Worst case investment scenario - what to do?

coastline

FinancialIdiot said:

Thanks for all replies. Can anybody help with the following question: in previous global stock market falls (where the fall was significant), what is the longest it's taken for markets to return to the previous high point? Has it ever been 10 years or more?

The link below of the SP500 is probably good enough to give you the general picture over 100 years. You can see there's been long periods of sideways movements and even lower. I  would imagine dividend payments aren't included in the chart so that would be something in your favour. It's possible to set the chart to various time periods but a quick view tells you there's always volatility. Regarding the pandemic I would imagine the lockdown is now over and any future lockdowns will be regional. It's cost a fortune as it is . As they say when one door shuts another one opens so you would think fund managers will be placing money where the future is brighter.
https://www.macrotrends.net/2324/sp-500-historical-chart-data
Just to give you an idea of recent events the link below shows the performance of a global equity tracker and your chosen VLS60. VLS60 didn't take the same hit as the 100% equity fund but still a fair slump. If you are concerned why not divide your £30,000 into amounts of £5,000 and drip feed. A 20% fall would result in a £1,000 reduction in value but you'd still have best part of your funds available. No easy answers really.
https://www2.trustnet.com/Tools/Charting.aspx?typeCode=NM990100,FACDO,FACDQ

FinancialIdiot

Malthusian said:

When do you plan to spend the money? I don't mean "in 10-15 years", I mean, what will it be spent on, what will the trigger point be that changes "in 10-15 years" to "now", what happens if the market is down at that time?

The purpose of the investment would be to help fund retirement, which should be reached in 10-15 years. Ideally the £30k invested now would produce maybe £100 per month throughout retirement or as close to that as possible if such a target can't be reached. At a push it might be possible to leave the money invested for 20 years but I doubt it could be left longer than that and there's no guarantee it could be left for more than 10 years (though that will probably be possible).

Thrugelmir

Malthusian said:

A classic "I know I shouldn't try to time the market but should I try to time the market?" post.

History has shown that if you enter the market at the worst possible moment you will still beat cash providing a) you don't borrow to invest b) you are sensibly diversified c) you truly invest for the long term. (Note: selling everything after 5 or 6 years is not investing for the long term.) Unless the world enters a new Dark Age or total economic collapse, and that is an apocalypse scenario, meaning it doesn't matter whether you invest or stay in cash.

There is no evidence that anyone can consistently beat the market via market timing.

Thrugelmir said:

Grenage said:

Thrugelmir said:

Grenage said:

Over that long period of time there was only a couple of percent difference.  

A couple of % compounded over many years could be a sizable amount of money. Who won the race. The hare or the tortoise? 

You are correct, it could well be.  I was merely trying to say that as one cannot time the market, the worst-case scenario in the long run isn't horrific.

No you cannot time the market. However it is not neccessary to remain fully invested. If you invest on the basis of company fundamentals rather than market indexes. Opportunities will arise. 

That has exactly the same problem as timing the market, namely that there is no evidence that anyone can consistently outperform the market by active management (= sitting on cash until they have identified good opportunities based on company fundamentals).

Which market are you referring to? There's plenty to choose from. 

Malthusian

FinancialIdiot said:

Malthusian said:

When do you plan to spend the money? I don't mean "in 10-15 years", I mean, what will it be spent on, what will the trigger point be that changes "in 10-15 years" to "now", what happens if the market is down at that time?

The purpose of the investment would be to help fund retirement, which should be reached in 10-15 years. Ideally the £30k invested now would produce maybe £100 per month throughout retirement or as close to that as possible if such a target can't be reached. At a push it might be possible to leave the money invested for 20 years but I doubt it could be left longer than that and there's no guarantee it could be left for more than 10 years (though that will probably be possible).

Without a drastic change in economic circumstances, you won't get £100 per month from an annuity of £30k (not with inflation increases and assuming reasonable health), so that suggests your actual investment timeframe is your lifetime, not just 10-15 years. You won't be spending all your money when you retire, you will be spending some of it but most of it will remain invested for the next year and the next and so on.

Are you hoping to spend your entire lifetime timing the market - staying in cash when the markets are at or near an all-time high but there are lots of things to worry about in the medium term (i.e. nearly all of the time) and investing at just the right moment?

How come you didn't invest all your money in March? It appears you've already missed the last big chance.

Thrugelmir said:

Which market are you referring to? There's plenty to choose from. 

The appopriate benchmark to use depends on the level of risk, however as far as globally diversified portfolios suitable for retail investors goes, there is no evidence that anyone can beat a global market-cap weighted index with a comparable risk level.

FinancialIdiot

Malthusian said:

Without a drastic change in economic circumstances, you won't get £100 per month from an annuity of £30k (not with inflation increases and assuming reasonable health), so that suggests your actual investment timeframe is your lifetime, not just 10-15 years. You won't be spending all your money when you retire, you will be spending some of it but most of it will remain invested for the next year and the next and so on.

Are you hoping to spend your entire lifetime timing the market - staying in cash when the markets are at or near an all-time high but there are lots of things to worry about in the medium term (i.e. nearly all of the time) and investing at just the right moment?

How come you didn't invest all your money in March? It appears you've already missed the last big chance.

Wow, that was unexpected.

Well, with regard to pension provision, I'm expecting to want certainty of income in retirement so I'm expecting to want to withdraw the money from the stock market and use it to either buy an annuity (if that's possible and depending on how much I would get) or possibly more likely just put it into a savings account so I can withdraw the amount I need each month. Either way I'm expecting to want to (or have to) take it out of the stock market after 10-15 years.

With regard to the sarcastic remarks about me trying to time the market, they do seem unfair and unnecessary. Why did you feel the need to do that - just because of my innocent observation that some people some of the time are able to use their judgement about future events to correctly time the market?

kinger101

I didn't detect any sarcasm.  If anything, the message was a little blunt.  But the points about annuity rates and market timing were entirely valid.  

Currently, £100K buys around £3,200 pa @ 65 as a single person lifetime annuity with 3% increase pa.  Annuity rates have been falling steadily, and if we've entered a new era of permanently low interest rates, it's difficult to see any improvement in the future.  Certainly on income will come at a price.

As far market timing, there's not a whole lot of evidence that anyone is any good at it.  The observation that some people can might just be probabilities.  50% of people will accurately predict which way a coin will land.  25% will predict correct twice.  And so on.  Is a person who calls correct 10 times skilled or lucky? You might think the comparison with coin-tossing isn't apt for the stock market, but a large number who've analysed markets in detail are convinced they are random, albeit with an slight bias to "up" days explaining the upward drift.

In the absence of purchasing an annuity, sticking the money in a investment account is actually quite risky.  Based on current interest rates, it's likely to lose at around 1% of it's spending power each year even if you find the best account.  The trick is finding the best split between assets to prevent the pot diminishing too quickly in your lifetime.  Nobody can say what this split is as we don't know future events (including our own demise), but based on historic data, all cash/equivalents and all equities are not sensible options.  

Thrugelmir

Malthusian said:

FinancialIdiot said:

Malthusian said:

When do you plan to spend the money? I don't mean "in 10-15 years", I mean, what will it be spent on, what will the trigger point be that changes "in 10-15 years" to "now", what happens if the market is down at that time?

The purpose of the investment would be to help fund retirement, which should be reached in 10-15 years. Ideally the £30k invested now would produce maybe £100 per month throughout retirement or as close to that as possible if such a target can't be reached. At a push it might be possible to leave the money invested for 20 years but I doubt it could be left longer than that and there's no guarantee it could be left for more than 10 years (though that will probably be possible).

Without a drastic change in economic circumstances, you won't get £100 per month from an annuity of £30k (not with inflation increases and assuming reasonable health), so that suggests your actual investment timeframe is your lifetime, not just 10-15 years. You won't be spending all your money when you retire, you will be spending some of it but most of it will remain invested for the next year and the next and so on.

Are you hoping to spend your entire lifetime timing the market - staying in cash when the markets are at or near an all-time high but there are lots of things to worry about in the medium term (i.e. nearly all of the time) and investing at just the right moment?

How come you didn't invest all your money in March? It appears you've already missed the last big chance.

Thrugelmir said:

Which market are you referring to? There's plenty to choose from. 

The appopriate benchmark to use depends on the level of risk, however as far as globally diversified portfolios suitable for retail investors goes, there is no evidence that anyone can beat a global market-cap weighted index with a comparable risk level.

With over 3,500 stocks would be a challenge for any active manager. The cost and time to administer would be an insurmountable challenge. Trouble is with that number of stocks the star performers which account for the bulk of the returns are somewhat diluted. 

Sailtheworld

Thrugelmir said:

Malthusian said:

FinancialIdiot said:

Malthusian said:

When do you plan to spend the money? I don't mean "in 10-15 years", I mean, what will it be spent on, what will the trigger point be that changes "in 10-15 years" to "now", what happens if the market is down at that time?

The purpose of the investment would be to help fund retirement, which should be reached in 10-15 years. Ideally the £30k invested now would produce maybe £100 per month throughout retirement or as close to that as possible if such a target can't be reached. At a push it might be possible to leave the money invested for 20 years but I doubt it could be left longer than that and there's no guarantee it could be left for more than 10 years (though that will probably be possible).

Without a drastic change in economic circumstances, you won't get £100 per month from an annuity of £30k (not with inflation increases and assuming reasonable health), so that suggests your actual investment timeframe is your lifetime, not just 10-15 years. You won't be spending all your money when you retire, you will be spending some of it but most of it will remain invested for the next year and the next and so on.

Are you hoping to spend your entire lifetime timing the market - staying in cash when the markets are at or near an all-time high but there are lots of things to worry about in the medium term (i.e. nearly all of the time) and investing at just the right moment?

How come you didn't invest all your money in March? It appears you've already missed the last big chance.

Thrugelmir said:

Which market are you referring to? There's plenty to choose from. 

The appopriate benchmark to use depends on the level of risk, however as far as globally diversified portfolios suitable for retail investors goes, there is no evidence that anyone can beat a global market-cap weighted index with a comparable risk level.

With over 3,500 stocks would be a challenge for any active manager. The cost and time to administer would be an insurmountable challenge. Trouble is with that number of stocks the star performers which account for the bulk of the returns are somewhat diluted. 

Of course it's a challenge for an active manager to beat a global market cap weighted taking the same risk - that's why most of them don't. And, if they take more risk to beat the index you have to make a judgement as to whether it's luck and whether the returns justify the additional risk.

Of course none of this matters if you have a knack for timing the market or being able to pick someone who can

Sailtheworld

FinancialIdiot said:

Thanks for all replies. Can anybody help with the following question: in previous global stock market falls (where the fall was significant), what is the longest it's taken for markets to return to the previous high point? Has it ever been 10 years or more?

Just because markets fell in the past and recovered doesn't mean that will happen in the future. That risk is part of the reason you hold non-equity investments and even then, in a worse case scenario, the stock market won't crash in isolation meaning you'll be at greater risk of government default, job loss etc.

DairyQueen

FinancialIdiot said:

This might or might not be a plausible scenario and it's not one I'm expecting, but as a novice I'm still interested in advice even if just for my own learning/understanding process.

Suppose I've opened an S&S ISA on the Vanguard or iWeb platforms with a view to putting £30k into (say) the VLS60 fund for 10-15 years. I've initiated the process to transfer the money from an existing cash ISA to the S&S ISA and in the 2 or 3 weeks it takes for the money to come across an inoculation against Covid 19 is developed and proved to be effective. On the inoculation news emerging, stock markets everywhere leap ahead, reach new all-time highs and look likely to stay there for at least a year and probably longer. However, the medium-term outlook is for (global?) recession due to problems existing now (eg. widespread economy shut-downs, emerging trade wars, Brexit effects, etc).

With the money now in a cash account on the investment platform, what's the sensible thing to do? Go ahead and put the whole lot into the VLS60 fund in one go regardless? Drip-feed it in over 12 months? Put it into a different fund instead? Put it back into a savings account temporarily in the hope that a market 'correction' is not too far away so you can invest below the top of the market?

I know you're not supposed to try to time the market but even in a more extreme scenario like this does it still make sense to carry through your original plans regardless?

Many of us have been where you are - i.e. hesitant to commit. It's common - even natural - for novice investors to want some kind of guarantee (at best) or reassurance (at least).

I sense that this is a sizeable investment for you and that you don't have a sufficiently clear strategy or plan (yet). I'm also not convinced that you have correctly assessed your attitude to risk and assessing this is key to making confident investment decisions.

The good news is that you have a goal and a timeframe. 

Before you make the leap you must feel confident that the market will do its job for you over the long-term (10+ years). Without that confidence there is no incentive to ride market downturns in the interim, and riding the downturns should be a primary part of your plan.

You have allowed yourself some lee-way in your timescale so are able to delay accessing the fund should the market go against you in year 10. Flexibility is a good  principle.

Think about volatility. How would you feel if your portfolio took a 30% paper loss the day after you invested? That's a possibility with a 60/40 portfolio. The probability is that the drop would be temporary but 'temporary' could be measured in years. Would you be able to leave well alone and sleep soundly? If not then a 60/40 portfolio is too high equity. But without that volatility you can't expect to ride the intermittent  market (sometimes steep) rises that reward high-equity investors.

You will never be able to time the market and foresee when the drops and rises will occur.

Nobody knows the future and there are no guarantees. There is always something likely to give novices the heebie jeebies. Last year (for UK investors) it was Brexit, China-US trade tensions, Uk election, etc. Now, Covid-19 dominates and next year it could (and probably will) be something different. Without the pandemic, likely the US election would be a dominant theme. 

The following isn't a recommendation as only you can decide on how much volatility you can stand and what you will do if your plan doesn't work-out. But based on the info given your only hope of meeting your objective (given the current investment horizon) is to go all-out equities and be prepared to delay selling if SOR (sequence of returns) creates a delay.

If this was me I would choose the lowest OCF, lowest platform cost, 100% global equity tracker I could find. Invest immediately and don't bother looking at it again until this time next year. Each year I may take a peek but accept that any paper loss is just that. My eye would be on that 10-year horizon. Around year 5-7, and if I had a reasonable paper gain, I may decide to move a sufficient %age of the portfolio to cash/bonds in anticipation of drawdown in years 10-12. Alternatively, I would ensure that I had a cash buffer (outside of the 100% equity portfolio) sufficient to cover 2-3 years income requirement.

I reiterate - that's what i would do but I have a (tested) high attitude to risk. Sleeping well should be your primary aim. If you are unable to stand that level of heat then you should consider that your goal may not be achievable. Indeed, in the worst case scenario, and even if you can stand the heat, it may not be achievable. 

We all need a fair dose of luck to combat the dreaded adverse sequence of returns but time is on your side.