Once you've "won the game"

Albermarle

I wonder if it is worth starting to "invest" or if it's better to just keep the money "ticking over" with enough to cover inflation?

During some periods you can earn enough interest on cash savings to keep up with inflation , but most of the time you can not ( like today) . So to keep up with inflation long term you need to invest.

The issue then of course is that your target maybe say a modest 1 % above inflation , but designing a portfolio to achieve that is a matter of educated guesswork based on largely historical info , and most likely you will under or over achieve the target .

Keeping some in cash and investing some is a half way house but you would need to be a bit more aggressive on the investment side to reach the same target. 

Plus of course with investments there will be  some short/medium term wobbles along the way.

ex-pat_scot

waveydavey48 said:

I've read the expression "once you've won the game why keep playing" in relation to investing and it seems to refer to the situation where someone has invested long and well enough to be in the position where they have enough money to achieve their objectives, and the advice is that they should now de-risk. In other words why keep exposing your money to the vagaries of the market when you don't need to.
What happens next?
Is there a way to ensure your money just keeps pace with inflation so that it doesn't decrease in real terms, or maybe increases by 1 or 2% per annum?   

That's the classic approach taken by pension firms - when DB schemes become fully funded, they de-risk and invest in bonds / fixed interest assets, with a maturity profile that matches the underlying scheme liabilities (ie expected outflows of money to pensioners).

There are many ways of de-risking your portfolio, once you have "enough".
First is to understand how much is "enough" and whether it incorporates sufficient capacity to cope with stress/shocks.
Second is to know your own appetite for risk in general - what worries you, what you are happy with etc.
Thirdly is to look to your investments.
You can take a very cautious approach and buy an annuity. Not a terribly cost effective approach, but might be desirable for some
You can derisk some / all investments into cash, cash equivalent, fixed interest, bonds etc.
The Vanguard life series is quite a nice approach, in that it gives an equities / bonds mix for a fund, and you can take a broad strategic approach (eg LS20 is 20% equities 80% bonds) to dial down the portfolio risk.

michaels

ex-pat_scot said:

waveydavey48 said:

I've read the expression "once you've won the game why keep playing" in relation to investing and it seems to refer to the situation where someone has invested long and well enough to be in the position where they have enough money to achieve their objectives, and the advice is that they should now de-risk. In other words why keep exposing your money to the vagaries of the market when you don't need to.
What happens next?
Is there a way to ensure your money just keeps pace with inflation so that it doesn't decrease in real terms, or maybe increases by 1 or 2% per annum?   

That's the classic approach taken by pension firms - when DB schemes become fully funded, they de-risk and invest in bonds / fixed interest assets, with a maturity profile that matches the underlying scheme liabilities (ie expected outflows of money to pensioners).

There are many ways of de-risking your portfolio, once you have "enough".
First is to understand how much is "enough" and whether it incorporates sufficient capacity to cope with stress/shocks.
Second is to know your own appetite for risk in general - what worries you, what you are happy with etc.
Thirdly is to look to your investments.
You can take a very cautious approach and buy an annuity. Not a terribly cost effective approach, but might be desirable for some
You can derisk some / all investments into cash, cash equivalent, fixed interest, bonds etc.
The Vanguard life series is quite a nice approach, in that it gives an equities / bonds mix for a fund, and you can take a broad strategic approach (eg LS20 is 20% equities 80% bonds) to dial down the portfolio risk.

How do bonds protect from inflation risk?

Joey_Soap

I have some DB pension in payment so my basic living costs are covered. So my approach to "de-risking" after winning the game and stopping work has been to simply keep 2 to 3 years of expenditure in a cash buffer. And just keep the investment pot fully invested at all times. From tax year end 21-22, each tax year end I will be drawing down the accumulated natural yield as a one off sum for spending on travel and other good stuff now covid is less of an issue. After an exceptional investment year in the future, if one comes along, I might cash in some portfolio growth too. But we'll see when the time comes.

zagfles

You haven't "won the game" until you can buy an index linked annuity which will give you sufficent income. Look at the rates for indexed annuities, usually about 2% at 60, so a million would get you £20k pa.

No point approximating with a 3% escalating annuity, which is usually cheaper, inflation could easily go above 3%, a decade of 1970's inflation would over half the value of an annuity with 3% escalation.

If you can't afford that, you have not yet "won", and you need to take some risk, whether that's inflation risk, investment risk, longevity risk, or a combination. Of course as you get nearer to "winning", you can derisk, ie take less risk, but unless you buy an index linked annuity you are taking risk whatever you do.

[Deleted User]

Not sure if he was the first to make the claim, but this statement is a quote from William Bernstein.  He uses this phrase repeatedly in his books, eg The Four Pillars of Investing and Investing For Adults 
Series. 

He also provides a couple of solutions.  One of these solutions is a “liabilities matching portfolio”.   The key philosophy behind this is that stocks are not risky at all for young people but can be quite risky for someone approaching retirement and potentially toxic for a retiree. So, the idea is to provide for your needs with secure assets.  This can be a combination of delaying state pension, annuities and inflation linked bonds.  The “excess” can then be invested into stocks. 

MK62

Malthusian said:

There is one guaranteed way actually - buy an inflation-linked annuity. "Money" can mean "income" as well as "capital". If you buy an inflation-linked annuity then you will have the same amount of money to spend month-to-month for the rest of your life and that money will keep pace with inflation.

You have to forfeit a very large amount of potential income as well as the option of passing on (most of) the capital on your death, but the option's there.

Well, yes, fair enough if talking about income.....as you said though, index linked annuities will not protect your pot, they will consume it, so you have to be absolutely sure before going down that route.

Audaxer

If you are a retired couple with say, a couple of DB pensions and SPs that more than covers your annual expenditure, then I would say you have 'won the game' because you already have more than enough guaranteed income increasing with inflation.  If you have also accumulated a significant amount of investments you could keep it invested if you want to leave a big inheritance, or you could de-risk significantly by moving it mostly to cash to actually spend it when you are still young enough to enjoy it. 

Thrugelmir

michaels said:

ex-pat_scot said:

waveydavey48 said:

I've read the expression "once you've won the game why keep playing" in relation to investing and it seems to refer to the situation where someone has invested long and well enough to be in the position where they have enough money to achieve their objectives, and the advice is that they should now de-risk. In other words why keep exposing your money to the vagaries of the market when you don't need to.
What happens next?
Is there a way to ensure your money just keeps pace with inflation so that it doesn't decrease in real terms, or maybe increases by 1 or 2% per annum?   

That's the classic approach taken by pension firms - when DB schemes become fully funded, they de-risk and invest in bonds / fixed interest assets, with a maturity profile that matches the underlying scheme liabilities (ie expected outflows of money to pensioners).

There are many ways of de-risking your portfolio, once you have "enough".
First is to understand how much is "enough" and whether it incorporates sufficient capacity to cope with stress/shocks.
Second is to know your own appetite for risk in general - what worries you, what you are happy with etc.
Thirdly is to look to your investments.
You can take a very cautious approach and buy an annuity. Not a terribly cost effective approach, but might be desirable for some
You can derisk some / all investments into cash, cash equivalent, fixed interest, bonds etc.
The Vanguard life series is quite a nice approach, in that it gives an equities / bonds mix for a fund, and you can take a broad strategic approach (eg LS20 is 20% equities 80% bonds) to dial down the portfolio risk.

How do bonds protect from inflation risk?

When you've "won the game" then protection of capital becomes the primary objective. Inflation is very much down to how an individual spends their money. 

bostonerimus

"Winning the game" can mean different things to different people. Is it having 1M in the stock market and needing 30k or 40k each year or retiring with a DB pension? If you can genuinely not worry about having enough income for your entire retirement then I think you have "won the game" on your terms. That then argues that you have enough money and income sources that you don't have to worry about the stock market and rather than de-risking you can invest aggressively.