Equity percentage in the deaccumulation phase

[Deleted User]

zagfles said:

Deleted_User said:

zagfles said:

Deleted_User said:

zagfles said:

Thrugelmir said:

zagfles said:

Deleted_User said:

Just a note that these percentages don’t mean a lot unless you specify your family’s DB income. Including state pension and whatever other bits you may have. Thats part of your FI allocation. 

Definitely something that needs considering for people with a possibly 30-40 year potential retirement horizon, a few years of high inflation (almost inevitable over a 30-40 year period) could halve the value of your DB pensions. Anyone got other strategies for this?

If stagflation were to return then we would all be in trouble. A very different world to the 70's. 

I would tend to agree the future is unlikely to be similar to the past, but all modelling of investment returns, safe withdrawal rates etc seem to use historic data on equity/bonds returns & volatility etc and "back-test" the strategy over various periods in the past.

Doing the same with capped DB pensions gives scary results... it's not just the 70's, even over the 1980's a capped DB pension would have lost 20-30% of its value (down to 71-83% of it's value)

If the inflation is high, you will be protected by your equities. They typically do ok during periods of high inflation (but terribly during deflation). There are other vehicles you can use. I have TIPS and some preferred shares (which provide an escalating dividend if interest rates go up. Or you can buy inflation protected  annuity with a portion of your portfolio.  

What are TIPS? Not an easy acronymn to google!

Article in the Telegraph basically saying higher inflation is inevitable (probably behind a paywall):

https://www.telegraph.co.uk/business/2020/11/23/inflation-inevitable-wont-happen-overnight/

https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

Thanks - so basically the US version of index linked gilts, which like the UK version seem to have negative yields. I think I'll stick mainly with equities, as they can hopefully provide real growth over the long term even if there is high inflation for a period.

The yields are positive but less than inflation if thats what you mean. TIPS have some advantages over inflation protected bonds from other countries.  In a crisis they typically go up faster because money floods to US bonds. Like you say, they are expensive now after jumping about 10% this year. Rate reset prefs have good yield (over 5% in Canada but they have other issues. 

Prism

The UK index linked gilts yields are negative at the moment. For example there is a index linked 0.125% gilt that matures in 2029. It costs £130 today and pays back £100 in nine years. So unless the price rises or we get inflation it will certainly lose money over those nine years since it only packs back £1.13 in total interest over that time (12p per year!). Then again thats not the point. Its there to protect against inflation, though it might take quite a high rate of inflation to recover the built in loss.

[Deleted User]

Prism said:

The UK index linked gilts yields are negative at the moment. For example there is a index linked 0.125% gilt that matures in 2029. It costs £130 today and pays back £100 in nine years. So unless the price rises or we get inflation it will certainly lose money over those nine years since it only packs back £1.13 in total interest over that time (12p per year!). Then again thats not the point. Its there to protect against inflation, though it might take quite a high rate of inflation to recover the built in loss.

I hold TIPS through SCHP which has yield to maturity of 0.66%.  Positive nominal but negative net of inflation. Investors often accept negative yield on TIPS because they expect to get more due to inflation. 

Say that because of market conditions, you'd have to pay $1,005 for $1000 1 year TIPS bond with a 2% coupon. After one year, you will still receive $1,020. What is the equivalent interest rate? It would be:

1.49% = ($1,020 / $1,005) - 1

Now assume market conditions are such that the price of the bond is $1,025. What  interest rate would make $1,025 "grow" to $1,020 in one year? It would have to be a negative interest rate. In this case:

-0.49% = ($1,020 / $1,025) - 1.

Assume the bond costing $1,025 is a TIPS, and that the CPI increases 3% during the year. Investors will get $1,051 = ($1,020 X 1.03) a year from now, so they will have a positive nominal return.

Inflation protected bonds have a place in a fixed income portion of a portfolio as they provide diversification. Negatively correlated to equity. Having said all this, I don’t like coupons which pay less than inflation. 

garmeg

Prism said:

The UK index linked gilts yields are negative at the moment. For example there is a index linked 0.125% gilt that matures in 2029. It costs £130 today and pays back £100 in nine years. So unless the price rises or we get inflation it will certainly lose money over those nine years since it only packs back £1.13 in total interest over that time (12p per year!). Then again thats not the point. Its there to protect against inflation, though it might take quite a high rate of inflation to recover the built in loss.

Presumably the £100 is the indexed value at the issue date and will have grown by inflation to more than that now and will grow with future inflation (if any) to 2029? The coupon is also similarly indexed.

That is my limited understanding of index linked gilts.

MK62

The following site/paper gives an explanation, with examples, of how returns on index linked gilts are calculated (it's a bit of a chew though tbh... )

https://www.dmo.gov.uk/media/1953/igcalc.pdf

This one gives the relevant numbers needed to perform the calculations

https://www.dmo.gov.uk/data/ExportReport?reportCode=D5I

Linton

To add to the complexity, according to: https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3530 the published Yield to Maturities are based on an assumed inflation rate of 3%.  As you will see, on that basis all index linked gilts are around -2% to -3%, which I assume would mean that even in £ terms, never mind real terms, they could well lose money.

michaels

The point being that even an asset that is certain to have a negative real return can actually result in a higher swr for a portfolio as a whole as it dampens the equity volatility that can lead to asset wipeout with an unlucky sequence of returns early in retirement - lower real returns in exchange for less volatility.

Prism

Linton said:

To add to the complexity, according to: https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3530 the published Yield to Maturities are based on an assumed inflation rate of 3%.  As you will see, on that basis all index linked gilts are around -2% to -3%, which I assume would mean that even in £ terms, never mind real terms, they could well lose money.

Its pretty sorry state really that either inflation needs to be above 3% or the rumour of it to push the prices up even further for the chance to make much from index linked gilts. I don't know if the BoE buy index linked as part of their QE process but if they left off a bit over the next few years then I assume the prices will drop. Seems like quite a risky place to be at the moment.

pip895

Thanks everyone - plenty of food for thought here - none of the bond options look appealing.  I think though, rather than letting my concerns about bonds directly drive my equity percentage up above the 60-70% mark, I will probably just widen the range of what I can hold in my "non equity" category - I think diversity is key.  I will consider defensive funds (Like PNL) that include a percentage of equity as "non equity" and trust their managers to pick the right fixed interest exposure.  No one area or alternative strategy fund will exceed 5% of my portfolio - with the exception of cash where I will hold ~3 years living expenses in addition.

Who knows what the future holds - I cant help thinking inflation is a threat though.

Thrugelmir

Ensure your "equities" cover a broad range of themes and sectors. No guarantees but as always diversification is key.