Rebalancing DC pension portfolio away from bonds

Fall

Recently been looking at my pension portfolios which are currently invested in default lifestyle funds. Pension 1 is valued at £88000 and is 60% equity, 30% bonds (mostly UK gilts) and 10% other. Pension 2 is valued at £32000 and is 55% bonds (a large proportion of which are UK gilts) and 45% equity. Both are overall heavily invested in the UK (~50%).

I think where I want to get to is to have 90-100% equity as I am 40 and planned retirement date at the moment is 60 so I have a reasonably long time to invest.  I have even picked out equity funds - just a L&G global index tracker ex UK, along with a UK equity index tracker so that I would end up ~60% US, 20% UK etc.

However my issue is that UK gilts have declined so much over the past year that if I sell them now I will realise the loss. They make up over 20% of my portfolio in total.

How do people approach restructuring of their investments like this? Is it best to do it all at once or gradually over a period of eg 3 years?

Does anyone know how much a financial advisor would charge for this kind of advice?

JohnWinder

There’ll be the full range of approaches, surely. Reading ‘I do this’ or ‘I do that’ can’t assist you unless it comes with some pretty strong promise of being the better/best approach.

As equities have a history of outperforming bonds, you’d imagine doing it all at once is likely to be more profitable, although you mightn’t sleep as well. But as equities, and bonds, can make (un)pretty unanticipated moves you wouldn’t promise anyone ‘all at once’ is better than ‘3 years’.

‘Does anyone know how much a financial advisor would charge for this kind of advice?’

I’d be interested too, because I doubt you can buy that advice. I think it’s the full monty or nothing.

Linton

If you want to restructure then do so quickly. Why would you keep an allocation that does not meet your requirements? The argument about selling at a loss does not really work for safe bonds. With equity you can generally expect a major fall to be followed by a bounce back as sentiment changes. This cannot happen with safe bonds since their value is mathematically tied into global interest rates more than short term investor sentiment. A return to the values of 2 years ago could take decades.

Also, if you are moving from bonds to equity, changing quickly makes sense since generally equity provides better returns.

Fall

Thanks for your response. Of course no one could predict the future, but I was wondering what general advice is when restructuring. I was drawing parallels here to long term investing, where typically it is advised to drip feed investments over a period of time rather than investing one large lump sum all at once, as this rides out waves in the stock market.  I haven't found any advice at all on restructuring, hence the question.

QrizB

Not really relevant but I'm surprised at quite how bond-heavy Pension 2 is for a 40-year-old.

OldScientist

I don't know what will be the case in the future but...

1) Historically, adopting a higher proportion of equities (80%+) in accumulation has led to a larger pot at retirement (at least for the UK and US, not necessarily for all countries though).
2) Looking at the thread I started this morning ( How long do bond funds take to recover after a sharp rise in yields? ), the bond funds will sort of recover eventually - how long that 'eventually' is depends on the duration of the funds you're invested in.

Of course, a greater proportion of equities will generally (notwithstanding the last year or two) result in greater volatility. While a 40% drop for long duration bonds is unpleasant, equities have and can easily drop 50% or more (e.g., more than 70% in the early 70s, see https://monevator.com/the-uks-worst-stock-market-crash-1972-1974/ ).

My own preference (FWIW) would be a gradual change by a) changing where new deposits are directed to and b) by setting out a schedule of stock allocations to rebalance to, e.g., you are currently at roughly 50% stocks and 50% bonds, increasing the target stock allocation by 10 percentage points per year over the next 3 or 4 years might be one approach. The gradual approach has the psychological benefit of allowing one to get used to higher volatility (i.e., a test of risk tolerance). However, I suspect (without doing the modelling, but basing it on the lump sum vs drip feed argument) that moving quickly to your desired stock allocation would, historically, have been statistically the better choice. Whether the latter is a good choice depends on how much buyer's regret you'd suffer if stocks did fall 50% shortly after you'd sold your bonds!

Fall

@QrizB I know, I was pretty shocked to see that when I delved into the underlying funds.

Fall

Thanks @OldScientist. I think in conclusion my approach might be a hybrid 50:50, so switch 50% of the unwanted investments now and gradually change the others over the next couple of years. At least this way I can't regret my approach!

JohnWinder

I was drawing parallels here to long term investing, where typically it is advised to drip feed investments over a period of time rather than investing one large lump sum all at once, as this rides out waves in the stock market.

Can you provide us a source for this typical advice? Or can you put 'riding out the waves' into terms without a metaphor so it's clear what it means?

Bostonerimus1

Definitely get to the allocation that you think is right for you ie up your equity percentage in your case. But you should ask yourself why you have your current allocation and the reasons for changing now. You might also consider that bond funds are at 10 year lows and it might be a good time to buy. Getting asset allocation right is an important aspect of strategic investing and it also forces you to rebalance by selling high and buying low.

OldScientist

Fall said:

Thanks @OldScientist. I think in conclusion my approach might be a hybrid 50:50, so switch 50% of the unwanted investments now and gradually change the others over the next couple of years. At least this way I can't regret my approach!

I think psychology is an important factor in investing, so in the face of an unknowable future, minimising regrets has the makings of a good plan!