'Annuities are poor value' - what do they know that we don't?

itwasntme001

It is worth pointing out the obvious - a fall of 50% in the markets requires a 100% return to just go back to pre-crash levels.  The next crash may not recover as fast as the great crash of 2020 did.  The mathematics of compounding wealth means that avoiding the large draw-downs is at least, if not more, important than earning a positive return.

That is why wealth preservation funds take a market timing approach with a value mindset - when your mandate requires absolute returns matching inflation, you better put the effort to take the right amount of risk and in the right stuff and at the RIGHT TIMES.  It is why CGT has outperformed SMT overall if you go back to the 1980s.

BananaRepublic

A few points:

1) The crash around 1929 occurred after large gains. You would only have lost ridiculous amounts if you had invested all of your money near the peak, and taken it out at the low. 
2) The market recovered fairly quickly, albeit in years and not months. 
3) Graphs of US markets show the value of companies, and do not include reinvested dividends. 
4) The inaction of the US government made the crash much worse. They allowed banks to fail. The action of governments after the 2008 crash prevented something far worse.
5) People often consider only the US markets. Here is the FTSE all share index:

https://stockmarketalmanac.co.uk/2016/12/100-years-of-the-ftse-all-share-index-since-1917/

There is no precipitous fall, illustrating the point that diversification reduces volatility and risk.

Obviously you can’t remove risk, and if you live life clutching a security blanket, you should buy annuities, or invest in something else such as property. 

JohnWinder

BananaRepublic said:

A few points:
1) The crash around 1929 occurred after large gains. You would only have lost ridiculous amounts if you had invested all of your money near the peak, and taken it out at the low. 
2) The market recovered fairly quickly, albeit in years and not months.

Just to put some numbers on it: after the 1929 crash it was about 13 years before recovery, even with dividends reinvested for US investors. Even taking into account the deflation of the time, there was only a 1 year 'blip' in 1937 when real value briefly got back to 1929 level before falling again until 1944. Images and discussion here: https://www.bogleheads.org/forum/viewtopic.php?t=294087

Thrugelmir

Some perspective to my earlier comments.

In 1997, 10 year UK Gilts yielded slightly over 7% to maturity. Annual rate of inflation was 3.6% and BOE base rate 6.25%. 

In mid December 2020, inflation had averaged 0.3%. Instant access savings accounts offered neligible rates of interest , and 10 year UK Gilts 0.31% to maturity. 

How times have changed. 

itwasntme001

Thrugelmir said:

Some perspective to my earlier comments.

In 1997, 10 year UK Gilts yielded slightly over 7% to maturity. Annual rate of inflation was 3.6% and BOE base rate 6.25%. 

In mid December 2020, inflation had averaged 0.3%. Instant access savings accounts offered neligible rates of interest , and 10 year UK Gilts 0.31% to maturity. 

How times have changed. 

It is crazy to think that not that long ago you could take 0 risk and still earn a decent return after inflation.  Or even take low risk in government bonds and earn an even higher real return (interest and capital gains).

It seems now return OF REAL capital has become more important than return ON REAL capital.  Although the crowd still seems to want the extra return by risking their capital...

It is worth keeping in mind that you can still lose significant amount in risky assets without them crashing nominally.  Inflation can outpace the return on investments for a long period of time.

MK62

Deleted_User said:

US stocks 1929-1932 drawdown: 84%.  And thats just 100 years of historic data.  Other markets lost more, up to 100%. Someone 50 today can easily live another 50 years. A major event over that period of time is credible.

Though to put some perspective into that.......US stocks 1921-1929: +472%

Wild times to be a stock market investor....

As ever, the stock market can be a very lucrative place to make money.....or a place to learn some very harsh lessons (or both).......it's all a matter of timing........and that's hard to forecast and get right!

itwasntme001

MK62 said:

Deleted_User said:

US stocks 1929-1932 drawdown: 84%.  And thats just 100 years of historic data.  Other markets lost more, up to 100%. Someone 50 today can easily live another 50 years. A major event over that period of time is credible.

Though to put some perspective into that.......US stocks 1921-1929: +472%

Wild times to be a stock market investor....

As ever, the stock market can be a very lucrative place to make money.....or a place to learn some very harsh lessons (or both).......it's all a matter of timing........and that's hard to forecast and get right!

And to put even more perspective into that, the US stock market was in a 20 year bear market prior to 1921 along with MULTIPLE CONTRACTION.  So by 1921 stocks looked very cheap.  And as I said before, it takes a 100% return to recover fully from a 50% draw-down.

We could be in a mother of all bubbles in financial assets.  We just won't know for sure without hindsight.

mark55man

and a 472% increase followed by a 84% reduction ends up at only 90% of your original stake, so I'm not quite sure what you point is other than capital preservation is key.  Also if that year was your first year as a pensioner you would then be blown out of the water for the rest of your life.  This is looking like a much stronger argument for the certainty of annuity's than I was expecting (or in my case not playing games with my DB)

itwasntme001

And a DB pension may appear safe, but the reasons for sticking to it to avoid the risks of the asset markets is exactly the same scenario where DB pensions may be defaulted upon.

It is a tail risk, but a risk nonetheless.

Thrugelmir

itwasntme001 said:

MK62 said:

Deleted_User said:

US stocks 1929-1932 drawdown: 84%.  And thats just 100 years of historic data.  Other markets lost more, up to 100%. Someone 50 today can easily live another 50 years. A major event over that period of time is credible.

Though to put some perspective into that.......US stocks 1921-1929: +472%

Wild times to be a stock market investor....

As ever, the stock market can be a very lucrative place to make money.....or a place to learn some very harsh lessons (or both).......it's all a matter of timing........and that's hard to forecast and get right!

We could be in a mother of all bubbles in financial assets.  We just won't know for sure without hindsight.

Debt is now at a higher level than at the time of the GFC.  Next time maybe even more painfull.