My Pension Funds terrible performance

Linton

Linton said:

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So your problem is that you are significantly invested in longer term bonds which have been extremely badly hit by the rise in interest rates and fall in UK bond prices of the past 6 months.  It would seem that until then your portfolio would have been performing reasonably well given its high bond allocation.  Sadly you started your increased contributions at around the top of the bond market.

Tony_J said:

I was a little vague when I said 5 years or more.  I'm currently 64, but don't intend to stop working soon.  But there are annual redundancies and I may have no choice.  Nonetheless I have savings that I could live on for a number of years and my intention with this fund (and another 2 I have) would be to use them for drawer down.  I think the forecasted retirement age I put was 70.

I'm afraid your last sentence went a bit over my head.  But thanks for the comment.  So as the drop is due to interest rate rises, I suppose I could expect further drops in the short term.  But would a reduction in the interest rate allow that part to recover.

To expand on my last sentance:

Ever since the 2008 Great Crash until recently interest rates have been dropping.  When interest rates drop existing bonds, particulalrly those with long dates to maturity  become more valuable since they return the previously normal rates - if you have a bond returning 4% that matures in say 20 years time and the interest rates available now are only 1% someone will pay a lot extra to buy your bond.  When interest rates rise, the reverse happens.

Interes rates reached close to zero so this  process started winding down about a year ago with attempts to increase interest rates to perhaps something like the pre-2008 normal.  Then early this year we had the bombshell of the Ukraine invasion and the fallout from the sanctions on Russia.  Plus of course the efforts of the new Conservative government.  UK bonds have become less desirable. All this was happening soon after you increased your contributions.

I agree with Albemarle that much of the hit has already happened, but I dont see any recovery to previous values in the short/medium term future.

Albermarle

Tony_J said:

Marcon said:

A knee jerk reaction to a short term loss such as switching funds locks in your losses,

That's a very good way to express what I meant. 

I would not be able to make an informed decision without advice.  Would it be worth seeking and paying for a financial advisor for this relatively modest amount.  Particularly as it is a work pension (salary sacrifice, so saving N.I), so I guess locked into what options the scheme allows.

The fund size is around about the limit of where most financial advisors would get interested, especially as you are still contributing. Even with a workplace pension there are different options, some have up to 300. An advisor could not really manage it for you, but a one off discussion and advice on what to do could be possible.

[Deleted User]

Given the size of your pot, I doubt the advisors would be keen to help.

The “change and have losses locked in” argument does not work.  If the portfolio is poorly designed, then it should be changed.  Investments can take a long time to recover. 20th century has seen decades on end of negative returns for bonds.  It is true that changes should not be rushed though. 

The portfolio you have is fairly standard for your age, so not surprised it would be in “default funds”.  In 2020, as bond rates dropped to negative in real terms while governments introduced multiple inflationary measures, it became clear that bonds were going to lose money and that long term bonds were going to lose more. Thats what we saw happen in 2022.

The future of bond performance is less certain.  An unexpected drop in inflation or further QE would play out very well for your portfolio.  UK is likely heading for a major recession so this scenario seems plausible. That’s a guess though; we could see more unexpected inflation and then you would see further losses. 

The other reason for poor returns is that of the 40% of your equity allocation 50% is in UK stocks.  British stocks underperformed, particularly when compared to the US.  50% is    too high.  UK makes up 5% of the world stock market by value. I would limit UK to 20-30% at most. 

Don’t know what you have available, but I would change asset allocation to 60/40 and reduce UK within your equity holdings.    But I don’t know your circumstances and what you have in your other “dormant” funds. You should try to treat all your pension pots as a single portfolio. 

dunstonh

The fund size is around about the limit of where most financial advisors would get interested, especially as you are still contributing. 

It is.    Probably on a transactional basis rather than servicing.  

JohnWinder

I don’t think we know enough about your circumstances to be very definite about what you should do. Won’t stop me doing pretty much just that however.

I can’t make anything of those tabled figures you provided, but I’ll take it that you have a ‘40/60’ portfolio.

Have a look at 50 years of returns for a 40/60 vs a 60/40 (equities/bonds) portfolio. One returned 7.1%/year and the other 7.7%. 0.6%/year is not to be sneezed at, but over your remaining years of investing it’s much less important that for a 50 year investing period. So, don’t up-end everything just because a ‘sensible’ balance for a lot of people is 60/40.

Secondly, a global weighted equity balance is favoured because it doesn’t put too many eggs in a basket the rest of the investing world thinks shouldn’t have so many eggs in. But there’s enough to support a ‘home bias’ with more UK stocks than someone in Canada ‘should’ own, so don’t up-end everything just because it is ‘ideal’ to one way of thinking.

Thirdly, you’ve got index funds it appears. I don’t know what indexes they’re following, or how closely, but they’re probably suitable enough choices, so don’t up-end everything seeking ‘the perfect’ when ‘the satisfactory’ will do.

Fourthly, it’s too easy to think your portfolio is poorly constructed when it performs poorly today/this year; what’s important is how it has performed up to when you finish taking cash from it. It seems you’re a long way away from that. You seem to be in the unfortunate position of not sufficiently understanding your investments (the nature of them, how they’ve done in the long past, and how they’ll serve your needs), so don’t up-end everything, only to feel they need up-ending again in a few years for similar or vastly different reasons on the basis of still not understanding your investments. 

Fifthly, if you take (even pay) for expert advice, there’s no reason to say it will result in you getting a more suitable portfolio; we read every few weeks here the doubtful choices ‘experts’ have burdened clients with. And if you don’t make some effort to understand the basics of personal investing you might have up-ended everything only to find yourself in the same situation in 10 years that you’re in today, wanting to up-end again.

Don’t rely on other people if you’ve got some ordinary reading skills to educate yourself to a basic level if you want peace of mind, and don’t think anyone else can determine with certainty the perfect portfolio ahead of time. 

[Deleted User]

Secondly, a global weighted equity balance is favoured because it doesn’t put too many eggs in a basket the rest of the investing world thinks shouldn’t have so many eggs in. But there’s enough to support a ‘home bias’ with more UK stocks than someone in Canada ‘should’ own, so don’t up-end everything just because it is ‘ideal’ to one way of thinking.

There is enough to support some limited home bias. Do you have examples of analysis supporting 50% UK stocks?  Keep in mind that he likely has 100% of his bond allocation to UK as well. 

I suggested to consider 60/40 over 40/60 because the former is likely to be less of a risk given the limited information we have.  So not just “returns”.  Last 50 years included 40 years of interest rates steadily dropping and is not all that informative as different scenarios need to be considered.

Agree that paying for  IFAs may or may not help, and could be counterproductive. Reading is a far better option. 

JohnWinder

Here is a Vanguard paper. The reader, if they’re not Australian, has to do their own adjusting for relevant market considerations eg sector concentration in the home market, and the approach has a ‘finger to the breeze’ feel about it. Readers will reach different home bias percentages; I’d be interested to hear what readers think UK should be based on these ideas.

https://www.vanguard.ca/documents/home-bias-allocation.pdf

The other analysis has so much data that I can’t do it justice with a summary, but it tests home bias no more than 43% UK 55% global for UK investors and concludes it hasn’t been a bad mix over a recent 50 years. Readers might conclude less would suit them better from now on based on this analysis. https://www.bogleheads.org/blog/2020/03/02/50-years-of-investing-in-the-world-part-3/ 

Do you have examples of analysis supporting 50% UK stocks?  

I don’t think those analyses convincingly support any figure, and the further you deviate from a global weighting the better the argument should be to justify the deviation I suppose. But they say to me that 50% UK for a UK investor shouldn’t be thought of as a hanging crime. If the OP was 100% cash we could reasonably say ‘for goodness sake get some get some equities even if you don’t understand what you’re doing’; but the portfolio described is adequate enough for me to think the best course of action is ‘get a basic understanding of investing, and tweak it as you see fit, rather than risk up-ending it whenever returns take a short term dive or the cognoscenti says you can improve it in a variety of ways’.