similar failure scenario.......For instance, as a stress test, see how your portfolio would have fared if you'd retired in 2000 using 100% equities vs 60%.........

PS.....that's not as easy as it sounds.....

PPS....the article was written in 2017, and considers 30yr periods, so the latest retirement date it considers is 1987......which puts the dotcom crash in the middle of the period, and the GFC crash in the latter part, following a very benign first 12 years......if those two events had happened in the first decade, the end result might be quite different.......

Thrugelmir

Prism wrote: »

Saying that, its still possible gov bonds will price even higher if there was an equity crash.

Government bonds will also price higher if interest rates were to fall further.

gm0

MClung book good on this. Shows 100% not optimal. Also that 40%-60% is likely too low for long retirements to be optimal. You don't have to buy into his "prime harvesting" management idea to use the SWR, equity % and failure comparison rate tables. US and international data sets used. Variable income strategies assessed.

Use of flexible income and other buffers don't "solve" sequence of return risk but they mitigate it relative to scenarios modelled on a fixed indexed income and forced sale of equities rain or shine. It's *very* dependent on how hard you need to push the SWR vs portfolio size for must have and desired income.

We all need to take a position (but not necessarily once and done for 40 years) on income, asset mix and approach, extraction approach. Market cycles, current strange world of QE (long lived but not necessarily a new normal for 40 years from now). I don't own many bond funds. I *should* own more based on my emerging thinking on where I should be vs where I am.

SonOf

The data for equities is for the US stockmarket so it does not follow that an investment in VLS 100 (which is global and significantly overweighted to the UK) will perform similarly. Most markets have performed worse than the US historically, and it is entirely possible that the US market may not perform as well as it did in the past.

This is worth noting for several reasons.

1 - For much of the 20th century, the US was largely seen as an emerging market. So, it had the growth that went with it. That is not the case any more.
2 - In the previous cycle, the US underperformed global equities. It is not uncommon for the next cycle to see the underperformer be one of the better performers. And that has happened.
3 - It is extremely rare for the top performer in one cycle to be the best in the following cycle. So, looking forward, you would expect the US to not be as good as it has been (still crystal ball gazing but a reasonable expectation).

For the UK, investors in global assets have done well in recent times due to the fall in sterling. When Sterling rises again, that will create a drag on global assets. You are already seeing fluid asset models starting to increase their UK allocations again.

People on the forums generally seem to go for an equity mix something like VLS60 when they are retired rather than VLS100 as the much higher volatility of VLS100 means that when the next crash happens it would tend to drop a lot lower and so you are eating into your capital more as you withdraw for those years before it recovers.

The average UK consumer is cautious. They want maximum return with minimal risk. In VLS terms, that is VLS40 or VLS60 for most.

When drawing an income from the investments and no longer making contributions into it, then the risks of a negative period increase significantly compared to someone in the growth phase who can increment the investments and take advantage of the drops.

e.g.
4% of £100k is £4000
Stockmarket crash of 40% on £100k brings the value down to £60,000. Taking £4000 p.a. from £60,000 is 6.67% income. So, if you are drawing that amount a year, you are not leaving much left over for recovery. And to recover from say a 50% drop, you need a 100% growth after.

The average UK consumer just cannot afford to have that level of drop occur on their income-producing assets. Whereas a growth investor not yet drawing but still contributing can really benefit from the drops.

There is also the assumption that the investments will recover from the drops. They may not do. They may take a decade or more before they start to recover. So, drawing 6.67% instead of 4% means that the capital value starts to drop. If the recovery is not quick then the capital erosion would continue beyond the size of the market falls and start a spiral of erosion that can never be recovered.

IanSt

MK62 wrote: »

Interesting, and it illustrates the point, but it is unlikely that there will be only one "crash"....
...
...
Personally, I think it would be more prudent to plan for an early occurence, but that does run the "risk" of missing out on potentially higher returns......probably the circle most investors struggle to close really.

I've always been 100% equities on my investments but have also always been a saver.

I'm now retired and the cash is now approx 30%, whilst the other 70% is invested across the globe in equity funds.

We do have some small db pensions to look forward to and later the state pensions, but until they start our intention is to mainly live off the dividends from our investments and the interest coming from the various accounts our cash is in.

If there is a crash then hopefully the dividends will not fall as much and so we won't need to eat too much into our cash and selling off any of the funds would be an absolute last resort , but I realise that we are lucky in having a lot of cash that we could live off for several years and most others will not have that luxury.

MK62

SonOf wrote: »

If the recovery is not quick then the capital erosion would continue beyond the size of the market falls and start a spiral of erosion that can never be recovered.

For a real life example of that, just at the effect of retiring in the year 2000......admittedly a worst case for recent times, but nevertheless, it happened.

If someone retired next year, and suffered a similar sequence of returns, a 100% equity strategy would wreak havoc with any retirement plan (unless it was a very short one).
This is the problem with basing any plan just on averages - it's easy to forget that half the time things work out worse than average, sometimes much worse, and it's also easy to overlook that, with a withdrawal plan, you can have two identical averages over a period, where the outcome is actually radically different due to the sequence of the returns.

Bottom line is that it's impossible to say today whether a 100% equity strategy will actually result in a better outcome over a long period.....it might, but let's not kid ourselves that it's not a relatively high risk strategy.

The upside might be a nicer car, or an extra star on the holiday hotel etc, but the downside might be total disaster..........