Equity percentage in the deaccumulation phase

[Deleted User]

You need to decide what is your fixed income for. That informs your choices of FI.
 I do not hold fixed income to maximize returns. Equity does that. 

I do not hold FI to mitigate long term risks. Equity does that. 

I do not hold FI to mitigate routine volatility. I can handle that. 

I need FI to mitigate short term risk of major crashes. The kinds of crashes when major companies go bankrupt like in 2008 but the taxpayer can’t come to the rescue so its worse. 

So to meet my objectives I stay away from company bonds which could go bust and buy government bonds. I don’t care about juicing returns by 1 percent. Not what FI is for. 

I use my country bonds but also US because everyone starts buying US treasuries during the crisis.  And I tend to go for shorter durations to minimize inflation risks. You don’t need an active manager to buy government bonds. They are simple. You can buy them direct, which is better, or via a really large and reliable fund provider but keep the costs down. 

Others have different objectives for their FI and use different vehicles. 

pip895

Deleted_User said:

You need to decide what is your fixed income for. That informs your choices of FI.
 I do not hold fixed income to maximize returns. Equity does that. 

I do not hold FI to mitigate long term risks. Equity does that. 

I do not hold FI to mitigate routine volatility. I can handle that. 

I need FI to mitigate short term risk of major crashes. The kinds of crashes when major companies go bankrupt like in 2008 but the taxpayer can’t come to the rescue so its worse. 

So to meet my objectives I stay away from company bonds which could go bust and buy government bonds. I don’t care about juicing returns by 1 percent. Not what FI is for. 

I use my country bonds but also US because everyone starts buying US treasuries during the crisis.  And I tend to go for shorter durations to minimize inflation risks. You don’t need an active manager to buy government bonds. They are simple. You can buy them direct, which is better, or via a really large and reliable fund provider but keep the costs down. 

Others have different objectives for their FI and use different vehicles. 

I think my objectives are similar - Another thing I would like to be able to do is rebalance during a correction. I don't like using funds for this, both because of the delay and because you don't know in advance what price you are getting - important during times of market volatility, so I like to use ETFs. I already hold VAGS and was considering adding VUTA which generally has a negative correlation to equity - its not specifically short duration though and a bit more volatile than I would like.. 

MarkCarnage

I'm fortunate enough to have a significant DB income from a pretty solvent scheme. That's almost all my FI allocation, though how to 'value' it in capital sum terms is a moot question. If I apply  an 'open market' valuation such as or annuity based valuation it's probably approaching 50% of my total asset allocation.
Therefore I don't typically hold much FI in my own portfolio. A couple of niche debt funds, plus some lookthrough in the WP IT funds I hold, though they tend to be more in index linked debt and gold. I hold cash for liquidity not bonds as there is no meaningful duration reward at present, and lots of negative real return. Currently hold just over 80% in equities, 10% cash, 3% specialist debt, 5% gold. Look through would lift the FI a little, probably give about 3-4% in IL bonds, and take gold up to maybe 6-7%. Cash is higher than optimal due to anticipated cash requirements next year. I bought gold a year or so ago and added to it at start of pandemic. Never thought I'd do that, but then again I never thought that zero and negative interest rates might prevail. Adding some TIPS might be the only other thing I'd do right now. Have done some reallocation in equity portfolio recently (nearly all in IT's) by reducing some spectacular performers and adding to a couple of WP funds and an unloved UK centric one. I have enough property in my house so nothing there. Don't particularly like the access routes for a retail investor there. 

Thrugelmir

pip895 said:

Deleted_User said:

You need to decide what is your fixed income for. That informs your choices of FI.
 I do not hold fixed income to maximize returns. Equity does that. 

I do not hold FI to mitigate long term risks. Equity does that. 

I do not hold FI to mitigate routine volatility. I can handle that. 

I need FI to mitigate short term risk of major crashes. The kinds of crashes when major companies go bankrupt like in 2008 but the taxpayer can’t come to the rescue so its worse. 

So to meet my objectives I stay away from company bonds which could go bust and buy government bonds. I don’t care about juicing returns by 1 percent. Not what FI is for. 

I use my country bonds but also US because everyone starts buying US treasuries during the crisis.  And I tend to go for shorter durations to minimize inflation risks. You don’t need an active manager to buy government bonds. They are simple. You can buy them direct, which is better, or via a really large and reliable fund provider but keep the costs down. 

Others have different objectives for their FI and use different vehicles. 

 was considering adding VUTA which generally has a negative correlation to equity - its not specifically short duration though and a bit more volatile than I would like.. 

With a 100% exposure to US Treasuries it will move in line with exchange rates. Another dimension that needs to be factored into your portfolio construction. 

Robert_McGeddon

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. 

Indeed. We have a solid base of DB pensions plus state pension, but the DB pensions have inflation risk, as like most (nearly all?) DB pensions they are not fully inflation protected. The inflation increases are capped, partly at 3% and partly at 5%.

I've just done some frightening analysis on the effect the inflation levels of previous decades would have on our DB pensions, after 10 years at 1970-1980 inflation rates, the DB pensions would be well under half their real value, a DB pension of £10,000 with an inflation cap of 5% would be worth £4300 in real terms after 10 years of 1970's inflation, and with a 3% cap only £3500. So somewhere in between for us, maybe £4000.

Every so often something is posted on the MSE forums that gives me a jolt.  Thank you, zagfiles, you hit the mark with this post. Whilst my DB is relatively small I had not considered the impact of capped inflation increases in the longer term. I will do so from now on.

Thrugelmir

Robert_McGeddon 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. 

Indeed. We have a solid base of DB pensions plus state pension, but the DB pensions have inflation risk, as like most (nearly all?) DB pensions they are not fully inflation protected. The inflation increases are capped, partly at 3% and partly at 5%.

I've just done some frightening analysis on the effect the inflation levels of previous decades would have on our DB pensions, after 10 years at 1970-1980 inflation rates, the DB pensions would be well under half their real value, a DB pension of £10,000 with an inflation cap of 5% would be worth £4300 in real terms after 10 years of 1970's inflation, and with a 3% cap only £3500. So somewhere in between for us, maybe £4000.

Every so often something is posted on the MSE forums that gives me a jolt.  Thank you, zagfiles, you hit the mark with this post. Whilst my DB is relatively small I had not considered the impact of capped inflation increases in the longer term. I will do so from now on.

There's no guarantee that returns from equities will exceed inflation over any given time frame. 

zagfles

Thrugelmir said:

Robert_McGeddon 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. 

Indeed. We have a solid base of DB pensions plus state pension, but the DB pensions have inflation risk, as like most (nearly all?) DB pensions they are not fully inflation protected. The inflation increases are capped, partly at 3% and partly at 5%.

I've just done some frightening analysis on the effect the inflation levels of previous decades would have on our DB pensions, after 10 years at 1970-1980 inflation rates, the DB pensions would be well under half their real value, a DB pension of £10,000 with an inflation cap of 5% would be worth £4300 in real terms after 10 years of 1970's inflation, and with a 3% cap only £3500. So somewhere in between for us, maybe £4000.

Every so often something is posted on the MSE forums that gives me a jolt.  Thank you, zagfiles, you hit the mark with this post. Whilst my DB is relatively small I had not considered the impact of capped inflation increases in the longer term. I will do so from now on.

There's no guarantee that returns from equities will exceed inflation over any given time frame. 

Of course there isn't, but the question is what's the best inflation hedge? Cash and bonds clearly aren't in a low interest environment, index linked gilts/TIPS etc, possibly but with them it seems you're guaranteed a below inflation return, albeit with protection against a real return too far below inflation in a high inflation environment. Equities might provide the right sort of compromise between getting a real return in normal/good times and some inflation protection if inflation does take off. Possibly foreign equities to protect against high UK inflation, which would likely weaken the pound on the currency markets if other countries aren't affected so much. Obviously nothing is guaranteed.

Thrugelmir

zagfles said:

Thrugelmir said:

Robert_McGeddon 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. 

Indeed. We have a solid base of DB pensions plus state pension, but the DB pensions have inflation risk, as like most (nearly all?) DB pensions they are not fully inflation protected. The inflation increases are capped, partly at 3% and partly at 5%.

I've just done some frightening analysis on the effect the inflation levels of previous decades would have on our DB pensions, after 10 years at 1970-1980 inflation rates, the DB pensions would be well under half their real value, a DB pension of £10,000 with an inflation cap of 5% would be worth £4300 in real terms after 10 years of 1970's inflation, and with a 3% cap only £3500. So somewhere in between for us, maybe £4000.

Every so often something is posted on the MSE forums that gives me a jolt.  Thank you, zagfiles, you hit the mark with this post. Whilst my DB is relatively small I had not considered the impact of capped inflation increases in the longer term. I will do so from now on.

There's no guarantee that returns from equities will exceed inflation over any given time frame. 

Of course there isn't, but the question is what's the best inflation hedge? Cash and bonds clearly aren't in a low interest environment, index linked gilts/TIPS etc, possibly but with them it seems you're guaranteed a below inflation return, albeit with protection against a real return too far below inflation in a high inflation environment. Equities might provide the right sort of compromise between getting a real return in normal/good times and some inflation protection if inflation does take off. Possibly foreign equities to protect against high UK inflation, which would likely weaken the pound on the currency markets if other countries aren't affected so much. Obviously nothing is guaranteed.

Focus on the investment return with a diversified balanced portfolio.  Which should be tailored according to the investment time horizon. Little point in worrying about something over which you've no direct control.  Though everybody's personal inflation measurement differs in any event. Unless you hedge your portfolio, currency flutuations could even compound the challenges.  

Robert_McGeddon

Thrugelmir said:

Robert_McGeddon 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. 

Indeed. We have a solid base of DB pensions plus state pension, but the DB pensions have inflation risk, as like most (nearly all?) DB pensions they are not fully inflation protected. The inflation increases are capped, partly at 3% and partly at 5%.

I've just done some frightening analysis on the effect the inflation levels of previous decades would have on our DB pensions, after 10 years at 1970-1980 inflation rates, the DB pensions would be well under half their real value, a DB pension of £10,000 with an inflation cap of 5% would be worth £4300 in real terms after 10 years of 1970's inflation, and with a 3% cap only £3500. So somewhere in between for us, maybe £4000.

Every so often something is posted on the MSE forums that gives me a jolt.  Thank you, zagfiles, you hit the mark with this post. Whilst my DB is relatively small I had not considered the impact of capped inflation increases in the longer term. I will do so from now on.

There's no guarantee that returns from equities will exceed inflation over any given time frame. 

Agreed. However I,m not seeing a connection with what I posted. Why should I be concerned what my DB pension is invested in? It's not within my gift.  As long as it continues paying out (and isn't affected by zagfiles' inflation observation)  I don't see why I should get animated.

Thrugelmir

Robert_McGeddon said:

Thrugelmir said:

Robert_McGeddon 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. 

Indeed. We have a solid base of DB pensions plus state pension, but the DB pensions have inflation risk, as like most (nearly all?) DB pensions they are not fully inflation protected. The inflation increases are capped, partly at 3% and partly at 5%.

I've just done some frightening analysis on the effect the inflation levels of previous decades would have on our DB pensions, after 10 years at 1970-1980 inflation rates, the DB pensions would be well under half their real value, a DB pension of £10,000 with an inflation cap of 5% would be worth £4300 in real terms after 10 years of 1970's inflation, and with a 3% cap only £3500. So somewhere in between for us, maybe £4000.

Every so often something is posted on the MSE forums that gives me a jolt.  Thank you, zagfiles, you hit the mark with this post. Whilst my DB is relatively small I had not considered the impact of capped inflation increases in the longer term. I will do so from now on.

There's no guarantee that returns from equities will exceed inflation over any given time frame. 

Agreed. However I,m not seeing a connection with what I posted. Why should I be concerned what my DB pension is invested in? It's not within my gift.  As long as it continues paying out (and isn't affected by zagfiles' inflation observation)  I don't see why I should get animated.

Is your DB scheme fully funded?