Upside Gains vs Downside Protection

chiang_mai

Malthusian said:

chiang_mai said:

One last thought: which of us doesn't buy insurance of some sort in our daily lives, it seems odd that people would buy life insurance etc but not buy similar when investing.

If I die and my spouse waits an indeterminate period of 5-10 years, I'm not going to come back to life.

Most investors do have downside protection in the sense of 1) alternative asset classes to reduce volatility and 2) a cash emergency fund to ensure that it's unlikely they'll need to cash in investments during a downturn. Gung-ho DIY investors who go 100% equities are in a minority.

Most investors hold any or all of 1) workplace pension default funds 2) Vanguard Lifestrategy type "60/40" funds 3) risk-targeted portfolios designed by advisers or the likes of Nutmeg 4) DIY portfolios with some downside protection.

It does not make sense to me that a person would work all their life to acquire wealth and then in the final 10% of their life, risk losing a substantial portion of that wealth, simply because they didn't modify their approach.

The final 10% of life for the typical investor is 80-90, possibly older.

If your heirs are of a similar mindset to you, and are likely to leave any inherited funds invested, you are not necessarily running any more risk of loss than you were at 60. If your invested assets fall by 20% or 40% just before death you don't fall down the high score table.

I love the positivity in this thread regarding longevity, everyone thinks they're going to live to be 90. 

My/our heirs are not UK citizens and are not of similar mindsets. We are expats married to Asian women who wouldn't begin to understand SIPP investing in the UK, the associated taxes, foreign currency exchange implications, local tax implications or a myriad of related issues. When I die, my SIPP dies also. So yes, A fall of 20% or whatever just prior to death is a big important issue, for us.

adindas

chiang_mai said:

adindas said:

chiang_mai said:

Half my portfolio is split between RICA, PNL and CGT. Another 25% is in Cash and the last 25% is split between MWY, FSSA Asia Focus and BG Int. That combination should, on a historical basis, achieve around 12% per year but also provide significant downside protection. I'm currently down 3.1% YTD but up 6.5% over one year. I'll allocate most of the remaining Cash as soon as the time seems right. A couple of friends are big BG fanatics, one holds nearly all the big BG funds but is down 28% over one year and holds no downside protection whatsoever. We constantly debate whether 60/40 is dead and the 40 is merely a drag on the 60, I think it is but that's the price to be paid for protecting the downside, I'm holding only 40% equities! I think they're hairy chest types who don't understand what they've invested in. They think I'm foolish for holding so few equities, we're all in our mid/late 60's and the money involved is not central to our well being. I also think many have unrealistic expectations of what is a reasonable gain each year. What do you think?

Have you thought about hedging it ??

For instance protection against inflation is to have some gold in your portfolio. Unless you have done that since November/Dec last year, but it is too late now as the price of gold have shooting up.

The other strategy is going "short".

There are various variations such as put option, short ETP, or the easiest one is to buy and inverse ETFs., it could be leveraged or unleveraged.

If you "strongly believe" that your current high growth stocks or ETFs position will be going down  much further from here you could for instance hedge  by opening SQQQ (ProShares UltraPro Short QQQ ETF) a 3X Short QQQ Inverse ETF

Similarly to S&P500, by openingg SPXU (ProShares UltraPro Short S&P500) Inverse ETF this is a 3X Short S&P 500

Just need to make sure that you understand about the risk and how the short, put option, Short ETP, Inverse inverse ETF work.

Hedging and short will limit your damage when your current portfolio going south but it will also limit your profit when the stock market is going up.

The long term solution is by composing an all weather, weather proof portfolio. such as Ray Dalio all weather portfolio.

https://www.optimizedportfolio.com/all-weather-portfolio/

https://www.optimizedportfolio.com/all-weather-portfolio/

Doing hedging, going short right now will only make sense and make profit if the current market have more in the downside compared to the upside. I personally believe that market especially high growth stock is already very close to the bottom and due for reversal. This is also the views of many wall-street strategists / analysts if you regularly watch the stock market news.

The high growth stock even the very good one has been battered recently going down 50% or even more as 70%+. The downside is 30%, the upside is 100%+ which one is bigger ??. Let alone many of these high growth stocks are highly unlike to go bankrupt as they do not have comparable substitute.

I am very comfortable with my holdings and plan to do almost nothing with them, apart perhaps from scaling up. The point of the discussion, as outlined in the original post, is about the degree of risk a person at or beyond retirement age should take.

But you are aiming to achieve 12% per year but at the same time want to get downside protection by just holding 40% Equity and asking whether it is unrealistic expectations or not. The protection against the downside, limit the damage in the downside is hedging, going short, inverse ETFs, all weather portfolios.

A historic annualized return of S&P 500 (e.g 100% Equities) is only around 10.5% since its 1957 inception through 2021. Let alone if you include 2022  ??

This is also the performance of VLS 40% equity

dunstonh

I love the positivity in this thread regarding longevity, everyone thinks they're going to live to be 90. 

In reality, most people underestimate their life expectancy.   Only just over a quarter will live beyond 90.   Although over half will get into their 80s.  That bit is often a surprise to many who think mid 70s is a  good run.

When I die, my SIPP dies also. So yes, A fall of 20% or whatever just prior to death is a big important issue, for us.

In the UK, it doesn't die with you.   The value is paid to beneficiaries.

chiang_mai

dunstonh said:

I love the positivity in this thread regarding longevity, everyone thinks they're going to live to be 90. 

In reality, most people underestimate their life expectancy.   Only just over a quarter will live beyond 90.   Although over half will get into their 80s.  That bit is often a surprise to many who think mid 70s is a  good run.

When I die, my SIPP dies also. So yes, A fall of 20% or whatever just prior to death is a big important issue, for us.

In the UK, it doesn't die with you.   The value is paid to beneficiaries.

Oddly, I do understand what happens to my SIPP when I die! It ceases operation and is paid out to beneficiaries, in my imprecise none UK English that means it dies with me!

I also have more than a fair indication as to my likely longevity which means I will expire in my 70's.

chiang_mai

adindas said:

chiang_mai said:

I am very comfortable with my holdings and plan to do almost nothing with them, apart perhaps from scaling up. The point of the discussion, as outlined in the original post, is about the degree of risk a person at or beyond retirement age should take.

But you are aiming to achieve 12% per year but at the same time want to get significant downside protection by just holding 40% Equity and asking whether it is unrealistic expectations or not. A historic annualized return of S&P 500 (e.g 100% Equities) is only around 10.5% since its1957 inception through 2021. Let alone if you include 2022  ??

This is the performance of VLS 40% equity

No I am not!

If you read again carefully what I wrote, I said that I achieved 12% total return in the 12 months ending October 2021 and that I do not have any idea what the return might be going forward, but I do not  expect it to be the same again.

And no, I was not aware that the 65-year average return of the S&P was only 5%, probably because I consider that to be a meaningless statistic. Personally, I would never consider buying an S&P tracker and holding it for 65 years. I would however consider buying a fund that is driven by an experienced and talented Fund Manager, who in turn would buy a select few components of the S&P, a fund which I might hold for a few years and which under "normal" circumstances would return far in excess of 5% per year.

masonic

It's also worth bearing in mind that for each year you survive, your likelihood of reaching such a ripe old age increases. Of the just over half that get into their 80s, around 50% will live beyond 90. Those without serious health conditions at that age are even more likely to survive that long. It's prudent to plan for the longest feasible lifespan.

chiang_mai

For those posters who are fixated solely on the 40% equities aspect, can I just point out that indivudal funds also hold non-equity instruments that produce income or a return, gold, property, TIPS, bond payments and dividends etc. Of the 75% of my funds that are invested, 43% is invested in equities whilst 57% is invested in non-equity type investments, including cash held by funds which in the case of RICA presently is 15%. These numbers are separate from the over 25% cash I hold at present, which is why earlier I said that I intended to scale up to reduce cash holdings.

Malthusian

chiang_mai said:

I love the positivity in this thread regarding longevity, everyone thinks they're going to live to be 90. 

From an investment risk point of view, expecting a long life is negativity, as your money has to last longer.

As dunstonh said, most people underestimate life expectancy. For someone in good health with investments to live on, assuming you will live to 90 is both a reasonable goal and erring on the side of conservatism.

Average life expectancy for a UK male currently aged 65 is 85, but if you're currently in good health and you have money, your own odds are considerably better than average.

My/our heirs are not UK citizens and are not of similar mindsets. We are expats married to Asian women who wouldn't begin to understand SIPP investing in the UK, the associated taxes, foreign currency exchange implications, local tax implications or a myriad of related issues. When I die, my SIPP dies also. So yes, A fall of 20% or whatever just prior to death is a big important issue, for us.

Fair enough. But most people in the UK with investments aren't expecting their spouses to cash it all in on their death. There is simply no need in a modern financial system with reasonably good regulation. If the widow lacks their spouse's financial knowledge they can employ an independent adviser.

masonic

chiang_mai said:

For those posters who are fixated solely on the 40% equities aspect, can I just point out that the funds also hold non-equity instruments that produce income or a return, gold, property, TIPS, bond payments and dividends etc.

I was under the impression that the "property" exposure was through REITs, which behave quite differently to bricks and mortar property funds. I wouldn't class this as defensive and I believe it is included in the 40-45% equities total (PNL does have a stated 0.1% property allocation, but I'm ignoring that due to its insignificance). Inflation linked bonds will be doing most of the heavy lifting across the three trusts you mentioned in the first post. Due to capital appreciation, their real YTM will be negative. While gold has been very useful recently, if you look at a very long term inflation adjusted chart, it is looking rather overpriced right now, so the prospects of a more sustained real return are low.

It's a pretty dire situation in the defensive investment space. As a holder of these trusts, I've sought to diversify away from bonds somewhat. The hope is that total return from the 40% will balance out real losses from the 60%, but I think there is quite a challenge for these funds to meet their mandate in what is shaping up to be an extremely tough climate. They have at least performed very well in the recent shock scenario.

Notepad_Phil

chiang_mai said:
... Personally, I would never consider buying an S&P tracker and holding it for 65 years. I would however consider buying a fund that is driven by an experienced and talented Fund Manager, who in turn would buy a select few components of the S&P, a fund which I might hold for a few years and which under "normal" circumstances would return far in excess of 5% per year.

You might be lucky and find such a fund that continues to provide good performance (for a few years anyway), but you'd need to keep a constant watch on its performance otherwise you could find yourself coming back to this forum in years to come to join the many threads of reports of once high flying funds coming to a juddering downturn in performance far worse than the rest of the market.

Personally, if I had to choose between only active management or only passive index funds then I'd go passive. I might not always get the highest year on year results, but over a longer period of time its likely that it will beat most active funds in that area -  unless you're investing in a niche area, which the S&P certainly isn't.