How to Diversify in current climate

GBY

I’ve been looking to reduce my exposure to equities within my DC company pension as retirement should be between 15 to 20 years away. Much of my research has been on this site, Monevator and reading the books by Tim Hale and Lars Kroijer, over-simplified summary would be world tracker for growth and bonds/gilts for defence/conservation in variable proportions, perhaps some REIT thrown in.


That’s all well and good but bonds and gilts have been unnatractive in recent times and have a pessimistic outlook, according to what I've read. Staying overweight in a world tracker is not desirable if there is a correction or crash with only 15-20 years to go.


I want to keep life simple but the choices don’t seem to be as clear cut as when these books were written and it’s hard to decide upon a suitable mix for growth and preservation should any downturn last a long period.


I wonder how many others are struggling to find a comfortable balance.

[Deleted User]

Both stocks and bonds are unlikely to offer the kind of returns we have seen in the last 10 years. Interest rates can’t go down much further, which hurts outlook for bonds. Stocks are trading at high multiples by historic standards so also hard to see the multiples going up.

Having said all this, the world economy is growing. Returns from stocks and bonds might be lower but better than the alternatives. Stay the course.

grnglide

In 15 to 20 years do you expect to purchase an annuity or convert your entire to cash?


If the answer is no then leave it pretty much the same.


15 years ago purchasing an annuity would have been pretty much a no brainer, why are you assuming you can see what the future pensions landscape will be?

Malthusian

If there's a correction or crash with 15 or 20 years to go then the correction or crash will be virtually irrelevant.

In addition, unless you are planning to use the fund to buy an annuity when you retire (which is currently very niche), your investment timeframe is hopefully 40-50 years, not 15-20.

SonOf

How to Diversify in current climate

What is the current climate that you refer to and how does it compare to others?

That’s all well and good but bonds and gilts have been unnatractive in recent times

Have they? Whilst high yield bonds and corporate bonds are not overly attractive, gilts haven't been at all bad.

Staying overweight in a world tracker is not desirable if there is a correction or crash with only 15-20 years to go.

In 15-20 years you are likely to see three or four crashes. In reality, as covered higher up, you are likely to be invested for a much longer period and will see plenty of crashes.

I want to keep life simple but the choices don’t seem to be as clear cut as when these books were written and it’s hard to decide upon a suitable mix for growth and preservation should any downturn last a long period.

In the accumulation phase (pre-retirement), downturns are a good thing to occur. You shouldn't view them negatively. In the decumulation phase, (post-retirement) most people reduce risk a little and play the long game.

Most crashes recover inside of a year. You wont know when they are coming or when the downturn is ending. Most likely you will reduce risk far too early and go back in too early or too late and end up in a worse position compared to had you just remained invested and come out the other side.

There is also the issue that its really only the US that is above long term averages and even then, the PE ratios are not screaming "large crash". A recession does not always equate to market downturns. And a crash is not always sudden. And there doesnt have to be a crash following negativity. It could just stagnate.

as you cannot predict, you should just stick with diversification that fits with your attitude to loss and your capacity for loss (too many forget the latter)

I wonder how many others are struggling to find a comfortable balance.

Not many at all.

GBY

grnglide wrote: »

In 15 to 20 years do you expect to purchase an annuity or convert your entire to cash?


If the answer is no then leave it pretty much the same.


15 years ago purchasing an annuity would have been pretty much a no brainer, why are you assuming you can see what the future pensions landscape will be?

Thanks for your comments, most likely drawdown in which I'm looking at a longer period but only 15-20 years of accumulation. I'm not assuming I can see the future pensions' landscape, quite the opposite.

GBY

SonOf wrote: »

What is the current climate that you refer to and how does it compare to others?


Have they? Whilst high yield bonds and corporate bonds are not overly attractive, gilts haven't been at all bad.



In 15-20 years you are likely to see three or four crashes. In reality, as covered higher up, you are likely to be invested for a much longer period and will see plenty of crashes.



In the accumulation phase (pre-retirement), downturns are a good thing to occur. You shouldn't view them negatively. In the decumulation phase, (post-retirement) most people reduce risk a little and play the long game.

Most crashes recover inside of a year. You wont know when they are coming or when the downturn is ending. Most likely you will reduce risk far too early and go back in too early or too late and end up in a worse position compared to had you just remained invested and come out the other side.

There is also the issue that its really only the US that is above long term averages and even then, the PE ratios are not screaming "large crash". A recession does not always equate to market downturns. And a crash is not always sudden. And there doesnt have to be a crash following negativity. It could just stagnate.

as you cannot predict, you should just stick with diversification that fits with your attitude to loss and your capacity for loss (too many forget the latter)


Not many at all.

Thanks for the reply. Current climate would be one where equities are overpriced and likely to drop, bonds unattractive. Clearly I need to research gilts more.


I agree a downturn is good for accumulation but this assumes a recovery within an acceptable period for one's needs and no-one can predict the future.


Whatever the time frame a 100% equity fund, albeit diverse world tracker, may be too much of a risk and it strikes me it's more difficult to decide on how to diversify into other assets than it may have been a couple of years ago. I'm surprised you think there not many others with a similar view, I am writing as lay person with regard to finance.



I would turn to a good IFA if I could find one, rather than DIY, but past experiences have been very disappointing.

AnotherJoe

GBY wrote: »

I agree a downturn is good for accumulation but this assumes a recovery within an acceptable period for one's needs and no-one can predict the future.

If you dont think that over accumulation of 15 years and then decumulation of say 25 years, the markets wont be higher than now, you shouldn't be investing.

to_and_fro

The chatter about both equities and bonds being overpriced is just that, and it's better to tune it out.

Nobody really knows whether returns will be poor over next 10-15 years starting from today. The last 10 years have been very good to investors — better than historical averages. Just as a baseline assumption, I'd expect lower returns over the next 10. But there's a huge range of plausible outcomes for future returns, as there always is. As investors, we always have to live with that kind of uncertainty.

There are always reasons to worry about future returns. A saying is: the market climbs a wall of worry. I.e. some of the things the market is worrying about may not turn out so bad, and then it may rise. (Or it may find new things to worry about.)

Gloomy predictions are very popular. People love saying that QE is unprecedented, and something new and awful is bound to result from it (though the story about what and when is a bit shifty). If people were saying that everything would be wonderful from now on, and "this time it's different", we'd be laughing at them, because finance always goes through busts as well as booms. But when people put a negative slant on "this time it's different", we let them get away with it!

Diversification still works. Bonds still do the job of making a portfolio less volatile than 100% equities.

SonOf

. Current climate would be one where equities are overpriced and likely to drop, bonds unattractive. Clearly I need to research gilts more.

What makes you think equities are overpriced when there is only one mature economy that has PE ratios above the long term average? - yes that is one measure and there are signs the global economy is slowing but that doesnt in itself mean a crash is coming.

Whatever the time frame a 100% equity fund, albeit diverse world tracker, may be too much of a risk and it strikes me it's more difficult to decide on how to diversify into other assets than it may have been a couple of years ago. I'm surprised you think there not many others with a similar view, I am writing as lay person with regard to finance.

I am writing as an IFA that has been investing for over 25 years. Been through many crashes. Two of which much bigger than the typical. Investing today is no different from other times in that period.

The average UK consumer is considered cautious and would not have an equity content higher than 40-60%. It is very common for DIY investors to invest with a higher equity level than advised investors. Most advised investors sit and their risk level and dont try and time markets. Much the same as experienced DIY investors. Its mainly inexperienced investors who try and time and it usually ends up in getting less overall return than just sticking with your risk profile and rebalancing.

If you are trying to build your own bespoke portfolio and are using fluid allocations instead of static then you expect the allocations to adjust over the cycle. However, you generally find the split between fixed interest securities, equities and property tend to remain in a similar ballpark. it is the sectors within those that change a bit more. Earlier in the cycle, the fixed interest security allocations were heavier in high yield bonds and corporate bonds and less in gilts. Now they are the other way around. With periodic rebalancing to the new weightings, you take advantage of the ups and downs.

Some people stick with fixed allocations through thick and thin and rebalance to those. This requires less knowledge and experience than fluid allocations and is viable if you have sensible allocations and rebalance.

You can get multi-asset funds that work to both methods which can totally take it out of your hands if you are not comfortable. However, one of the worst things you can do is go up and down the risk table on the whim of media coverage that is wrong more than it is right.

[Deleted User]

Current climate would be one where equities are overpriced and likely to drop, bonds unattractive. Clearly I need to research gilts more.

Gilts are a type of bonds. It’s a fancy British term for good ol’ government bonds. One would expect more safety but lower long term returns from gilts compared to corporate bonds. At times of major downturns these tend to shine as everyone rushes to safety.