A sense check on de-risking approach please

Workerbee999

wjr4 said:

Where will you be putting the £400k once it is out of the pension?

£100k TFLS will be spent on house move/ initial travel. £50k pa - taken out each year over 5 years when required- will be what we live on as retirement income, so somewhere easy access during the year or taken out as smaller chunks when needed. Any not spent will go into ISA allowance each year (as cash). Balance would stay in the pension as contingency.

Workerbee999

Deleted_User said:

Blackrock Sterling Liquidity = money market fund. Your principle is pretty safe. Basically you own debt from large companies, the kind of companies which are very unlikely to go bankrupt. Your main risk is inflation. You will lose some purchasing power but unless inflation jumps it does not matter too much over a relatively short period of time. 

MyM L&G pre-retirement is an international bond fund. Looks like 30% is in guilts (UK government) and the rest in foreign corporate or government bonds. You will be exposed to currency risk. I wouldn’t choose this fund. 

MyM Blackrock Aq Connect All Stocks UK Gilts Index is a gilt fund (uk government bonds). No currency risk. However you would carry the risk of inflation. If the interest rates jump you could lose money, even some of the principle. 

Of these three, I would pick the first one for 80% of the portfolio.  For the rest I would pick a balanced fund (60% stocks, 40% bonds).  Under most scenarios you would then get your money back in real terms with the balanced fund protecting you from inflation. 

 If things go really bad, you get roughly the value of original investment in sterling. Thats if the balanced fund drops in value over your investment horizon (very rare) but the interest on your money market fund would offset the losses. 

The worst case you experience major losses. That would happen if major banks were allowed to go bankrupt. I dont think it would happen. 

Keep in mind that I spent 5 min researching the make-up of these funds and you need to do your own research as its your livelihood.

And you should stop paying attention to 12 months returns. A meaningless number if you are building a portfolio. 

Thanks for your input Mordko. There doesn’t seem to be readily available fund that would give me the 60/40 split, so I would need to combine options. There is the Blackrock world ex-UK that could provide the Equity element. Then I would need to add bonds.

There is the pre-retirement fund with international bonds but you have already said you wouldn’t chose that. In the default option there is 15% international bonds but that comes from the 30% in the Mercer DGF fund (which is 50% of the total).

 What is the benefit in bonds when interest rates are rock bottom? I know there is some talk of negative interest rates but it doesn’t seem to be a long term thing? Does having a proportion in bonds at the moment provide some sort of extra benefit compared to just a different proportion of cash and equities?

thank you

[Deleted User]

For the 20% portion of your portfolio I wouldn’t worry about bonds being international or long duration. This is what I would call  “at risk” portion of your portfolio. No risk, no return. 

If you search this forum, you will find claims that bonds are guaranteed to result in losses last year. And 2 years ago. And before that. This year my bonds are the star performer in my portfolio.  Don’t listen to predictions. Its noise. The future is unpredictable. You need to plan for a variety of scenarios. Thats why you need diversification. Bonds provide diversification as an asset class. 

Or you could just pick a stock fund for the 20%. Results in a higher chance of losing principle but not too drastic in an 80/20 portfolio. 

BritishInvestor

Deleted_User said:

For the 20% portion of your portfolio I wouldn’t worry about bonds being international or long duration. This is what I would call  “at risk” portion of your portfolio. No risk, no return. 

If you search this forum, you will find claims that bonds are guaranteed to result in losses last year. And 2 years ago. And before that. This year my bonds are the star performer in my portfolio.  Don’t listen to predictions. Its noise. The future is unpredictable. You need to plan for a variety of scenarios. Thats why you need diversification. Bonds provide diversification as an asset class. 

Or you could just pick a stock fund for the 20%. Results in a higher chance of losing principle but not too drastic in an 80/20 portfolio. 

"I wouldn’t worry about bonds being international or long duration"
"Thats why you need diversification. Bonds provide diversification as an asset class. "

I think it depends what you mean by diversification and exactly what the bond element in the portfolio is for. Some may want bonds to provide ballast during times of market volatility, longer-dated or high yield didn't really provide that in mid-March when the bond markets really came under pressure (certainly for the data I was looking at).

Albermarle

Or you could increase the risk ( and hopefully return ) one notch and have say 60% Sterling liquidity : 20% equity fund + 20% bond fund ( that L&G one has done rather well in recent time but of course past performance is no guarantee etc ) 
There is no absolute right or wrong answer, except  you need to get out of that 75% equity fund due to the only medium term time frame involved.