When there is no need for asset diversification?

lozzy1965

Malthusian said:

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.

I guess this thread is probably aimed more at the seasoned investors who know that the markets go up and down all the time, so don't panic when they go down.

dunstonh

lozzy1965 said:

Malthusian said:

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.

I guess this thread is probably aimed more at the seasoned investors who know that the markets go up and down all the time, so don't panic when they go down.

But seasoned investors know that there will be periods where losses can be greater than 40% and there will be periods that could last decades before they recover.    So, putting your whole retirement plan on 100% equities when you know you have enough to fund your retirement could be folly.

Prism

lozzy1965 said:

Malthusian said:

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.

I guess this thread is probably aimed more at the seasoned investors who know that the markets go up and down all the time, so don't panic when they go down.

I'm not sure any of us really know how we would deal with an 80% drop in our investments in a relatively short space of time. I'd rather not try and find out while retired.

maxsteam

lozzy1965 said:

But one might expect the return on average over many years to be higher for that fund than a lower risk fund.  

No. It doesn't work like that. There are plenty of statistics for funds over the years. A high risk fund can lose money in the long term.

Thrugelmir

lozzy1965 said:

 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.  

Higher risk is higher risk. Doesn't diminish with time. Volatility is a form of risk. Of which there are many kinds. 

There's no guarantees that higher risk will result in higher returns. Investments need to targeted and risk adjusted. Company structures and the equities they issue can take many forms. 

The art of diversification is for a portfolio to produce the optimum return whatever the weather. As no asset class sits top of the tree every year. Bubbles will form from time to time. Being overweight when the correction occurs can be painfull. If a share price falls 20%. Then it's got to recover 25% just for you to breakeven. 

lozzy1965

I think I probably should have read this before posting   It's US based.

https://www.visualcapitalist.com/historical-returns-by-asset-class/

Note (near the bottom) that it still shows that on average ALL forms of stock outperform all other asset classes over time.  Big variations within that timeframe though.

Thrugelmir

lozzy1965 said:

I think I probably should have read this before posting   It's US based.

https://www.visualcapitalist.com/historical-returns-by-asset-class/

Note (near the bottom) that it still shows that on average ALL forms of stock outperform all other asset classes over time.  Big variations within that timeframe though.

Same principles apply in the UK. Currency movements having a major impact on outcomes as well. 

Albermarle

Alexland said:

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.

Your point is very valid, and as you know this subject of what are valid alternatives to equities in the current situation is not an easy one to answer.
However 100% equities in the OP's situation seems too risky, and surely some dilution with cash, bonds, gold, infrastructure would be wise . At what % would be debatable of course.

Thrugelmir

Albermarle said:

Alexland said:

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.

Your point is very valid, and as you know this subject of what are valid alternatives to equities in the current situation is not an easy one to answer.
However 100% equities in the OP's situation seems too risky, and surely some dilution with cash, bonds, gold, infrastructure would be wise . At what % would be debatable of course.

"Equities" is a broad generalisation. Company activities take many forms and as a result will perform very differently depending on economic circumstances. 

itwasntme001

lozzy1965 said:

I think I probably should have read this before posting   It's US based.

https://www.visualcapitalist.com/historical-returns-by-asset-class/

Note (near the bottom) that it still shows that on average ALL forms of stock outperform all other asset classes over time.  Big variations within that timeframe though.

It also seems to have chosen a time period (last 40 years) which has been particularly generous for equity investments (lowering of interest rates, favourable demographics, low hanging fruit in technology and innovation etc).

There's no guarantees favourable conditions will persist.  And that is the problem with investing under uncertainty.  You just don't know when that terrible bear market will hit your finances so hard that your lifestyle suffers from it.

All-weather approach is suitable for money that you don't necessarily need to earn an out-sized return on.  Protecting capital becomes more important when the likelihood of ruin rises.

Statistics based on historical averages are completely meaningless.  Our lives are non-ergodic.  In other words we only get to live our lives once.

Invest accordingly.