risk profiling - lower risk actually = higher risk

dunstonh

Last couple of monitoring reports have indicated a surplus, even not accounting for the cuts made in April last year.

Yes, I read about that.  It seems like a lot of discussion between both sides is what date point should be used.

That's largely because the last valuation was taken precisely in the dip of the market crash of 2020 (the start of Covid lockdowns), and the resulting deficit was used to justify further cuts to the scheme. 

Although this year has brought many portfolios back to that level.

[Deleted User]

I think the OP is spot on.  “Risk” isn’t well defined or handled by the industry.  I am a big fan of Bernstein’s “Deep Risk”. The OP could read the book and then evaluate his own risk following the method described by Bernstein. Nobody knows you better than you do.

Linton

Pat38493 said:

Mistermeaner said:

hi

question regards risk profiling

I understand that a number of investment companies / advisors will work with clients to understand their 'risk profile' and then structure their invetsments accordingly

i.e. someone 'risk adverse' would be put into generally lower volatility products such as bond weighted funds where as someone with a higher risk appetite would be higher in equities etc.

while i get the principle of this is it not somewhat self defeating as over a long term (esp with pensions) regardless of your 'risk tollerance' going bond heavy at age 20, 30 even 40 and 50 is simply lowering your returns and therefore exposing you to greater risks

Isn;t the concept just misplaced?

Reason for asking my company is moving to a new DCpension provider and the new company will be offering a 'risk review' to help people decide on their investments - i see the whole process as somewhat arbitrary and flawed

Appreciate thoughts and comments 


Thanks

As you can see from perusing these boards, a lot of people tend to get a bit of a panic on if they see their pension fund making precipitous drops in value, so if your pension fund dropped by 40% when you were one year into retirement, can you still stay rational enough to assume that this is still within the parameters of past history that you tested against, and therefore you don't need to take any action?  

Even if you know your strategy is fully rational, if you are the type of person who will lose a lot of sleep when your pension has dropped a lot early in retirement, I guess this is why people need profiling - you might be wealthier in the long run but you might not be happier if you are losing lot of sleep worrying about the recent market crash.

However fundamentally you are not far off - putting too much of your funds into low valatility and low risk investments is likely to end up with you working a lot longer.  

I know a couple of people who are fully aware of all this, but they still keep bringing up how much their fund dropped this year - go figure....

Rationally I suppose you should only start worrying if the markets do things that have never happened before and you were not prepared for in your retirement planning.

I think this is putting too much faith in the parameters of history.

In practice we have no really reliable parameters of history.  Take a 30 year SWR based on 120 years of stock market records.  There are only 3 completely independent 30 year periods in 119 years.  In that 120 years we had 2 world wars, the rise and fall of major industries,  the  rise of the USA from an emerging market into a world dominating economic super power and the destruction of global empires. What will the next 30 years bring?  Who knows but it could well be quite different to what has been seen before.

For example the recent large fall in bond prices is, I believe, unprecedented and only happened following an unprecedented rise over the previous 40 years.

So ISTM to make sense to derisk as far as you need to ensure your day to day income is protected up to the point where a projected scenario means the end of the world financial system as we know it.  Beyond that you just have to shrug your shoulders and accept you will have to join the queue for the soup kitchen along with everyone else.  This approach means that if your pension fund drops by 40% you know that your day to day living expenses  are safe for the next say 10 years and so you are under no pressure to act immediatly and end up doing something foolish.

Pat38493

Linton said:

Pat38493 said:

Mistermeaner said:

hi

question regards risk profiling

I understand that a number of investment companies / advisors will work with clients to understand their 'risk profile' and then structure their invetsments accordingly

i.e. someone 'risk adverse' would be put into generally lower volatility products such as bond weighted funds where as someone with a higher risk appetite would be higher in equities etc.

while i get the principle of this is it not somewhat self defeating as over a long term (esp with pensions) regardless of your 'risk tollerance' going bond heavy at age 20, 30 even 40 and 50 is simply lowering your returns and therefore exposing you to greater risks

Isn;t the concept just misplaced?

Reason for asking my company is moving to a new DCpension provider and the new company will be offering a 'risk review' to help people decide on their investments - i see the whole process as somewhat arbitrary and flawed

Appreciate thoughts and comments 


Thanks

As you can see from perusing these boards, a lot of people tend to get a bit of a panic on if they see their pension fund making precipitous drops in value, so if your pension fund dropped by 40% when you were one year into retirement, can you still stay rational enough to assume that this is still within the parameters of past history that you tested against, and therefore you don't need to take any action?  

Even if you know your strategy is fully rational, if you are the type of person who will lose a lot of sleep when your pension has dropped a lot early in retirement, I guess this is why people need profiling - you might be wealthier in the long run but you might not be happier if you are losing lot of sleep worrying about the recent market crash.

However fundamentally you are not far off - putting too much of your funds into low valatility and low risk investments is likely to end up with you working a lot longer.  

I know a couple of people who are fully aware of all this, but they still keep bringing up how much their fund dropped this year - go figure....

Rationally I suppose you should only start worrying if the markets do things that have never happened before and you were not prepared for in your retirement planning.

I think this is putting too much faith in the parameters of history.

In practice we have no really reliable parameters of history.  Take a 30 year SWR based on 120 years of stock market records.  There are only 3 completely independent 30 year periods in 119 years.  In that 120 years we had 2 world wars, the rise and fall of major industries,  the  rise of the USA from an emerging market into a world dominating economic super power and the destruction of global empires. What will the next 30 years bring?  Who knows but it could well be quite different to what has been seen before.

For example the recent large fall in bond prices is, I believe, unprecedented and only happened following an unprecedented rise over the previous 40 years.

So ISTM to make sense to derisk as far as you need to ensure your day to day income is protected up to the point where a projected scenario means the end of the world financial system as we know it.  Beyond that you just have to shrug your shoulders and accept you will have to join the queue for the soup kitchen along with everyone else.  This approach means that if your pension fund drops by 40% you know that your day to day living expenses  are safe for the next say 10 years and so you are under no pressure to act immediatly and end up doing something foolish.

LOL so I'm tempted to ask if you think it will be worse than "in that 120 years we had 2 world wars, the rise and fall of major industries,  the  rise of the USA from an emerging market into a world dominating economic super power and the destruction of global empires"?  Possibly I guess.

I guess I am in a fortunate position in that even if I lost more than half my pension income, I'd still be better off than the majority of pensioners I suspect even in this country let alone globally, so I wouldn't be starving.  If that happened, I suspect many would be starving.

To be honest, if there was a massive crash more than 50% that was then sustained for many more years than has ever happened in the past, I suspect that even your so called guaranteed funds would have an issue remaining solvent as they would end up defaulting on payments.

More interestingly, what is your statistical grounds for saying that you cannot examine periods by month with overlapping scenarios?  Pretty much every model I've seen does that including some models that were developed by people who claim to have a degree in statistics - if you are saying their entire approach is invalid I'm surprised there isn't a bigger debate about it all the time?   I am not a statistician but I've seen some people write that the overlapping approach is valid as long as you use particular adjustments and methods in your statistics.

On the flip side, I guess 120 years is not long in the whole 250000 years of human evolution!

Of course no statistics or economics could predict the 3rd world nuclear war or suchlike, but then not even your DB golden plated pension would help much.

(also FYI I am quite highly de-risked as when I look at our joint finances as a couple we have a pretty high portion of guaranteed income from DB and SP assets anyway).

[Deleted User]

Linton said:

Pat38493 said:

Mistermeaner said:

hi

question regards risk profiling

I understand that a number of investment companies / advisors will work with clients to understand their 'risk profile' and then structure their invetsments accordingly

i.e. someone 'risk adverse' would be put into generally lower volatility products such as bond weighted funds where as someone with a higher risk appetite would be higher in equities etc.

while i get the principle of this is it not somewhat self defeating as over a long term (esp with pensions) regardless of your 'risk tollerance' going bond heavy at age 20, 30 even 40 and 50 is simply lowering your returns and therefore exposing you to greater risks

Isn;t the concept just misplaced?

Reason for asking my company is moving to a new DCpension provider and the new company will be offering a 'risk review' to help people decide on their investments - i see the whole process as somewhat arbitrary and flawed

Appreciate thoughts and comments 


Thanks

As you can see from perusing these boards, a lot of people tend to get a bit of a panic on if they see their pension fund making precipitous drops in value, so if your pension fund dropped by 40% when you were one year into retirement, can you still stay rational enough to assume that this is still within the parameters of past history that you tested against, and therefore you don't need to take any action?  

Even if you know your strategy is fully rational, if you are the type of person who will lose a lot of sleep when your pension has dropped a lot early in retirement, I guess this is why people need profiling - you might be wealthier in the long run but you might not be happier if you are losing lot of sleep worrying about the recent market crash.

However fundamentally you are not far off - putting too much of your funds into low valatility and low risk investments is likely to end up with you working a lot longer.  

I know a couple of people who are fully aware of all this, but they still keep bringing up how much their fund dropped this year - go figure....

Rationally I suppose you should only start worrying if the markets do things that have never happened before and you were not prepared for in your retirement planning.

For example the recent large fall in bond prices is, I believe, unprecedented and only happened following an unprecedented rise over the previous 40 years.

I haven’t checked specific drop percentages over a 1 year period but suspect this isn’t “unprecedented” if you look at the 20th century prior to 1980.  Bonds had disastrous periods then.  Every time you have a bout of unexpected inflation bonds tend to perform poorly.  

[Deleted User]

Pat38493 said:

Linton said:

Pat38493 said:

Mistermeaner said:

hi

question regards risk profiling

I understand that a number of investment companies / advisors will work with clients to understand their 'risk profile' and then structure their invetsments accordingly

i.e. someone 'risk adverse' would be put into generally lower volatility products such as bond weighted funds where as someone with a higher risk appetite would be higher in equities etc.

while i get the principle of this is it not somewhat self defeating as over a long term (esp with pensions) regardless of your 'risk tollerance' going bond heavy at age 20, 30 even 40 and 50 is simply lowering your returns and therefore exposing you to greater risks

Isn;t the concept just misplaced?

Reason for asking my company is moving to a new DCpension provider and the new company will be offering a 'risk review' to help people decide on their investments - i see the whole process as somewhat arbitrary and flawed

Appreciate thoughts and comments 


Thanks

As you can see from perusing these boards, a lot of people tend to get a bit of a panic on if they see their pension fund making precipitous drops in value, so if your pension fund dropped by 40% when you were one year into retirement, can you still stay rational enough to assume that this is still within the parameters of past history that you tested against, and therefore you don't need to take any action?  

Even if you know your strategy is fully rational, if you are the type of person who will lose a lot of sleep when your pension has dropped a lot early in retirement, I guess this is why people need profiling - you might be wealthier in the long run but you might not be happier if you are losing lot of sleep worrying about the recent market crash.

However fundamentally you are not far off - putting too much of your funds into low valatility and low risk investments is likely to end up with you working a lot longer.  

I know a couple of people who are fully aware of all this, but they still keep bringing up how much their fund dropped this year - go figure....

Rationally I suppose you should only start worrying if the markets do things that have never happened before and you were not prepared for in your retirement planning.

I think this is putting too much faith in the parameters of history.

In practice we have no really reliable parameters of history.  Take a 30 year SWR based on 120 years of stock market records.  There are only 3 completely independent 30 year periods in 119 years.  In that 120 years we had 2 world wars, the rise and fall of major industries,  the  rise of the USA from an emerging market into a world dominating economic super power and the destruction of global empires. What will the next 30 years bring?  Who knows but it could well be quite different to what has been seen before.

For example the recent large fall in bond prices is, I believe, unprecedented and only happened following an unprecedented rise over the previous 40 years.

So ISTM to make sense to derisk as far as you need to ensure your day to day income is protected up to the point where a projected scenario means the end of the world financial system as we know it.  Beyond that you just have to shrug your shoulders and accept you will have to join the queue for the soup kitchen along with everyone else.  This approach means that if your pension fund drops by 40% you know that your day to day living expenses  are safe for the next say 10 years and so you are under no pressure to act immediatly and end up doing something foolish.

More interestingly, what is your statistical grounds for saying that you cannot examine periods by month with overlapping scenarios?  Pretty much every model I've seen does that including some models that were developed by people who claim to have a degree in statistics - if you are saying their entire approach is invalid I'm surprised there isn't a bigger debate about it all the time?   I am not a statistician but I've seen some people write that the overlapping approach is valid as long as you use particular adjustments and methods in your statistics.

I am not a statistician either but I do use stats for long term risk assessments in engineering so have some understanding.

 Don’t think anyone said you can’t use comparatively short periods  taking month long or year long blocks and mixing them up differently to get a range of forecasts.  That’s what they do rather than “overlap”.  And in doing this mixing they may underestimate  “trends” and “momentum” scenarios which represent actual economic, fiscal and monetary conditions.  

But Linton’s point is valid.  They use this approach because they have no other option.  Its not great but you just don’t have a million years’ of data on stock markets.  This introduces all sorts of problems. For example if your “block size” is 1 year, the result would be very different to 10 year blocks (don’t think anyone uses 1 month because then you completely misrepresent “economic trends” and just get the average over 120 years).  In a perfect world we would have enough separate 40-50 year periods to do stat analysis but we dont.

Bottom line: there just isn’t enough available historical return data to run this type of experiment without getting creative.  If we had a million years of actual stock returns rather than just a century or so, it would be much easier and the estimate would have been more meaningful.  As it is, we have interesting simulations with questionable accuracy.  Certainly not the “95% confidence” some claim.  

coastline

Deleted_User said:

Linton said:

Pat38493 said:

Mistermeaner said:

hi

question regards risk profiling

I understand that a number of investment companies / advisors will work with clients to understand their 'risk profile' and then structure their invetsments accordingly

i.e. someone 'risk adverse' would be put into generally lower volatility products such as bond weighted funds where as someone with a higher risk appetite would be higher in equities etc.

while i get the principle of this is it not somewhat self defeating as over a long term (esp with pensions) regardless of your 'risk tollerance' going bond heavy at age 20, 30 even 40 and 50 is simply lowering your returns and therefore exposing you to greater risks

Isn;t the concept just misplaced?

Reason for asking my company is moving to a new DCpension provider and the new company will be offering a 'risk review' to help people decide on their investments - i see the whole process as somewhat arbitrary and flawed

Appreciate thoughts and comments 


Thanks

As you can see from perusing these boards, a lot of people tend to get a bit of a panic on if they see their pension fund making precipitous drops in value, so if your pension fund dropped by 40% when you were one year into retirement, can you still stay rational enough to assume that this is still within the parameters of past history that you tested against, and therefore you don't need to take any action?  

Even if you know your strategy is fully rational, if you are the type of person who will lose a lot of sleep when your pension has dropped a lot early in retirement, I guess this is why people need profiling - you might be wealthier in the long run but you might not be happier if you are losing lot of sleep worrying about the recent market crash.

However fundamentally you are not far off - putting too much of your funds into low valatility and low risk investments is likely to end up with you working a lot longer.  

I know a couple of people who are fully aware of all this, but they still keep bringing up how much their fund dropped this year - go figure....

Rationally I suppose you should only start worrying if the markets do things that have never happened before and you were not prepared for in your retirement planning.

For example the recent large fall in bond prices is, I believe, unprecedented and only happened following an unprecedented rise over the previous 40 years.

I haven’t checked specific drop percentages over a 1 year period but suspect this isn’t “unprecedented” if you look at the 20th century prior to 1980.  Bonds had disastrous periods then.  Every time you have a bout of unexpected inflation bonds tend to perform poorly.  

2021-2022

FlUSsKwWAAE7h55 (589×432) (twimg.com)

Worst year for the Bloomberg Aggregate.

FlOpD7RaEAAybCm (561×352) (twimg.com)

60/40 portfolio no better.

FlOpbZ0aEAIzOW0 (561×322) (twimg.com)

Worst in history for US treasury bonds down 16%.

FlUBO7EXwAU0WeZ (483×478) (twimg.com)

60/40 since 1928

FlUDJ1xWYAQ8sFf (483×511) (twimg.com)

At the end of the day any portfolio will struggle if we have 3 bad years in a row. It's happened before but who knows ?

FlT93MSXoAIyVC- (519×705) (twimg.com)

[Deleted User]

coastline said:

Deleted_User said:

Linton said:

Pat38493 said:

Mistermeaner said:

hi

question regards risk profiling

I understand that a number of investment companies / advisors will work with clients to understand their 'risk profile' and then structure their invetsments accordingly

i.e. someone 'risk adverse' would be put into generally lower volatility products such as bond weighted funds where as someone with a higher risk appetite would be higher in equities etc.

while i get the principle of this is it not somewhat self defeating as over a long term (esp with pensions) regardless of your 'risk tollerance' going bond heavy at age 20, 30 even 40 and 50 is simply lowering your returns and therefore exposing you to greater risks

Isn;t the concept just misplaced?

Reason for asking my company is moving to a new DCpension provider and the new company will be offering a 'risk review' to help people decide on their investments - i see the whole process as somewhat arbitrary and flawed

Appreciate thoughts and comments 


Thanks

As you can see from perusing these boards, a lot of people tend to get a bit of a panic on if they see their pension fund making precipitous drops in value, so if your pension fund dropped by 40% when you were one year into retirement, can you still stay rational enough to assume that this is still within the parameters of past history that you tested against, and therefore you don't need to take any action?  

Even if you know your strategy is fully rational, if you are the type of person who will lose a lot of sleep when your pension has dropped a lot early in retirement, I guess this is why people need profiling - you might be wealthier in the long run but you might not be happier if you are losing lot of sleep worrying about the recent market crash.

However fundamentally you are not far off - putting too much of your funds into low valatility and low risk investments is likely to end up with you working a lot longer.  

I know a couple of people who are fully aware of all this, but they still keep bringing up how much their fund dropped this year - go figure....

Rationally I suppose you should only start worrying if the markets do things that have never happened before and you were not prepared for in your retirement planning.

For example the recent large fall in bond prices is, I believe, unprecedented and only happened following an unprecedented rise over the previous 40 years.

I haven’t checked specific drop percentages over a 1 year period but suspect this isn’t “unprecedented” if you look at the 20th century prior to 1980.  Bonds had disastrous periods then.  Every time you have a bout of unexpected inflation bonds tend to perform poorly.  

2021-2022

FlUSsKwWAAE7h55 (589×432) (twimg.com)

Worst year for the Bloomberg Aggregate.

FlOpD7RaEAAybCm (561×352) (twimg.com)

60/40 portfolio no better.

FlOpbZ0aEAIzOW0 (561×322) (twimg.com)

Worst in history for US treasury bonds down 16%.

FlUBO7EXwAU0WeZ (483×478) (twimg.com)

60/40 since 1928

FlUDJ1xWYAQ8sFf (483×511) (twimg.com)

At the end of the day any portfolio will struggle if we have 3 bad years in a row. It's happened before but who knows ?

FlT93MSXoAIyVC- (519×705) (twimg.com)

Perhaps 2022 was unique if you look at US treasuries or Bloomberg Aggregate (comparatively recent) datasets but it certainly isn’t unique otherwise if you look across nations and pick periods with high inflation.

From Bernstein’s “Deep Risk”:

“In their 2012 and 2013 yearbook supplements, DMS performed a detailed analysis of the effects of inflation on all three asset classes: stocks, bonds, and bills. They uncovered several important relationships… they amalgamated the 2,128 country-year returns and found that the returns for stocks and bonds, unsurprisingly, were negatively correlated with inflation: during the 5% of country-years with the highest inflation, stocks did badly, losing an average 12.0%, but bonds did even worse, losing 23.2%.“

coastline

Deleted_User said:

coastline said:

Deleted_User said:

Linton said:

Pat38493 said:

Mistermeaner said:

hi

question regards risk profiling

I understand that a number of investment companies / advisors will work with clients to understand their 'risk profile' and then structure their invetsments accordingly

i.e. someone 'risk adverse' would be put into generally lower volatility products such as bond weighted funds where as someone with a higher risk appetite would be higher in equities etc.

while i get the principle of this is it not somewhat self defeating as over a long term (esp with pensions) regardless of your 'risk tollerance' going bond heavy at age 20, 30 even 40 and 50 is simply lowering your returns and therefore exposing you to greater risks

Isn;t the concept just misplaced?

Reason for asking my company is moving to a new DCpension provider and the new company will be offering a 'risk review' to help people decide on their investments - i see the whole process as somewhat arbitrary and flawed

Appreciate thoughts and comments 


Thanks

As you can see from perusing these boards, a lot of people tend to get a bit of a panic on if they see their pension fund making precipitous drops in value, so if your pension fund dropped by 40% when you were one year into retirement, can you still stay rational enough to assume that this is still within the parameters of past history that you tested against, and therefore you don't need to take any action?  

Even if you know your strategy is fully rational, if you are the type of person who will lose a lot of sleep when your pension has dropped a lot early in retirement, I guess this is why people need profiling - you might be wealthier in the long run but you might not be happier if you are losing lot of sleep worrying about the recent market crash.

However fundamentally you are not far off - putting too much of your funds into low valatility and low risk investments is likely to end up with you working a lot longer.  

I know a couple of people who are fully aware of all this, but they still keep bringing up how much their fund dropped this year - go figure....

Rationally I suppose you should only start worrying if the markets do things that have never happened before and you were not prepared for in your retirement planning.

For example the recent large fall in bond prices is, I believe, unprecedented and only happened following an unprecedented rise over the previous 40 years.

I haven’t checked specific drop percentages over a 1 year period but suspect this isn’t “unprecedented” if you look at the 20th century prior to 1980.  Bonds had disastrous periods then.  Every time you have a bout of unexpected inflation bonds tend to perform poorly.  

2021-2022

FlUSsKwWAAE7h55 (589×432) (twimg.com)

Worst year for the Bloomberg Aggregate.

FlOpD7RaEAAybCm (561×352) (twimg.com)

60/40 portfolio no better.

FlOpbZ0aEAIzOW0 (561×322) (twimg.com)

Worst in history for US treasury bonds down 16%.

FlUBO7EXwAU0WeZ (483×478) (twimg.com)

60/40 since 1928

FlUDJ1xWYAQ8sFf (483×511) (twimg.com)

At the end of the day any portfolio will struggle if we have 3 bad years in a row. It's happened before but who knows ?

FlT93MSXoAIyVC- (519×705) (twimg.com)

Perhaps 2022 was unique if you look at US treasuries or Bloomberg Aggregate (comparatively recent) datasets but it certainly isn’t unique otherwise if you look across nations and pick periods with high inflation.

From Bernstein’s “Deep Risk”:

“In their 2012 and 2013 yearbook supplements, DMS performed a detailed analysis of the effects of inflation on all three asset classes: stocks, bonds, and bills. They uncovered several important relationships… they amalgamated the 2,128 country-year returns and found that the returns for stocks and bonds, unsurprisingly, were negatively correlated with inflation: during the 5% of country-years with the highest inflation, stocks did badly, losing an average 12.0%, but bonds did even worse, losing 23.2%.“

The effects on the SP500 over the years can be clearly seen in this link. Spikes in inflation have led to falls in the stock market.

FDgNCrbXEAA4BFu (890×550) (twimg.com)

FNzuqw8XEAUsiRi (900×824) (twimg.com)

Rate rises have been the tool to fight inflation for decades. Bonds will suffer just like today.

FYDN7BzVUAAsgbc (1200×503) (twimg.com)

JohnWinder

... suspect even in this country let alone globally, so I wouldn't be starving.  If that happened, I suspect many would be starving.

I think many people are already starving, although like 'risk' one could have one's own definition.

Not wanting to be churlish, but keeping a problem in view gives us a better chance of fixing it.

https://www.theguardian.com/society/2022/feb/07/1m-uk-adults-go-entire-day-without-food-in-cost-of-living-crisis