In the real world - asset allocation

michaels

So we are all saving for our pensions - why?  So that when we are no longer producing and bringing in an income we can still consume stuff that other younger people are producing.

I would argue that the Corona Virus has probably destroyed capital and reduced the amount that will be produced in future - a smaller pie to go around.

And yet the value of all our assets that we have saved for in our pension pots has miraculously gone up in inflation adjusted terms which suggests that collectively we will all be able to consume more in our retirement years.

Can anyone see the real problem with the above - less production and yet it would appear that everyone can consume more.

Something doesn't add up.  I suspect all those lovely appreciating financial assets are not going to be able to purchase as much production as it currently appears.

So my question is what assets should we invest in to protect the current 'real' value of our inflated financial asset pots from whatever form the inevitable reduction in real value takes  (inflation, asset price fall etc)?

[Deleted User]

Until all the money in the world can buy everything in the world, the world should and will go on printing money. 
Sorry, bears. Tot up all the gains you have foregone in the last ten years then extrapolate them for the next ten or twenty.

NottinghamKnight

Gold, the answer is always gold, apart from when it is bitcoin of course. 
The only real protection is diversification, the main reason things are 'appreciating' is down to the huge amount of money printing undertaken by all the major central banks.

[Deleted User]

 the main reason things are 'appreciating' is down to the huge amount of money printing undertaken by all the major central banks.
As and when necessary. 
Can you mount any argument to the contrary, NK? I don't mean theoretical but a practical argument to fly in the teeth of the Chairman of the Federal Reserve.. 

michaels

NottinghamKnight said:

Gold, the answer is always gold, apart from when it is bitcoin of course. 
The only real protection is diversification, the main reason things are 'appreciating' is down to the huge amount of money printing undertaken by all the major central banks.

What about futures - could you buy forward (and I mean a long way forward) 'real' things so you know that you can then exchange them other real things that you might want when you are retired?  Obviously you are taking a risk on the relative prices of the real things that have a forward market and the real things that you will want to buy in the future.  I was going to say if only there was a futures market for carers, home help etc but that has so many connotations that are all wrong.

NottinghamKnight

michaels said:

NottinghamKnight said:

Gold, the answer is always gold, apart from when it is bitcoin of course. 
The only real protection is diversification, the main reason things are 'appreciating' is down to the huge amount of money printing undertaken by all the major central banks.

What about futures - could you buy forward (and I mean a long way forward) 'real' things so you know that you can then exchange them other real things that you might want when you are retired?  Obviously you are taking a risk on the relative prices of the real things that have a forward market and the real things that you will want to buy in the future.  I was going to say if only there was a futures market for carers, home help etc but that has so many connotations that are all wrong.

Theoretically yes but there's no guarantee any of those real things will accrue value, certainly at an acceptable rate. You can buy annuities of course, including for care needs, but many would consider them very expensive. Depending on what you buy, and using the term futures conjures up visions of counter party risk, which may well be greater the longer the time period considered. 
Part of the solution, at least for those who are older and have sufficient wealth, is to spend more as that is what is being encouraged and it could be argued that what is being purchased in that regard may well offer better 'value'. 
The other consideration is inflation as you raised earlier, no indications currently this will increase hugely but the devaluing pound may make this more of an issue in the UK than many other countries. Headline inflation is also not representative of any individual so your or my inflation rate may well be much higher than what is published.  

Thrugelmir

Is the recent rise in asset values merely pulling forward from the future. Profits have to be earnt in the real world. Not manufactured as a number on a trading app. With musical chairs someone is left standing at the end with no where to sit once the music finally stops.   

[Deleted User]

Valuations are based on future returns over the next few decades. Profits were hurt in 2020 but its just one year and - once normality is restored - pent up demand will cause a boom.  That is assuming there is no long term damage to confidence.  

Thrugelmir

Deleted_User said:

Valuations are based on future returns over the next few decades. 

At most analysts forecast 2 years out. Average lifespan of a listed company is only 15 years now. 

[Deleted User]

Valuations are based on projecting profits and growth to infinity, although future returns are assumed based on terminal value - and discounted.  

Linton

Deleted_User said:

Valuations are based on projecting profits and growth to infinity, although future returns are assumed based on terminal value - and discounted.  

If only valuations were based on projecting profits to infinity!  Many high value share prices now are valued on the likelihood the buyer feels that they will be higher price next year (or rather perhaps next week). Then we have a positive feedback loop driven by supply and demand. Just like Bitcoin.