Timing the market

Linton

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I am not reassured by SWRs.  Never mind the dubious assumption that the future will be similar to the past, nor the fact that their values are completely determined by a very small number of very large effectively random events. More importantly they are based on historic zero total failures over 30 or so years .  I would have worried myself to an early grave long before my investments had dropped to zero.

The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case.

So overall the broad % equity vs non-equity allocation may not be very different to say the traditional 60/40 portfolio.  Separating them means that one can set up the detailed allocations to meet the very different objectives and so hopefully achieve a financially stress-free retirement.

My comment wasn't really about SWRs. it was more about equities have been the only real option for long term inflation-beating returns. If you believe this will continue to be the case and are happy that the retirement pot will outlast you, then does the short and medium-term matter as much? 

"The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case."

I can understand this from an emotional POV, but not sure that it enhances portfolio sustainability.

https://blog.iese.edu/jestrada/files/2019/01/BucketApproach.pdf

I think the emotional POV is the most important one.  Emotions are perhaps the major factor in determining quality of life.  Clearly if one felt that one's strategy was not sustainable that would affect one's emotions.

The short/medium term portfolio strategy certainly enhances income stability compared with say Guyton-Klingor approaches.  
In the real world I believe that portfolio sustainability should not be a serious factor if the portfolio is monitored annually to ensure that corrective action is taken early if required - no one is going to sit by and watch it go to zero. A relatively small drop in income for the rest of one's life could cause much less anguish than major temporary falls, and that would not need to be considered until significant depletion of the short/medium term investments had occurred.

Provided of course that the drawdown rate is realistic, I believe that for most people most of the time corrective action should not be necessary.  The reason is that if one survives the first 5-10 years of retirement with no catastrophic crash then there is likely to be far more money in the retirement pot than planned.  You see this in the SWR graphs which show the median wealth at the end of the modelled period to be higher than that at the start.

BritishInvestor

Audaxer said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I think it all depends on the Sequence of Returns. In the case of a bad first decade of returns, I think a withdrawal rate of 3.7% for a 100% equity portfolio might not last over 30 years. 

That's actual historical data over the last >100 years, so I don't see how you can dispute that (what happens going forward is a different matter). Retiring in the late 60s, with poor markets and inflation a few years ahead was challenging.

[Deleted User]

There are other, better ways to invest defensively without making huge bets like excluding technology or putting twice as much in the UK/Japan as in the US.  

Looking at Morningstar benchmarks for RICO furnishes the proof.

https://www.morningstar.com/cefs/xlon/rica/total-returns

I understand its a popular fund, and I understand their  “wealth preservation” slogan resonates well.  I also see what they are doing, although its not very transparent. Its an all-season type portfolio with added options and some regional/value bets.  In the end, the buyer is betting on the manager being a genius because all season portfolios do lose money during bad times. 

[Deleted User]

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

You know what they say about past performance…

I don’t have a silver bullet. Sadly.  In general, in this situation one has to:

1. Maximize diversification. Free lunch. Have it.

2. Increase fixed income vs long-term horizon. Maybe not as much as at times with lower risk of inflation. 

3. You have to be imaginative with fixed income today.  Active bond funds may offer value. Preferred shares. I do hold some TIPS. Bought a while back and only partially sold. Annuities look interesting vs alternatives. 

MK62

Linton said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I am not reassured by SWRs.  Never mind the dubious assumption that the future will be similar to the past, nor the fact that their values are completely determined by a very small number of very large effectively random events. More importantly they are based on historic zero total failures over 30 or so years .  I would have worried myself to an early grave long before my investments had dropped to zero.

The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case.

So overall the broad % equity vs non-equity allocation may not be very different to say the traditional 60/40 portfolio.  Separating them means that one can set up the detailed allocations to meet the very different objectives and so hopefully achieve a financially stress-free retirement.

My comment wasn't really about SWRs. it was more about equities have been the only real option for long term inflation-beating returns. If you believe this will continue to be the case and are happy that the retirement pot will outlast you, then does the short and medium-term matter as much? 

"The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case."

I can understand this from an emotional POV, but not sure that it enhances portfolio sustainability.

https://blog.iese.edu/jestrada/files/2019/01/BucketApproach.pdf

Provided of course that the drawdown rate is realistic, I believe that for most people most of the time corrective action should not be necessary.  The reason is that if one survives the first 5-10 years of retirement with no catastrophic crash then there is likely to be far more money in the retirement pot than planned.  You see this in the SWR graphs which show the median wealth at the end of the modelled period to be higher than that at the start.

The problem is though.....at the outset, you can't rely on that being the case, so you must either set your withdrawal rate at such a conservative level that it can withstand such a crash without corrective action, or else you'll need to take corrective action if and when such a crash occurs - either that or use other mitigation methods, such as a large cash buffer or the bucket approach (effectively variations on the same theme).

All these approaches/strategies have their pros and cons, so picking up on the emotion theme, I suppose the one to pick is the one which lets you sleep soundest at night.

Personally I don't like the prospect of slashing income by large amounts......nor do I like the prospect of making it through the early years of retirement having not spent enough, so I planned accordingly (both of those things could still happen of course, they are just less likely).

It has to be said though, that my plan, if tested against just ploughing everything into pensions/ISAs over the last few years, will have cost me money if calculated today, but I like the greater peace of mind I've had.......of course it's possible that eventually the opportunity cost may be greater than any loss from a crash, but then that's one of the cons - there's no free lunch. (the crash I fear (and hence have tried to plan for) isn't really the 20% one - I could handle that without my full plan......it's the much bigger one with no recovery for many years, but I guess I'm not alone there - the chances of it happening might be slim, but the consequences if it did, for me, are just too great not to plan for, at least as far as is reasonably practical anyway - it's a balancing act in the end).

Audaxer

BritishInvestor said:

Audaxer said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I think it all depends on the Sequence of Returns. In the case of a bad first decade of returns, I think a withdrawal rate of 3.7% for a 100% equity portfolio might not last over 30 years. 

That's actual historical data over the last >100 years, so I don't see how you can dispute that (what happens going forward is a different matter). Retiring in the late 60s, with poor markets and inflation a few years ahead was challenging.

The following page says the 3.7% SWR is for a 60/40 portfolio:
The golden rule: working out a safe withdrawal rate - Citywire
"More than 100 years of market data for a 60/40 portfolio puts the SWR for the UK at 3.7%."

Thrugelmir

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I am not reassured by SWRs.  Never mind the dubious assumption that the future will be similar to the past, nor the fact that their values are completely determined by a very small number of very large effectively random events. More importantly they are based on historic zero total failures over 30 or so years .  I would have worried myself to an early grave long before my investments had dropped to zero.

The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case.

So overall the broad % equity vs non-equity allocation may not be very different to say the traditional 60/40 portfolio.  Separating them means that one can set up the detailed allocations to meet the very different objectives and so hopefully achieve a financially stress-free retirement.

My comment wasn't really about SWRs. it was more about equities have been the only real option for long term inflation-beating returns. 

The return from equities has been generated progressively by a smaller and smaller pool of companies. Vast majority don't beat inflation in the long run. I'm reminded of the quote. 

“Successful investing is only common sense. Each system for investing will eventually become obsolete.”

BritishInvestor

Audaxer said:

BritishInvestor said:

Audaxer said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I think it all depends on the Sequence of Returns. In the case of a bad first decade of returns, I think a withdrawal rate of 3.7% for a 100% equity portfolio might not last over 30 years. 

That's actual historical data over the last >100 years, so I don't see how you can dispute that (what happens going forward is a different matter). Retiring in the late 60s, with poor markets and inflation a few years ahead was challenging.

The following page says the 3.7% SWR is for a 60/40 portfolio:
The golden rule: working out a safe withdrawal rate - Citywire
"More than 100 years of market data for a 60/40 portfolio puts the SWR for the UK at 3.7%."

A 60/40 portfolio can be many things:

Global/UK equities
Global/local bonds/T Bills.

But my point remains, equities tend to improve portfolio sustainability over the longer term.

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I am not reassured by SWRs.  Never mind the dubious assumption that the future will be similar to the past, nor the fact that their values are completely determined by a very small number of very large effectively random events. More importantly they are based on historic zero total failures over 30 or so years .  I would have worried myself to an early grave long before my investments had dropped to zero.

The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case.

So overall the broad % equity vs non-equity allocation may not be very different to say the traditional 60/40 portfolio.  Separating them means that one can set up the detailed allocations to meet the very different objectives and so hopefully achieve a financially stress-free retirement.

My comment wasn't really about SWRs. it was more about equities have been the only real option for long term inflation-beating returns. 

The return from equities has been generated progressively by a smaller and smaller pool of companies. Vast majority don't beat inflation in the long run. I'm reminded of the quote. 

“Successful investing is only common sense. Each system for investing will eventually become obsolete.”

Maybe, but if you are buying the market, you're going to capture those returns?

Thrugelmir

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

Everything you are saying especially about diversification relates to the long term.  Yes for long term growth WP funds are not appropriate except possibly for someone with strongh risk aversion where perceived safety is more important than total return.

However in retirement the short and medium term are equally important.  One has to eat whilst awaiting for the markets to return to their long term trends.  The short term can satisfactorily be managed with cash.  The difficult one is the medium term, say time-frames of  5-10 or possibly a bit more years.  In this medium term cash becomes more of a risk because of inflation whilst medium term timeframes are too short for equity volatility not to be a concern.  Safe UK Bonds are currently out of the picture.  It is here where WP funds really are the only option that offers a reasonable hope on past performance of providing a greater than inflation return whilst avoiding major crashes.  It is reassuring that unlike many other funds this matches their stated objectives.

What is your proposal for managing the medium term?

I've just created a rough and ready example - 30 year retirement, zero fees

50% equity - 3.3% SWR
100% - 3.7%

Holding a 100% equity portfolio has (historically) provided a higher SWR than 50% equity. Of course, not many would be happy with a 100% equity portfolio, but equities do tend to give long term inflation protection. I'm not really sure how wealth preservation funds fit into the picture, or why you need to manage short or medium term?

I am not reassured by SWRs.  Never mind the dubious assumption that the future will be similar to the past, nor the fact that their values are completely determined by a very small number of very large effectively random events. More importantly they are based on historic zero total failures over 30 or so years .  I would have worried myself to an early grave long before my investments had dropped to zero.

The advantage I find with short and medium term portfolios is that severe drops in the long term investments can be completely ignored in the knowledge that they dont need to be touched for at least 10 years and probably much longer.  This has the resultant effect that the long term investments can be at a much higher risk level than would otherwise be the case.

So overall the broad % equity vs non-equity allocation may not be very different to say the traditional 60/40 portfolio.  Separating them means that one can set up the detailed allocations to meet the very different objectives and so hopefully achieve a financially stress-free retirement.

My comment wasn't really about SWRs. it was more about equities have been the only real option for long term inflation-beating returns. 

The return from equities has been generated progressively by a smaller and smaller pool of companies. Vast majority don't beat inflation in the long run. I'm reminded of the quote. 

“Successful investing is only common sense. Each system for investing will eventually become obsolete.”

Maybe, but if you are buying the market, you're going to capture those returns?

The eternal question I love to pose. Which market?