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

[Deleted User]

itwasntme001 said:

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.

False. This is basic maths.  COQC = 1 – e^(–25*Annual Cost).

COQC stands for Cost Over Quarter Century.  This is the percentage of your portfolio consumed by fees over 25 years. Makes no assumption about performance. The answer is the same.

 It is the percentage of “ending value” of the portfolio in your terminology. And it assumes growth. Gee...

cfw1994

Is it just me, or has the intent of this thread disappeared in the bickering 
Anyone else got any *cough* actual experiences of drawdown pensions during 2020, and intentions in 2021?
Feels like there needs to be a separate and deeply technical thread for some posters.....

itwasntme001

Deleted_User said:

itwasntme001 said:

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.

False. This is basic maths.  COQC = 1 – e^(–25*Annual Cost).

COQC stands for Cost Over Quarter Century.  This is the percentage of your portfolio consumed by fees over 25 years. Makes no assumption about performance. The answer is the same.

 It is the percentage of “ending value” of the portfolio in your terminology. And it assumes growth. Gee...

Never heard of COQC but that formula, if correct, means that % fees on ending value is independent on interim performance.  But that can't be true because the fees most certainly do depend on the value each year, in fact it has to be path dependent - its so easy to see this I have no idea why you would think otherwise.

Just simulate it in Excel, use different fund growth assumptions, deduct the fee after end of each year (or quarterly or whatever - the end conclusion is the same), grow it the next year then take the sum of all fees as a % of the ending value.

You will get different %s for different fund growth assumptions.

BritishInvestor

Deleted_User said:

NottinghamKnight said:

Deleted_User said:

Read slower. “Risk of drawdown”. Thats the same as drawdown risk. 

I think there is a conflict in the use of the term drawdown, in the UK this is traditionally used for management of pension assets after crystallisation, the american terminology has crept in which is that drawdown means a correction in the market, very different things. Not necessarily in this instance but just through it worth stating.  

Yes, its a measure of downside volatility. Drop from peak to bottom. A genuinely cautious portfolio for someone in a withdrawal mode would sacrifice some of expected long term returns in exchange for smaller falls during a bear market. And it makes sense as sequence of returns can hurt a retiree otherwise. But this particular portfolio sacrifices returns in exchange for sharp drawdowns. 

"And it makes sense as sequence of returns can hurt a retiree otherwise."
I'd disagree slightly there in the sense that higher equity exposure tends to give a greater success rate, assuming the cautious investor would be willing to stay the course during drawdowns.

BritishInvestor

itwasntme001 said:

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.

I'd struggle to compare direct property (assuming BTL) with something like global equities given the illiquidity, concentration risk, potential taxation, expenses, your time (or pay someone to manage), potential voids etc.

I take your point on potential sustained loss that equities may suffer, but they've been through lost decades in the past, and a robust plan should be able to cater for that.

[Deleted User]

BritishInvestor said:

Deleted_User said:

NottinghamKnight said:

Deleted_User said:

Read slower. “Risk of drawdown”. Thats the same as drawdown risk. 

I think there is a conflict in the use of the term drawdown, in the UK this is traditionally used for management of pension assets after crystallisation, the american terminology has crept in which is that drawdown means a correction in the market, very different things. Not necessarily in this instance but just through it worth stating.  

Yes, its a measure of downside volatility. Drop from peak to bottom. A genuinely cautious portfolio for someone in a withdrawal mode would sacrifice some of expected long term returns in exchange for smaller falls during a bear market. And it makes sense as sequence of returns can hurt a retiree otherwise. But this particular portfolio sacrifices returns in exchange for sharp drawdowns. 

"And it makes sense as sequence of returns can hurt a retiree otherwise."
I'd disagree slightly there in the sense that higher equity exposure tends to give a greater success rate, assuming the cautious investor would be willing to stay the course during drawdowns.

In today’s reality, I tend to agree.  This is because of the problem with bonds.  Today a retiree is effectively forced into a higher proportion of equity than he would otherwise have and I think its safer than trying to replace zero interest  bonds with iffy assets like RL portfolio 3.  

Historically it wasn’t the case. 

itwasntme001

BritishInvestor said:

itwasntme001 said:

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.

I'd struggle to compare direct property (assuming BTL) with something like global equities given the illiquidity, concentration risk, potential taxation, expenses, your time (or pay someone to manage), potential voids etc.

I take your point on potential sustained loss that equities may suffer, but they've been through lost decades in the past, and a robust plan should be able to cater for that.

The point is to find alternative asset classes to diversify away from equities.  BTL obviously pose risks but the key thing is they are different risks to equity risk.  Which is what you want in order to diversify your risks and reduce the chance of a long and sustained draw-down in your risky portfolio.

BritishInvestor

itwasntme001 said:

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.

Regarding the dampening effect of index-linked offerings, most I've seen tend to be longer duration - something like a 15-20% fall in a week in March for example which is not ideal.
https://www.vanguardinvestor.co.uk/investments/vanguard-uk-inflation-linked-gilt-index-fund-gbp-acc/price-performance

BritishInvestor

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.

"Is it a lot of money if the fund manager delivers enough returns (above the benchmark) to more than offset the charges?"
I'm not aware of such an offering in the retail space.

shinytop

cfw1994 said:

Is it just me, or has the intent of this thread disappeared in the bickering 
Anyone else got any *cough* actual experiences of drawdown pensions during 2020, and intentions in 2021?
Feels like there needs to be a separate and deeply technical thread for some posters.....

It happens to a lot of threads.  The OP askes how to wire a plug and before we know it people who have never wired a plug before are arguing about advanced electromagnetic theory.