90-100% equities for those already retired

shinytop

I'm far from being an expert or even particularly knowledgeable but whenever there is discussion of safe withdrawal rates or risk tolerance there is always talk of the the next big crash and the fact that one is due every 20 years or so. But the world has changed a lot since the dotcom crash and even since the noughties financial crisis. And it's definitely different to the 1880s. Why are we trying to predict what will happen based on on financial data from the 19th century? What if we don't have 50% crashes any more but instead several smaller drops over a couple of years or even just a long periods of slow growth instead. Would that make a difference to the analyses?

In 1950 we might have predicted a munitions-based world war in 10 years time based on history. Although we nearly got one it didn't happen and probably won't now. The world is still in conflict but it's a completely different sort of war now.

seacaitch

MK62 wrote: »

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..........

And that's the thing: retirees are often trying to avoid really bad outcomes (running out of money) as opposed to aiming for the best possible investment returns:

At age 80, noting that your original £1M 100% equity pot is now fortuitously worth £5M is good. But perhaps not so good that it was worth the gamble, if that same risky asset allocation might've instead resulted in your £1M pot becoming £5k at age 80, had markets behaved differently during your retirement...

The unattractiveness of the latter possible outcome, does for most people, outweigh the appeal of the former possible outcome. ie. prudence reigns, and so a material allocation to "safer" assets is warranted.


Having said that, I think there are two smaller cohorts of retirees who might wish to own very high %s of risk assets (and thus very low %s, or no, 'safer' assets):

- those with very large pots vs their income requirements, ie. very low % withdrawal rates, for whom large drawdowns and poor sequence of returns are (barring societal collapse) not really a threat because their annual withdrawals are just a drop in the ocean of their very large portfolios;

- those with insufficient pots vs. their income requirements, ie. high withdrawal rates, who "need" to generate high returns in order to meet their goals; clearly, the aspirations of this group are imperilled by large drawdowns and sequential risk. So not really recommended - better to save more or retire later if possible than to "rely" upon unrealistically high returns.

danm

I like to plug some numbers into the start page at firecalc.




it is US based, but shows shhow for a given starting portfolio number ,drawdown amount and timeframe... you would acehive your desired drawdown over the time prescribed.... for each historical observed market path..... https://firecalc.com/

bostonerimus

Retirees with large pots compared to their income needs can certainly afford to take the risk of 100% equity. However, if 25% or even 50% fall in equity prices would deal a significant blow to your income plan then it's best to have some less volatile investments in your portfolio. The possible return on a portfolio is only one thing to consider, you also need to think about the standard deviation of that return and plan for a worst case scenario. Planning models take into account lots of combinations of historical data, but your plan has to work for one particular set of data, most of which you have no idea about.

Along similar lines is the concept of a rising equity percentage through retirement. That's a strategy I'm following as modelling with historical data shows that it has a greater probability of success than a fixed allocation. I started with a 70/30 asset mic and I'm now at 75/25 just because I've stopped rebalancing.

Linton

I agree with Seacaitch's post #23 completely. Yes, one may be likely to achieve a aomewhat higher estate value at death with 100% equity than with 60%. But why would one want to? 100% equity could well mean 50% loss of assets several times during retirement with the resultant stress and the possibility of significant variability in income. Is the inheritance for the beneficiaries worth this sacrifice?



I would only go for 100% equity in retirement with a tranch of money that was not essential for a comfortable life. My cautious investments at 35% equity are sufficient, alongside guaranteed income, to meet my wants (as opposed to needs) for perhaps 10 years.



The remaining money can then be 100% invested in equity with little worry about the next crash.

MaxiRobriguez

shinytop wrote: »

I'm far from being an expert or even particularly knowledgeable but whenever there is discussion of safe withdrawal rates or risk tolerance there is always talk of the the next big crash and the fact that one is due every 20 years or so. But the world has changed a lot since the dotcom crash and even since the noughties financial crisis. And it's definitely different to the 1880s. Why are we trying to predict what will happen based on on financial data from the 19th century? What if we don't have 50% crashes any more but instead several smaller drops over a couple of years or even just a long periods of slow growth instead. Would that make a difference to the analyses?

In 1950 we might have predicted a munitions-based world war in 10 years time based on history. Although we nearly got one it didn't happen and probably won't now. The world is still in conflict but it's a completely different sort of war now.

It's not necessarily the event that causes the crash, more that the event causes investors all at once to realise their assets aren't worth what they're currently selling for which prompts a rush for the exits.

And it's not hard to forecast another sizable crash when measurements are showing US markets are very expensive. If stocks continue to be bid up then we're just in the realms of waiting for a trigger, like an escalation in the trade war or an unexpected leap in inflation.

I think saying things like "things have changed" is folly. I'd go the opposite way and suggest nothing has been learned since the GFC.

Thrugelmir

shinytop wrote: »

I'm far from being an expert or even particularly knowledgeable but whenever there is discussion of safe withdrawal rates or risk tolerance there is always talk of the the next big crash and the fact that one is due every 20 years or so. But the world has changed a lot since the dotcom crash and even since the noughties financial crisis. And it's definitely different to the 1880s. Why are we trying to predict what will happen based on on financial data from the 19th century? What if we don't have 50% crashes any more but instead several smaller drops over a couple of years or even just a long periods of slow growth instead. Would that make a difference to the analyses?

In 1950 we might have predicted a munitions-based world war in 10 years time based on history. Although we nearly got one it didn't happen and probably won't now. The world is still in conflict but it's a completely different sort of war now.

There's a heavyweight book called "This Time Is Different: Eight Centuries of Financial Folly" by Reinhart and Rogoff. Countries have gone through periods of boom and bust for a very long time on a frequent basis. No reason to believe that anything is likely to change any time soon.

schiff

https://www.trustnet.com/news/7459299/the-six-biggest-bull-runs-since-1962-and-their-corrections?utm_source=Trustnet%20Newsletters&utm_campaign=b2c48b2d3c-EMAIL_CAMPAIGN_2019_10_30_12_19_COPY_01&utm_medium=email&utm_term=0_2314bd04ee-b2c48b2d3c-77606253

I found this an interesting read and it fits in with this ongoing discussion. At least for what has broadly gone on in the past.

bostonerimus

MaxiRobriguez wrote: »

And it's not hard to forecast another sizable crash when measurements are showing US markets are very expensive.

There will definitely be another crash - 100% certainty. The difficult bit is predicting when. We are definitely due one.

schiff

There will be some people well into retirement, residence mortgage free, no family responsibilities, ample money in the bank, living comfortably within their being paid out pensions and investment income, who could well be 'forgiven' for going for 80/100% invested in the market, rather than the 'safer' alternatives. And the figures don't have to be large, we are not talking aristocrats!

The main black cloud of course - going into care.