Drawdown Pensions - your experiences during 2020 and intentions in 2021?

itwasntme001

BritishInvestor said:

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

Thrugelmir said:

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

I think I understand your answer and the logic however my concern is that many on here suggest everyone should improve their investment knowledge (agreed) and DIY but you are suggesting a portfolio that would be considered too risky for an investor with a cautious attitude. My point is how do you ensure you build the correct retirement plan if the basis on which you formulate it maybe flawed?

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

The underlying assets held determine the risk level. By diversifying a portfolio it's possible to mitigate the volatility of an asset class.  Risk in itself comes in numerous forms. 

Very much depends on what you are using to diversify. Adding property, commodity and junk bonds to equities does not reduce risk of drawdown at all. In a crisis all of these assets will be screwed.

You are assuming that all risky assets are +100% correlated.  They are not.  Property, commodity, equities each have their own risk profiles and perform differently across a variety of economic environments/regimes.

If you take a 70/30 portfolio, having 70% in equities compared to having 50% equities + 20% property, I would think that the latter portfolio would suffer reduced draw-downs whilst producing similar returns.

If anything, I think relying on public equities for the bulk of your portfolio, even over the long term, is quite foolish.  Particularly at today's prices.

I think the global market portfolio only allocates about 40% to public equities.

I do not assume they are “100% correlated” (sic).  Correlations for these assets change over time.  They become positively correlated during major events. If you don’t believe me check out what happened to junk bonds in 2008. Just one example. Junk bonds drop more than shares. When companies go bankrupt, those in trouble, the ones forced to borrow at higher interest become prime candidates for returning zilch on the pound. Property funds like this become illiquid.  Haven’t some British property funds stopped trading and banned withdrawals this year? And commodity is cyclical but its always down when something like  2008 happens. Because who will buy oil or metal if the economy is down? 

Buying lots of risky assets like this, even if they are not normally correlated, does not give you safety during a major downturn.  It might however make your model look less risky.  All models work on a fundamental concept called “SISO”. 

You are assuming 100% correlation for all risky assets during a crisis.  You may not think you are but you most certainly are by your explanations.  Correlation is a function of both magnitude and direction.  Asset classes will clearly never always fall at the same time by the same magnitude, even during a "crisis", because they have different cash flow and risk profiles.  So it follows you are more diversified (i.e. less risk) by having assets across a number of asset classes for your risky portion compared to just equities.  Do a historical comparison and you will find this true for at least some combinations.

Junk bonds behave a lot like equities so asset classes such as this will obviously not improve diversification much if at all.  But IG corporate bonds will.  I think property will (UK property fell a lot less than the 50%+ equity crash in 2008/09).  Gold as well as other commodities do (in an inflationary environment commodities can do well whilst equities suffer due to higher rates / input costs).  After this, you can then assess which combination produced the best risk adjusted returns historically.  You will find there are at least a few asset class combinations that have been superior to just 100% equities.  You can diversify your "risky" allocation so you are taking overall less risk than if you just had equities as your risky allocation.

You can not use property OEIC fund liquidations to suggest they are as risky or more than equities.  These are a problem by design - it is absurd to have illiquid assets using OEICs as investment vehicles.

Re property - the Vanguard link I posted earlier had the performance of Global REIT during the GFC (which I think is a reasonable comparison vs global equities) - it didn't fare very well. But that said, people tend to be split over whether to include an explicit property fund in the growth part of their portfolio. 
For IG corporate bonds, is this as part of the growth or defensive part of the portfolio?

REITs will behave a lot like equities during crisis.  By property I meant holding direct holdings.  The point about holding more than equities as part of your risky allocation is not about short term liquidity driven draw-downs, but by the risk of a longer sustained loss in any particular asset class.  Having direct holdings in property means you do not have to rely on just equities to recover.

There is a case that IG corporate bonds in general are no longer defensive, because the FED has been buying these artificially keeping yields low.  But perhaps a well managed active fund for IG bonds (who are very selective) could be a defensive holding.

[Deleted User]

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

Thrugelmir said:

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

I think I understand your answer and the logic however my concern is that many on here suggest everyone should improve their investment knowledge (agreed) and DIY but you are suggesting a portfolio that would be considered too risky for an investor with a cautious attitude. My point is how do you ensure you build the correct retirement plan if the basis on which you formulate it maybe flawed?

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

The underlying assets held determine the risk level. By diversifying a portfolio it's possible to mitigate the volatility of an asset class.  Risk in itself comes in numerous forms. 

Very much depends on what you are using to diversify. Adding property, commodity and junk bonds to equities does not reduce risk of drawdown at all. In a crisis all of these assets will be screwed.

You are assuming that all risky assets are +100% correlated.  They are not.  Property, commodity, equities each have their own risk profiles and perform differently across a variety of economic environments/regimes.

If you take a 70/30 portfolio, having 70% in equities compared to having 50% equities + 20% property, I would think that the latter portfolio would suffer reduced draw-downs whilst producing similar returns.

If anything, I think relying on public equities for the bulk of your portfolio, even over the long term, is quite foolish.  Particularly at today's prices.

I think the global market portfolio only allocates about 40% to public equities.

I do not assume they are “100% correlated” (sic).  Correlations for these assets change over time.  They become positively correlated during major events. If you don’t believe me check out what happened to junk bonds in 2008. Just one example. Junk bonds drop more than shares. When companies go bankrupt, those in trouble, the ones forced to borrow at higher interest become prime candidates for returning zilch on the pound. Property funds like this become illiquid.  Haven’t some British property funds stopped trading and banned withdrawals this year? And commodity is cyclical but its always down when something like  2008 happens. Because who will buy oil or metal if the economy is down? 

Buying lots of risky assets like this, even if they are not normally correlated, does not give you safety during a major downturn.  It might however make your model look less risky.  All models work on a fundamental concept called “SISO”. 

You are assuming 100% correlation for all risky assets during a crisis.  You may not think you are but you most certainly are by your explanations.  Correlation is a function of both magnitude and direction.  Asset classes will clearly never always fall at the same time by the same magnitude, even during a "crisis", because they have different cash flow and risk profiles.  So it follows you are more diversified (i.e. less risk) by having assets across a number of asset classes for your risky portion compared to just equities.  Do a historical comparison and you will find this true for at least some combinations.

Junk bonds behave a lot like equities so asset classes such as this will obviously not improve diversification much if at all.  But IG corporate bonds will.  I think property will (UK property fell a lot less than the 50%+ equity crash in 2008/09).  Gold as well as other commodities do (in an inflationary environment commodities can do well whilst equities suffer due to higher rates / input costs).  After this, you can then assess which combination produced the best risk adjusted returns historically.  You will find there are at least a few asset class combinations that have been superior to just 100% equities.  You can diversify your "risky" allocation so you are taking overall less risk than if you just had equities as your risky allocation.

You can not use property OEIC fund liquidations to suggest they are as risky or more than equities.  These are a problem by design - it is absurd to have illiquid assets using OEICs as investment vehicles.

For starters, gold is not a commodity. I do not assume “100% correlation” (sic). I observe strong positive correlation during major downturns.  If property funds stop trading, you don’t know by how much they fell.  The fund managers can display any number they like if they stopped trading.  Things like this do not help an investor: https://www.mandg.co.uk/investor/articles/property-portfolio-temporary-suspension/

indeed, RLP property fund did not trade for several months in 2020. Its an illiquid and highly risky investment. Retirees or those about to retire should not touch it. 

Its an inappropriate portfolio. 

itwasntme001

BritishInvestor said:

itwasntme001 said:

Deleted_User said:

DT2001 said:

Thruglemir
“The underlying assets held determine the risk level. By diversifying a portfolio it's possible to mitigate the volatility of an asset class.  Risk in itself comes in numerous forms. “

I thought Mordko was saying that high quality bonds are high risk in the current environment but I thought generally a fund of them has been considered lower risk than equities. Who determines that risk indicator say on HL website?

I am saying this.  Right now I find it really hard justifying ownership of any long duration bonds in the developed world. Maths is against them. Deflation is the one and only scenario working for them.  This is not a normal situation and traditional “risk” measures are very misleading. 

It is not just deflation that works for bonds.  It is also disinflation.  But anyway, long duration bonds are obviously very expensive by historic standards.  But how do you know that this won't last for another 10 years?

You can make a good case that risk reward is simply not favourable for bonds.  But then you should do the same for equities given equities are priced off of yield curves.  You may then say "I'll just own more value stocks because they benefit from rising rates", to which I say "how do you know that this will be the case, what if we are closer to full scale AI/robotics automation that will kill off the business models for value stocks and kill off inflation and keep rates low or even negative for a very long time"?

The macro environment is incredibly difficult to forecast, I have not seen anyone do it consistently.  Therefore why presume anything?

I'm not sure that forecasting is required - it comes down to the point I made earlier - what job is a particular asset delivering in the retirement portfolio. Do long-duration bonds really deliver portfolio dampening in stressed markets, irrespective of their current valuations or when/if interest rates may rise in the future. 

Well yes that is the point I was making to Mordko - who was trying to make a forecast.  I was playing devils advocate.

Long duration bonds can still be beneficial in a portfolio and still lose in nominal terms.  But there may be better alternatives - perhaps shorter duration bonds or index linked.

The problem with index linked is that by holding many of these to maturity you lock in a substantial nominal loss (if inflation turns out as expected), particularly in UK (and that is not true for long duration nominal bonds given positive yields).  But as shorter term volatility dampening assets, they can work well.  They work well in both inflationary and deflationary conditions, providing real interest rates fall.

itwasntme001

Deleted_User said:

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

Thrugelmir said:

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

I think I understand your answer and the logic however my concern is that many on here suggest everyone should improve their investment knowledge (agreed) and DIY but you are suggesting a portfolio that would be considered too risky for an investor with a cautious attitude. My point is how do you ensure you build the correct retirement plan if the basis on which you formulate it maybe flawed?

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

The underlying assets held determine the risk level. By diversifying a portfolio it's possible to mitigate the volatility of an asset class.  Risk in itself comes in numerous forms. 

Very much depends on what you are using to diversify. Adding property, commodity and junk bonds to equities does not reduce risk of drawdown at all. In a crisis all of these assets will be screwed.

You are assuming that all risky assets are +100% correlated.  They are not.  Property, commodity, equities each have their own risk profiles and perform differently across a variety of economic environments/regimes.

If you take a 70/30 portfolio, having 70% in equities compared to having 50% equities + 20% property, I would think that the latter portfolio would suffer reduced draw-downs whilst producing similar returns.

If anything, I think relying on public equities for the bulk of your portfolio, even over the long term, is quite foolish.  Particularly at today's prices.

I think the global market portfolio only allocates about 40% to public equities.

I do not assume they are “100% correlated” (sic).  Correlations for these assets change over time.  They become positively correlated during major events. If you don’t believe me check out what happened to junk bonds in 2008. Just one example. Junk bonds drop more than shares. When companies go bankrupt, those in trouble, the ones forced to borrow at higher interest become prime candidates for returning zilch on the pound. Property funds like this become illiquid.  Haven’t some British property funds stopped trading and banned withdrawals this year? And commodity is cyclical but its always down when something like  2008 happens. Because who will buy oil or metal if the economy is down? 

Buying lots of risky assets like this, even if they are not normally correlated, does not give you safety during a major downturn.  It might however make your model look less risky.  All models work on a fundamental concept called “SISO”. 

You are assuming 100% correlation for all risky assets during a crisis.  You may not think you are but you most certainly are by your explanations.  Correlation is a function of both magnitude and direction.  Asset classes will clearly never always fall at the same time by the same magnitude, even during a "crisis", because they have different cash flow and risk profiles.  So it follows you are more diversified (i.e. less risk) by having assets across a number of asset classes for your risky portion compared to just equities.  Do a historical comparison and you will find this true for at least some combinations.

Junk bonds behave a lot like equities so asset classes such as this will obviously not improve diversification much if at all.  But IG corporate bonds will.  I think property will (UK property fell a lot less than the 50%+ equity crash in 2008/09).  Gold as well as other commodities do (in an inflationary environment commodities can do well whilst equities suffer due to higher rates / input costs).  After this, you can then assess which combination produced the best risk adjusted returns historically.  You will find there are at least a few asset class combinations that have been superior to just 100% equities.  You can diversify your "risky" allocation so you are taking overall less risk than if you just had equities as your risky allocation.

You can not use property OEIC fund liquidations to suggest they are as risky or more than equities.  These are a problem by design - it is absurd to have illiquid assets using OEICs as investment vehicles.

For starters, gold is not a commodity. I do not assume “100% correlation” (sic). I observe strong positive correlation during major downturns.  If property funds stop trading, you don’t know by how much they fell.  The fund managers can display any number they like if they stopped trading.  Things like this do not help an investor: https://www.mandg.co.uk/investor/articles/property-portfolio-temporary-suspension/

indeed, RLP property fund did not trade for several months in 2020. Its an illiquid and highly risky investment. Retirees or those about to retire should not touch it. 

Its an inappropriate portfolio. 

You do not look at property fund valuations to see how much the property market fell.  You would look at a house price index.

You can have strong positive correlations across assets and still find it beneficial to own more than just equities for your risky allocation.  It is about by how much and how long a particular asset recovers after a severe draw-down.  Having just equities means you rely on just that asset class.

[Deleted User]

A fund cost of 0.5% a year and an adviser cost of 0.5% a year is a lot. People should always translate these costs into its corresponding portfolio cost over a typical duration like 25 yrs. 

Annual	25 yr		Annual	25 yr		Annual	25 yr
0.1%	2.5%		1.1%	24%		2.1%	41%
0.2%	4.9%		1.2%	26%		2.2%	42%
0.3%	7.2%		1.3%	28%		2.3%	44%
0.4%	9.5%		1.4%	30%		2.4%	45%
0.5%	12%		1.5%	31%		2.5%	46%
0.6%	14%		1.6%	33%		2.6%	48%
0.7%	16%		1.7%	35%		2.7%	49%
0.8%	18%		1.8%	36%		2.8%	50%
0.9%	20%		1.9%	38%		2.9%	52%
1.0%	22%		2.0%	39%		3.0%	53%

So, 1% in annual costs translates to a portfolio that is a fifth smaller after 25 years than a portfolio with 0.1% costs, all other aspects being equal. Its a lot of money. 

itwasntme001

Deleted_User said:

A fund cost of 0.5% a year and a adviser cost of 0.5% a year is a lot. People should always translate these costs into its corresponding portfolio cost over a typical duration like 25 yrs. 

Annual	25 yr		Annual	25 yr		Annual	25 yr
0.1%	2.5%		1.1%	24%		2.1%	41%
0.2%	4.9%		1.2%	26%		2.2%	42%
0.3%	7.2%		1.3%	28%		2.3%	44%
0.4%	9.5%		1.4%	30%		2.4%	45%
0.5%	12%		1.5%	31%		2.5%	46%
0.6%	14%		1.6%	33%		2.6%	48%
0.7%	16%		1.7%	35%		2.7%	49%
0.8%	18%		1.8%	36%		2.8%	50%
0.9%	20%		1.9%	38%		2.9%	52%
1.0%	22%		2.0%	39%		3.0%	53%

So, 1% in annual costs translates to a portfolio that is a fifth smaller after 25 years than a portfolio with 0.1% costs, all other aspects being equal. Its a lot of money. 

Is it a lot of money if the fund manager delivers enough returns (above the benchmark) to more than offset the charges?

Also no one ever holds an active fund for much more than 10 years anyway - what are the charges after 10 years?  Styles go out of fashion quicker than the fashion itself.  Holding onto an active fund for long than 10 years means you are likely to be holding onto a loser.  Market timing is required if you hold active funds.

[Deleted User]

Here is my problem with long duration bonds right now. Forget “risk”, different people have different risks. Lets look at certainty.

As I write this, 10-year gilt pay 0.256% interest.  If you invest £10,000, you’ll get a total of only £ 256 pounds in interest over the decade, and then you’ll get your £10,000 back.  This is crazy.  Even if inflation stays at just 2%, you’ll lose about   £1750 in purchasing power.  In other words, you are tying your money in exchange for a substantial loss. 

Inflation has to be negative for most of the next decade for this to make any sense.  What is the likelihood of that? 

For me, choice of assets has to meet two criteria:
1. Negative correlation during a downturn 
2. Positive long term return.

Long duration bonds fail this test.

[Deleted User]

itwasntme001 said:

Deleted_User said:

A fund cost of 0.5% a year and a adviser cost of 0.5% a year is a lot. People should always translate these costs into its corresponding portfolio cost over a typical duration like 25 yrs. 

Annual	25 yr		Annual	25 yr		Annual	25 yr
0.1%	2.5%		1.1%	24%		2.1%	41%
0.2%	4.9%		1.2%	26%		2.2%	42%
0.3%	7.2%		1.3%	28%		2.3%	44%
0.4%	9.5%		1.4%	30%		2.4%	45%
0.5%	12%		1.5%	31%		2.5%	46%
0.6%	14%		1.6%	33%		2.6%	48%
0.7%	16%		1.7%	35%		2.7%	49%
0.8%	18%		1.8%	36%		2.8%	50%
0.9%	20%		1.9%	38%		2.9%	52%
1.0%	22%		2.0%	39%		3.0%	53%

So, 1% in annual costs translates to a portfolio that is a fifth smaller after 25 years than a portfolio with 0.1% costs, all other aspects being equal. Its a lot of money. 

Is it a lot of money if the fund manager delivers enough returns (above the benchmark) to more than offset the charges?

Also no one ever holds an active fund for much more than 10 years anyway - what are the charges after 10 years?  Styles go out of fashion quicker than the fashion itself.  Holding onto an active fund for long than 10 years means you are likely to be holding onto a loser.  Market timing is required if you hold active funds.

A lot of ifs. Charges are a certainty. If your strategy is to go for expensive investments, you should account for the impact of charges over your investment horizon. 

 RL portfolio 3 delivered negative return over the last 3 years. Thats unusual.  Did this portfolio cushion the blow vs a 100% equity portfolio? No.   The adviser told OP to stop withdrawals after a really bad month. Give me one reason to continue with this adviser and RL 3. 

itwasntme001

Deleted_User said:

Here is my problem with long duration bonds right now. Forget “risk”, different people have different risks. Lets look at certainty.

As I write this, 10-year gilt pay 0.256% interest.  If you invest £10,000, you’ll get a total of only £ 256 pounds in interest over the decade, and then you’ll get your £10,000 back.  This is crazy.  Even if inflation stays at just 2%, you’ll lose about   £1750 in purchasing power.  In other words, you are tying your money in exchange for a substantial loss. 

Inflation has to be negative for most of the next decade for this to make any sense.  What is the likelihood of that? 

For me, choice of assets has to meet two criteria:
1. Negative correlation during a downturn 
2. Positive long term return.

Long duration bonds fail this test.

I would not consider £1750 a substantial loss by itself.  It needs to be compared to the alternative.  If equities deliver a nominal loss over the same time frame, you would take that £1750 REAL loss instead.  Probably the more appropriate alternative would be index linked bonds.  But as I mentioned before, in the UK you would lock in a nominal loss if inflation turns out as expected (i think 2%).

I think there is an investment case for long duration bonds.  It will work very well under a AI/robotics/clean energy world where costs are reduced to near 0.  And if you have enough competition, equities, even long duration equities, may look vulnerable.  Long duration bonds would serve a purpose.  It acts as a bonus to the inevitable MMT money under that scenario - MMT that would hardly make a dent on inflation given the new world.

itwasntme001

Deleted_User said:

itwasntme001 said:

Deleted_User said:

A fund cost of 0.5% a year and a adviser cost of 0.5% a year is a lot. People should always translate these costs into its corresponding portfolio cost over a typical duration like 25 yrs. 

Annual	25 yr		Annual	25 yr		Annual	25 yr
0.1%	2.5%		1.1%	24%		2.1%	41%
0.2%	4.9%		1.2%	26%		2.2%	42%
0.3%	7.2%		1.3%	28%		2.3%	44%
0.4%	9.5%		1.4%	30%		2.4%	45%
0.5%	12%		1.5%	31%		2.5%	46%
0.6%	14%		1.6%	33%		2.6%	48%
0.7%	16%		1.7%	35%		2.7%	49%
0.8%	18%		1.8%	36%		2.8%	50%
0.9%	20%		1.9%	38%		2.9%	52%
1.0%	22%		2.0%	39%		3.0%	53%

So, 1% in annual costs translates to a portfolio that is a fifth smaller after 25 years than a portfolio with 0.1% costs, all other aspects being equal. Its a lot of money. 

Is it a lot of money if the fund manager delivers enough returns (above the benchmark) to more than offset the charges?

Also no one ever holds an active fund for much more than 10 years anyway - what are the charges after 10 years?  Styles go out of fashion quicker than the fashion itself.  Holding onto an active fund for long than 10 years means you are likely to be holding onto a loser.  Market timing is required if you hold active funds.

A lot of ifs. Charges are a certainty. If your strategy is to go for expensive investments, you should account for the impact of charges over your investment horizon. 

 RL portfolio 3 delivered negative return over the last 3 years. Thats unusual.  Did this portfolio cushion the blow vs a 100% equity portfolio? No.   The adviser told OP to stop withdrawals after a really bad month. Give me one reason to continue with this adviser and RL 3. 

But what are those charges a % of?  Clearly not the starting value nor the ending value at 25 years (unless no growth assumed).  Charges are a sum of the annual % based on each year's value.  So seems a bit misleading to state the %s as you have.  Your numbers are right assuming the fund does approx. nothing for each of the 25 years.  But if it rises, that % on the ending valuation at 25 years is going to look a lot smaller.

Yes a lot of ifs i.e. whether the fund performs or not.  But my point was that your table is misleading and the raw % assumes no growth.

Conversely, of course if the fund produce negative returns over that period, the % will look very large based on the ending valuation.

A better way to present your case is that what max % of fees on the ending valuation would you be happy with paying and work backwards to find out what the required % performance you would need to achieve to make that % fee justifiable.