When there is no need for asset diversification?

lozzy1965

Assuming that one is saving for retirement, one sets a target annual income to achieve.  One invests in higher risk/higher return assets when one is younger - higher risk meaning higher short term risk, higher return meaning higher average long term return.  In theory, one then de-risks as one approaches retirement, to minimise the short term risk of lower than expected returns.
What if one reaches a target of - say 150% - of ones desired annual income?  Then I suggest there is no need to de-risk.  You can suffer a 33% loss in investment with no loss of annual income and more than this if you consider that on average you can build your investments back up again during retirement when you are getting higher than average returns.
Thoughts on this anyone?

dunstonh

What if one reaches a target of - say 150% - of ones desired annual income, then I suggest there is no need to de-risk. 

You make a decision at the time.   Your views on risk will change over the years and will not be static.

Albermarle

You could argue it the other way . If you have 150% , why take unnecessary risk . There have been a few occasions in history when markets have taken many years to recover from a slump.

maxsteam

You seem to be thinking that high risk investments will bring high returns in the long term. It's just one possible outcome.

Apodemus

Perhaps there is also a mis-match between your thread title and content - the need for diversification and the need to de-risk are not necessarily the same!

lozzy1965

maxsteam said:

You seem to be thinking that high risk investments will bring high returns in the long term. It's just one possible outcome.

Maybe I've not been specific enough. I don't mean 'high' risk (unregulated/crypto), but 'higher' risk.  For example, a fund exclusively invested in shares might be considered high risk vs one that includes bonds/gold/other investments.  But one might expect the return on average over many years to be higher for that fund than a lower risk fund.  The 'risk' being that short term (over years possibly), the returns may be low.  This being compensated for by higher than needed returns in the 'good' years.

bostonerimus

It's all about matters of degree. How much do you have? How much do you need? How much does an economic crash wipe off your undiversified risky pot? How much do you believe the modeling? The "good years and bad years" scenario is baked into variable withdrawal strategies. Some people do maintain high equity allocations into retirement without the safety net of DB pensions or annuities, but they will usually keep the diversity of a cash buffer to ride out the equity down turns.

jimjames

In terms of the thread title I can't think of any situation when you wouldn't want diversification. Even if you have 100% cash you'd want to have different banks so you can still access. If equities then you wouldn't want only one region covered.

Malthusian

A loss that you can afford is still a loss. It will still leave less available for your heirs / charitable interests / future cruise fund / care costs / whatever your surplus income is going to be used for.

Most people will still suffer sleepless nights if they're ravaging a fund that is 40% down, even if it will turn out with hindsight that they'll have enough left once the market has eventually gone back up. Remember that the credit crunch induced recession was going to last a decade and the stockmarket crash of 2020 was going to last for years until the world crawled out of the pandemic.

So your fund has fallen by 33% and is now at exactly the level needed to sustain your income indefinitely. Does that mean you'll be resting easy? Because most people will be panicking because everyone will be saying that the market is bound to continue falling (which is what all the experts and everybody else says at the bottom of the market) and that means your fund is about to drop below the level you need for an indefinite period of time.

For most people it will still make more sense to keep some money in cash and/or low-risk investments than ravage a plummeting high-risk portfolio and go "whevs, it'll all work out".

Alexland

Albermarle said:

If you have 150% , why take unnecessary risk .

The problem is with recent high inflation moving too much into expensive bonds or cash isn't lowering the long term shortfall risk so under current market conditions it seems worth over-accumulating (which is pretty easy given recent investment returns) and maintaining a high proportion of equities. That way you still have enough in 'safe' assets to cover prolonged market downturns but the majority of your money should grow well, with some volatility, over the long term.

lozzy1965

Good points all.  Thanks for the contributions.
The cash comments are certainly a good point regarding diversification to ride out any downturns.
I guess I'm thinking of/hoping for a 30 to 40 year retirement plan.  One still wants the best return vs risk possible, so yes, that will depend on ones risk appetite.  Balanced of course against the risk of running out of money through inflation erosion.