Vanguard Pension

Alexland

Deleted_User said:

No you don’t ‘need’ to assume future growth. I haven’t.  People like to make guesses about the future. Thats ok as long as you dont build your actual plans based on wild guesses like stock movements over the next 30(!) years.   Your plan should be flexible enough so you can respond to whatever happens. And in the case of the OP, there is really no need to make projections. Just invest as much as you can and retire many years later when you can afford it. Its all about time in the market. 

There are some fundamental mechanics at work when making investments and the price you pay for something clearly has an effect on the future return. If you pay double the price for the same investment then you would expect the returns to be lower. Sure plans should be flexible to how things play out but if the OP has no expectation of returns then how do they know they are contributing roughly enough for their desired outcome? Working on a high assumed rate of return is more likely to cause shortfall than following the logic to a more reasonable expectation. So unless that earnings miracle happens the other thing that would be great for the OP is if the prices dropped so their regular investments were buying assets at prices more aligned to historic earnings. But while interest rates remain low that seems unlikely for the medium term at least.

NottinghamKnight

Whilst the reduction in interest rates has been hugely influential on returns on equities, there has also been huge amounts lof money printing. quantitative easing. So your dollar/ pound/ euro/ yen of today is of far less value than it was several years ago, the markets reflect the relative reduction in the value of currencies as well, which is why they have been so buoyant. 

[Deleted User]

“ If you pay double the price for the same investment then you would expect the returns to be lower.”

First of all, you have no idea if today’s price is low or high. In general, its what Mr Market thinks to be the right price. 

Secondly, price at a particular point in time has meaning if you put a million quid all at once and nothing else for the other 29 years. With the hindsight you will be able to say “I bought at a good/bad time and instead of 250% return I would have received had I invested a year later, I earned just 240% return. Poor me!”  However if you are making regular contributions over the next 30 years, its irrelevant.

If your horizon is short then fluctuations are important. Otherwise its all about time in the market. Check out that plot I linked. 

[Deleted User]

NottinghamKnight said:

Whilst the reduction in interest rates has been hugely influential on returns on equities, there has also been huge amounts lof money printing. quantitative easing. So your dollar/ pound/ euro/ yen of today is of far less value than it was several years ago, the markets reflect the relative reduction in the value of currencies as well, which is why they have been so buoyant. 

Inflation defines the reduction in the value of your dollar. Inflation has been low. Not to be ignored, but low.

NottinghamKnight

Deleted_User said:

NottinghamKnight said:

Whilst the reduction in interest rates has been hugely influential on returns on equities, there has also been huge amounts lof money printing. quantitative easing. So your dollar/ pound/ euro/ yen of today is of far less value than it was several years ago, the markets reflect the relative reduction in the value of currencies as well, which is why they have been so buoyant. 

Inflation defines the reduction in the value of your dollar. Inflation has been low. Not to be ignored, but low.

It's more complicated than that. QE leads to asset bubbles, and of course everyone has their own inflation as has been frequently discussed.

Mutton_Geoff

ZeroSum said:

Just to throw in another option. 
Rather than the life strategy funds, could consider the target retirement ones which gradually reduce risk the closer you get to retirement. 

A lot of company pension schemes do this (eg Aviva). But this was geared to a "purchase an annuity on retirement" mentality. With many people able to enjoy a 30 year retirement, staying invested in a drawdown SIPP is essential so that reduced risk strategy needs to be tweaked to accomodate this.

The old fag packet calc of half your age as a percentage of your salary into pension means that at 36, even a low wage earner on £20k a year should be considering puttting £300 a month into a scheme.

Alexland

Deleted_User said:

First of all, you have no idea if today’s price is low or high. In general, its what Mr Market thinks to be the right price.

I agree the price today is roughly right for the current environment but that doesn't mean you are not paying a high price for earnings and getting a lower dividend yield. So unless there is a step change in corporate performance this will affect the rate of compounding. We agree on a lot of things over the long term markets will keep going up and your investments will be worth more it's just the rate that happens at will likely be less for at least the medium term. Vanguard's published economic outlook for recent years has a similar view. It's just how it is, similar in the bond markets, and that former easy ride of making a low or medium risk investment and still getting an above inflation return probably isn't going to happen for those investing today.

[Deleted User]

“I agree the price today is roughly right for the current environment but that doesn't mean you are not paying a high price for earnings and getting a lower dividend yield.”

The thing is that when I am buying shares, I am not paying for historic earnings. I don’t care about them. I am paying for future earnings. Which are, of course, unknown. Dividend is kinda irrelevant (can be messed with by smart accountants, buybacks, etc) what does matter is profit, debt ratio, quality, etc. 

If we judge by historic trends then US growth stocks are highly priced. We agree on that. Thats not the case for US value stocks or international stocks. So an internationally diversified portfolio is fine by that standard.  But again, what really matters is future rather than the past and the future is unknown. 

Having said all this, even if you assume that the current valuations are indeed high, you can argue that returns on your today’s assets will be lower than usual over the next 10 years. For someone investing over a 30 year period it’s all lost in the noise. 

Alexland

Deleted_User said:

The thing is that when I am buying shares, I am not paying for historic earnings. I don’t care about them. I am paying for future earnings. Which are, of course, unknown. Dividend is kinda irrelevant (can be messed with by smart accountants, buybacks, etc) what does matter is profit, debt ratio, quality, etc. 

Sure lots of unknowns, accounting tricks, etc but fundamentally you are buying an asset in anticipation of future returns and when buying into the market we are now accepting a lower expectation for future returns that before. Investing in equities is still probably the best long term option for those who can see through the volatility which is why people have driven the prices to the current multiples with other competing asset classes looking less attractive. I agree global diversification helps but looking at the portfolio in an All World tracker the P/E is still at 21 so not cheap but correctly priced.

Having said all this, even if you assume that the current valuations are indeed high, you can argue that returns on your today’s assets will be lower than usual over the next 10 years. For someone investing over a 30 year period it’s all lost in the noise. 

If we assume the environment continues for the medium term 10 years and then we somehow work ourselves into a position where the valuations look more reasonable (acceleration in earnings, a period of disappointing capital growth, the next crash, etc) then yes the following 20 years might be a better time to be making contributions. However it would need to be better than average in order to compensate for lower performance on the early contributions which are usually so critical to the compounding process.

It doesn't concern me much as returns on historic contributions means my plans work on a growth rate of 2% pa (above inflation + fees) but for someone starting today I would suggest they make healthy contributions from the outset to improve their chances of getting their desired outcome.

[Deleted User]

“However it would need to be better than average in order to compensate for lower performance on the early contributions which are usually so critical to the compounding process.”

If you are starting to invest today and planning to drip into the market for the next 30 years, starting slower and then accelerating (like most of us) then in a perfect world you’ll have a few nice crashes early on.  Returns in the first 10 years are the opposite of critical.