Retirement Planner - Importance of Inflation?

Prism

Deleted_User said:

BritishInvestor said:

Deleted_User said:

Linton said:

BritishInvestor said:

Linton said:

Prism said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

I'm not sure which stats you have seen but Fundsmith has been around for 10 years and outperformed MCSI World every year except for 2016 when it equalled it. Trustnet is giving a total return of 436.9% over those 10 years. Global Index funds have done around 152% over that time. The GBP drop has certainly helped returns but 10% isn't really here nor there over the last 5 years - its around 20% over 10 years.

Question marks over if MCSI World is a fair benchmark since Fundsmith only really invests in three sectors but I can't think of a better one, partly since those three sectors are not fixed weights. Impossible to know if that performance continues but I have a large chunk of my money betting on it

According to Morningstar Fundsmith uinderpeformed the "MSCI ACWI Large Cap Growth Index " in 2019 and in 2020 to date.  Prior to then it wildly out-performed it. 

10 year perfomance
Fundsmith 18.3% annually=437% cumulative
Index: 13.87% annually=267% cumulative

But the question is only of academic interest anyway as it seems that according to MSCI there are no ETFs that track the index.

See: https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LK2Q&tab=1

Might be better to use World rather than ACWI

Perhaps but Morningstar give ACWI Growth as the category/ Index against which they compare the fund.

In any case it does not make a lot of difference to the overall picture.

True. Its usual for certain funds / subsections of the market to outperform for 10 years on end. Does not say a thing about the next 10 years.  If anything, its “a bad omen“. 

"If anything, its “a bad omen“. "
Either it genuinely is different this time (always possible), or we are in the greatest "growth" bubble on record.
https://www.ft.com/content/fc7ce313-92f8-4f51-902b-f883afc1e035
https://uk.reuters.com/article/us-funds-ajo-partners/value-fund-manager-ajo-with-10-billion-assets-to-shut-business-idUKKBN26Z39W

“Value” and “small” have been hammered for 10 years. We do have a very large premium on growth by historic standards. Covid contributed to this run but there could be other lone nger term factors. Interestingly, “Small value US” has jumped by % this morning. 5% more than S&P 500.

I think benchmarking is important for all active portfolios. And it needs to be an appropriate benchmark with similar risks. Benchmarking is kinda pointless if you are passive and following an index.  

I agree. I don't think there is a problem with comparing to several benchmarks either. It is easier if there is an ETF to follow too rather than having to use the index and then convert from $ to local currency.

I keep track of MCSI World since it has a long history, plus MCSI world momentum and MCSI world quality. Both of the last two do not yet have UK 10 year ETF history just yet so 5 years will have to do at the moment. I imagine a US investor might simply compare to Vanguards total market or similar.

BritishInvestor

Deleted_User said:

BritishInvestor said:

Deleted_User said:

Linton said:

BritishInvestor said:

Linton said:

Prism said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

I'm not sure which stats you have seen but Fundsmith has been around for 10 years and outperformed MCSI World every year except for 2016 when it equalled it. Trustnet is giving a total return of 436.9% over those 10 years. Global Index funds have done around 152% over that time. The GBP drop has certainly helped returns but 10% isn't really here nor there over the last 5 years - its around 20% over 10 years.

Question marks over if MCSI World is a fair benchmark since Fundsmith only really invests in three sectors but I can't think of a better one, partly since those three sectors are not fixed weights. Impossible to know if that performance continues but I have a large chunk of my money betting on it

According to Morningstar Fundsmith uinderpeformed the "MSCI ACWI Large Cap Growth Index " in 2019 and in 2020 to date.  Prior to then it wildly out-performed it. 

10 year perfomance
Fundsmith 18.3% annually=437% cumulative
Index: 13.87% annually=267% cumulative

But the question is only of academic interest anyway as it seems that according to MSCI there are no ETFs that track the index.

See: https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LK2Q&tab=1

Might be better to use World rather than ACWI

Perhaps but Morningstar give ACWI Growth as the category/ Index against which they compare the fund.

In any case it does not make a lot of difference to the overall picture.

True. Its usual for certain funds / subsections of the market to outperform for 10 years on end. Does not say a thing about the next 10 years.  If anything, its “a bad omen“. 

"If anything, its “a bad omen“. "
Either it genuinely is different this time (always possible), or we are in the greatest "growth" bubble on record.
https://www.ft.com/content/fc7ce313-92f8-4f51-902b-f883afc1e035
https://uk.reuters.com/article/us-funds-ajo-partners/value-fund-manager-ajo-with-10-billion-assets-to-shut-business-idUKKBN26Z39W

“Value” and “small” have been hammered for 10 years. We do have a very large premium on growth by historic standards. Covid contributed to this run but there could be other longer term factors. Interestingly, “Small value US” has jumped by 8% this morning. 5% more than S&P 500.

I think benchmarking is important for all active portfolios. And it needs to be an appropriate benchmark with similar risks. Benchmarking is kinda pointless if you are passive and following an index.  

“Small value US” has jumped by 8% this morning. 5% more than S&P 500.
I wonder if this is more down to the "stay at home" stocks such as Netflix, Amazon etc taking a hit rather than the SCV premium rising from the ashes....

Thrugelmir

Deleted_User said:

BritishInvestor said:

Deleted_User said:

Linton said:

BritishInvestor said:

Linton said:

Prism said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

I'm not sure which stats you have seen but Fundsmith has been around for 10 years and outperformed MCSI World every year except for 2016 when it equalled it. Trustnet is giving a total return of 436.9% over those 10 years. Global Index funds have done around 152% over that time. The GBP drop has certainly helped returns but 10% isn't really here nor there over the last 5 years - its around 20% over 10 years.

Question marks over if MCSI World is a fair benchmark since Fundsmith only really invests in three sectors but I can't think of a better one, partly since those three sectors are not fixed weights. Impossible to know if that performance continues but I have a large chunk of my money betting on it

According to Morningstar Fundsmith uinderpeformed the "MSCI ACWI Large Cap Growth Index " in 2019 and in 2020 to date.  Prior to then it wildly out-performed it. 

10 year perfomance
Fundsmith 18.3% annually=437% cumulative
Index: 13.87% annually=267% cumulative

But the question is only of academic interest anyway as it seems that according to MSCI there are no ETFs that track the index.

See: https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LK2Q&tab=1

Might be better to use World rather than ACWI

Perhaps but Morningstar give ACWI Growth as the category/ Index against which they compare the fund.

In any case it does not make a lot of difference to the overall picture.

True. Its usual for certain funds / subsections of the market to outperform for 10 years on end. Does not say a thing about the next 10 years.  If anything, its “a bad omen“. 

"If anything, its “a bad omen“. "
Either it genuinely is different this time (always possible), or we are in the greatest "growth" bubble on record.
https://www.ft.com/content/fc7ce313-92f8-4f51-902b-f883afc1e035
https://uk.reuters.com/article/us-funds-ajo-partners/value-fund-manager-ajo-with-10-billion-assets-to-shut-business-idUKKBN26Z39W

“Value” and “small” have been hammered for 10 years. We do have a very large premium on growth by historic standards. Covid contributed to this run but there could be other longer term factors. Interestingly, “Small value US” has jumped by 8% this morning. 5% more than S&P 500.

If you look under the bonnet US markets have been driven by relatively few stocks. Many have languished beneath their January 2020 highs.  Market recovery until now can be described as patchy. 

[Deleted User]

BritishInvestor said:

Deleted_User said:

BritishInvestor said:

Deleted_User said:

Linton said:

BritishInvestor said:

Linton said:

Prism said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

I'm not sure which stats you have seen but Fundsmith has been around for 10 years and outperformed MCSI World every year except for 2016 when it equalled it. Trustnet is giving a total return of 436.9% over those 10 years. Global Index funds have done around 152% over that time. The GBP drop has certainly helped returns but 10% isn't really here nor there over the last 5 years - its around 20% over 10 years.

Question marks over if MCSI World is a fair benchmark since Fundsmith only really invests in three sectors but I can't think of a better one, partly since those three sectors are not fixed weights. Impossible to know if that performance continues but I have a large chunk of my money betting on it

According to Morningstar Fundsmith uinderpeformed the "MSCI ACWI Large Cap Growth Index " in 2019 and in 2020 to date.  Prior to then it wildly out-performed it. 

10 year perfomance
Fundsmith 18.3% annually=437% cumulative
Index: 13.87% annually=267% cumulative

But the question is only of academic interest anyway as it seems that according to MSCI there are no ETFs that track the index.

See: https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LK2Q&tab=1

Might be better to use World rather than ACWI

Perhaps but Morningstar give ACWI Growth as the category/ Index against which they compare the fund.

In any case it does not make a lot of difference to the overall picture.

True. Its usual for certain funds / subsections of the market to outperform for 10 years on end. Does not say a thing about the next 10 years.  If anything, its “a bad omen“. 

"If anything, its “a bad omen“. "
Either it genuinely is different this time (always possible), or we are in the greatest "growth" bubble on record.
https://www.ft.com/content/fc7ce313-92f8-4f51-902b-f883afc1e035
https://uk.reuters.com/article/us-funds-ajo-partners/value-fund-manager-ajo-with-10-billion-assets-to-shut-business-idUKKBN26Z39W

“Value” and “small” have been hammered for 10 years. We do have a very large premium on growth by historic standards. Covid contributed to this run but there could be other longer term factors. Interestingly, “Small value US” has jumped by 8% this morning. 5% more than S&P 500.

I think benchmarking is important for all active portfolios. And it needs to be an appropriate benchmark with similar risks. Benchmarking is kinda pointless if you are passive and following an index.  

“Small value US” has jumped by 8% this morning. 5% more than S&P 500.
I wonder if this is more down to the "stay at home" stocks such as Netflix, Amazon etc taking a hit rather than the SCV premium rising from the ashes....

Reacted to a good news story on the vaccine. Which tells us what might happen when Covid is history

Thrugelmir

Deleted_User said:

BritishInvestor said:

Deleted_User said:

BritishInvestor said:

Deleted_User said:

Linton said:

BritishInvestor said:

Linton said:

Prism said:

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

I'm not sure which stats you have seen but Fundsmith has been around for 10 years and outperformed MCSI World every year except for 2016 when it equalled it. Trustnet is giving a total return of 436.9% over those 10 years. Global Index funds have done around 152% over that time. The GBP drop has certainly helped returns but 10% isn't really here nor there over the last 5 years - its around 20% over 10 years.

Question marks over if MCSI World is a fair benchmark since Fundsmith only really invests in three sectors but I can't think of a better one, partly since those three sectors are not fixed weights. Impossible to know if that performance continues but I have a large chunk of my money betting on it

According to Morningstar Fundsmith uinderpeformed the "MSCI ACWI Large Cap Growth Index " in 2019 and in 2020 to date.  Prior to then it wildly out-performed it. 

10 year perfomance
Fundsmith 18.3% annually=437% cumulative
Index: 13.87% annually=267% cumulative

But the question is only of academic interest anyway as it seems that according to MSCI there are no ETFs that track the index.

See: https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LK2Q&tab=1

Might be better to use World rather than ACWI

Perhaps but Morningstar give ACWI Growth as the category/ Index against which they compare the fund.

In any case it does not make a lot of difference to the overall picture.

True. Its usual for certain funds / subsections of the market to outperform for 10 years on end. Does not say a thing about the next 10 years.  If anything, its “a bad omen“. 

"If anything, its “a bad omen“. "
Either it genuinely is different this time (always possible), or we are in the greatest "growth" bubble on record.
https://www.ft.com/content/fc7ce313-92f8-4f51-902b-f883afc1e035
https://uk.reuters.com/article/us-funds-ajo-partners/value-fund-manager-ajo-with-10-billion-assets-to-shut-business-idUKKBN26Z39W

“Value” and “small” have been hammered for 10 years. We do have a very large premium on growth by historic standards. Covid contributed to this run but there could be other longer term factors. Interestingly, “Small value US” has jumped by 8% this morning. 5% more than S&P 500.

I think benchmarking is important for all active portfolios. And it needs to be an appropriate benchmark with similar risks. Benchmarking is kinda pointless if you are passive and following an index.  

“Small value US” has jumped by 8% this morning. 5% more than S&P 500.
I wonder if this is more down to the "stay at home" stocks such as Netflix, Amazon etc taking a hit rather than the SCV premium rising from the ashes....

Reacted to a good news story on the vaccine. Which tells us what might happen when Covid is history

The logistics globally involved in arriving at an outcome are going to make the D landings look simple in comparison. 

pensionpawn

Deleted_User said:

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

If you click on the blue hyperlink you'll find that both funds have been running for 10 and 9.66 years respectively.

ukdw

Found this article on expected decreases in spending through retirement quite interesting after watching the meaningful money podcast this morning, https://www.timelineapp.co/blog/abraham-okusanyas-latest-whitepaper-on-retirement-spending-patterns/
Have changed my modeller to reduce overall spending by 1% a year instead of keeping it flat or increasing it. i.e. effectively a real terms decrease of about 3% a year. 

Using this approach modelled spending in the early years of retirement can potentially be a lot larger, with drawdowns  reducing every year by more than 1% once state pensions kick in.

TVAS

What is the context what is the planner for? You have not mentioned the income you want and by implication you want it to at least increase with inflation. You also mention an IFA so are you thinking of transferring from a DB scheme? If the answer is yes the planner is irrelevant other factors matter so much more.

When you have an illustration that tells you the cost of the new plan this is expressed in a reduction in yield. Let's say 2.6% this means that you plan needs to grow by 5.6% to keep up with inflation of 3%. 

In the west we are obsessed with GDP so if we have a GDP of 3% if inflation is 3% there has been no growth.

Linton

ukdw said:

Found this article on expected decreases in spending through retirement quite interesting after watching the meaningful money podcast this morning, https://www.timelineapp.co/blog/abraham-okusanyas-latest-whitepaper-on-retirement-spending-patterns/
Have changed my modeller to reduce overall spending by 1% a year instead of keeping it flat or increasing it. i.e. effectively a real terms decrease of about 3% a year. 

Using this approach modelled spending in the early years of retirement can potentially be a lot larger, with drawdowns  reducing every year by more than 1% once state pensions kick in.

When planning you can change your assumptions to give whatever answer you want.  It wont change what actually happens.  There are 2 aspects in your post I would question....

1) You say 1% reduction in £ terms means a 3% reduction in real terms?  You are assuming inflation is 2%?  This is in my view very risky as the BoE is charged with keeping inflation at no lower than 2% and 2% is historically low.  According to the BoE calculator the average rate over the past 60 years has been 5.4%.  I would assume a value lower than that for planning purposes since governments may be better at managing the economy than in the past.  I use 3% for my plans.

2) I dont believe that it is realistic to assume that expenditure  decreases by 1% per year after SP age.  Our's certainly hasnt.  Unless you know different it would be reasonable to assume you will be healthy and active up to your late 70s and even once you become less mobile although some expenditure may change, items things like food, household goods, utilities, council tax etc  should remain much the same. 

Better in my view to keep day to day expenditure constant and have a separate stream for expensive one-offs - eg foreign holidays, replacement cars etc.  It would then make sense to reduce the latter once you reach your 80s.  However by that age care costs become a consideration, especially for assistance at home - cleaner, gardener at first moving to personal care by your late 80s.

ukdw

Linton said:

ukdw said:

Found this article on expected decreases in spending through retirement quite interesting after watching the meaningful money podcast this morning, https://www.timelineapp.co/blog/abraham-okusanyas-latest-whitepaper-on-retirement-spending-patterns/
Have changed my modeller to reduce overall spending by 1% a year instead of keeping it flat or increasing it. i.e. effectively a real terms decrease of about 3% a year. 

Using this approach modelled spending in the early years of retirement can potentially be a lot larger, with drawdowns  reducing every year by more than 1% once state pensions kick in.

When planning you can change your assumptions to give whatever answer you want.  It wont change what actually happens.  There are 2 aspects in your post I would question....

1) You say 1% reduction in £ terms means a 3% reduction in real terms?  You are assuming inflation is 2%?  This is in my view very risky as the BoE is charged with keeping inflation at no lower than 2% and 2% is historically low.  According to the BoE calculator the average rate over the past 60 years has been 5.4%.  I would assume a value lower than that for planning purposes since governments may be better at managing the economy than in the past.  I use 3% for my plans.

2) I dont believe that it is realistic to assume that expenditure  decreases by 1% per year after SP age.  Our's certainly hasnt.  Unless you know different it would be reasonable to assume you will be healthy and active up to your late 70s and even once you become less mobile although some expenditure may change, items things like food, household goods, utilities, council tax etc  should remain much the same. 

Better in my view to keep day to day expenditure constant and have a separate stream for expensive one-offs - eg foreign holidays, replacement cars etc.  It would then make sense to reduce the latter once you reach your 80s.  However by that age care costs become a consideration, especially for assistance at home - cleaner, gardener at first moving to personal care by your late 80s.

Yes used 2% - but I think my model would still work ok with 3%.  My previous way of looking at things was starting at a comfortable amount now, then increasing it mostly by inflation until age 99. 

  A potential revised approach is to start from age 99 with a minimum basic income (mostly covered by SP), then work back to the current date increasing the available mandatory and optional spend by whatever funds will allow until the current date.  

I agree that mandatory spend will need to go up by inflation (or more), but the big thing this approach seems to do is give a much larger potential optional spend in the early years.

The white paper suggests that you don't need to worry too much about increasing spending in 80+ for care costs etc - as less than half of people end up needing this, and as long as you own a house you could always use that the fund any major care costs.