Should I stay in a Lifestyle pension

OldScientist

JohnWinder said:

‘My question is - should I change my pension profile away from it’s “lifestyle” plan asap, or is the damage down and will it recover if left in this ?

The unit price may not recover in your lifetime, if every (if income units).  However, the income generated is now greater.  So, it may well recover in a decade.  Probably not earlier.     

For that to make sense to me I’ll guess it only applies if one takes the coupons and dividends from the lifestyle fund rather than having them reinvested.

‘In terms of recovery time, one useful thing to look at is the duration of the bonds …  the time taken to recover is at least the duration (this assumes no further interest rate changes - if rates drop, bond prices will go up again,.’

I can add a bit to that. Yes, ‘time taken to recover’, but my understanding is that it takes EXACTLY  one duration to recover for a bond, but for a bond fund this is an approximation. And time to recover means time to get back to the level of return the bonds would have achieved had there been no interest rate change - which is a higher value than the bonds’ value when the interest rate changed (if the yield was positive at that time).

‘if they continue to rise, then prices will continue to fall)’

But it’s not that grim. Eventually the higher yields of the new bonds will overcome the effect of price falls, such that the return you get after 2D-1 is the same as you would have got without the interest rate rise. After that it’s all jam. 2D-1 is twice the duration minus 1, so for a 8 year duration bond it is 15 years. https://www.bogleheads.org/forum/viewtopic.php?p=6922325&sid=b295fc5fc142a2fe94a80c394c93ca14#p6922325

Thanks for reminding me of that formula (and the discussion) - it is why I said "at least the duration" since I couldn't remember whether it was D or 2D and didn't have time to look it up (that's my excuse anyway!).

The more I learn about bond funds, the happier I am that about half the fixed income component of our portfolio has a duration of less than 2 years (including fixed rate cash accounts), another portion is duration matched, and only a relatively small amount is in long duration funds (one of which is the Vanguard Inflation linked bond fund with a duration of about 17 years - it'll recover in 30 years!).