Retirement Asset Allocation - 100% Equities?

ConsulinhoGaucho

What do you guys think of this allocation?
There was a lot of talk about it based on the recent academic paper: 

"Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice"

I do think that the critics are spot on though (see the couple of great links from today’s Bankeronwheels weekend’s investing press review for example).

masonic

I read the paper a while back, but am not sure which criticisms you are referring to specifically. To me, it seems to make sense that a retiree should secure an income floor based on guaranteed or low risk income/assets, above which they can layer on low-medium risk assets to provide "comfort", and above than can take more risk if their appetite permits it. It also rather depends on their views on leaving a legacy, and possibly the views of their potential heirs.

The paper discusses some useful factors people should consider when formulating a plan, but it wouldn't be very sensible to look at it in isolation. It is also has a US-centric view. 35% UK + 65% ROW would not be an attractive substitute for a UK retiree (though perhaps that's a matter of opinion).

tacpot12

100% allocation to equities makes sense if you have a large pension pot, and modest requirements for income. It might also be appropriate if you the vast majority of the income you need is already provided from the State Pension and from Defined Benefitpensions. For those of with smaller pots and a greater reliance on income, the volatility of equities means that it's not the right strategy. 

It is my strategy for later life when I will have a full state pension and two DB pensions paying a total of about  £4000 a year. This will be about 65% of my income needs, so I can afford to switch my retirement portfolio which is currently 70% equity and 30% bonds to 100% equity.

dunstonh

100% allocation to equities makes sense if you have a large pension pot, and modest requirements for income.

Or if you keep your defensive assets in cash savings.  e.g. 50% cash and 50% equities. 

EthicsGradient

I suspect the couple of criticisms are these:
https://www.aqr.com/Insights/Perspectives/Why-Not-100-Equities
https://earlyretirementnow.com/2024/02/12/100-percent-stocks-for-the-long-run/

As I said on another board, I'd like to know what those 2 writers mean by "leverage", since the 2nd seems to show they mean "borrowing money at the rate the US government can in the short term", which seems a useless concept to me, since we can't (they both suggest finding the "best" return-to-risk ratio, and then leveraging it to increase the return (and, inevitably, risk).

masonic

Well I certainly didn't think there would be articles advocating retirees borrow to invest. Perhaps they should remortgage their house and use that to invest with. What could possibly go wrong?!!

chucknorris

tacpot12 said:

100% allocation to equities makes sense if you have a large pension pot, and modest requirements for income. It might also be appropriate if you the vast majority of the income you need is already provided from the State Pension and from Defined Benefitpensions. For those of with smaller pots and a greater reliance on income, the volatility of equities means that it's not the right strategy. 

It is my strategy for later life when I will have a full state pension and two DB pensions paying a total of about  £4000 a year. This will be about 65% of my income needs, so I can afford to switch my retirement portfolio which is currently 70% equity and 30% bonds to 100% equity.

It looks like you meant to say £40,000 (rather than £4,000) a year.

tichtich

For what it's worth, my investments are 100% equities. I'm almost 66, but not expecting to start withdrawing for a few more years. Then I aim to withdraw dividends only. My investments are mostly defensive (I think) shares paying strong dividends (at the expense of real growth). They include a significant amount of "bond proxies", which I prefer to bonds for the protection from inflation as well as higher yield. Since I aim to just take the dividends, I think the sequence of returns risk is much lower than with general equities.

By the way, I only started investing in 2021, starting with a lump sum. I was advised then to put 40% or more in bonds, but I couldn't see the point of taking significant duration risk for the sake of minimal returns. I chose to keep some money in cash for a while instead. Good decision as it turned out! I deployed the last of my lump sum during 2023. Bonds are a better deal now, of course, but I still don't like them because I fear inflation (and index-linked bonds don't pay enough over inflation).

Bostonerimus1

OP an American retirement analyst called Wade Pfau has advocated a rising equity allocation in retirement in some of his papers.

How would you define "100% equities"? If you have secured a base of guaranteed income with an annuity or a DB pension you could include that as a fixed income allocation if you take a holistic approach to your finances. But once that is done then you might well go with 100% equities with whatever you have remaining.

Taking the risk of large equity percentage allocations in retirement is certainly easier to do for people with large DC pots relative to their finances or DB pensions, but Pfau has done studies (warning with US data) that shows that retirees benefit from a rising equity allocation in retirement. So you go into retirement with a buffer of cash and fixed income to mitigate sequence of returns risk, but as you get older you put more into equities as you don't have to survive as long when markets fall and you will also benefit when markets are good.  This I want I've done in my retirement. I put around $280k into a DB pension and $120k into a rental property and they now provide me with enough income to cover my retirement spending. With the rest of my money I'm 85% equities, 10% bonds and 5% cash.

aroominyork

tichtich said:

My investments are mostly defensive (I think) shares paying strong dividends (at the expense of real growth). They include a significant amount of "bond proxies", which I prefer to bonds for the protection from inflation as well as higher yield.

I am suspicious of term 'bond proxies'. I see it as marketing by people trying to sell equities which are not high-PE long-term growth. I don't think history shows they provide much protection.

Linton

tichtich said:

For what it's worth, my investments are 100% equities. I'm almost 66, but not expecting to start withdrawing for a few more years. Then I aim to withdraw dividends only. My investments are mostly defensive (I think) shares paying strong dividends (at the expense of real growth). They include a significant amount of "bond proxies", which I prefer to bonds for the protection from inflation as well as higher yield. Since I aim to just take the dividends, I think the sequence of returns risk is much lower than with general equities.

By the way, I only started investing in 2021, starting with a lump sum. I was advised then to put 40% or more in bonds, but I couldn't see the point of taking significant duration risk for the sake of minimal returns. I chose to keep some money in cash for a while instead. Good decision as it turned out! I deployed the last of my lump sum during 2023. Bonds are a better deal now, of course, but I still don't like them because I fear inflation (and index-linked bonds don't pay enough over inflation).

One problem with 100% equities is that in a serious crash even a broadly diversified equity portfolio could drop by 50%. Such a crash could reasonably be expected to happen every decade or so.  You may find this a little disconcerting.

Relying purely on dividends is likely to soften the blow somewhat, at least in the short term.  However you need to pay attention to diversification.  Prior to 2008 the banks provided some of the best dividends available.  Then their share price crashed and they stopped paying dividends.  One UK divIdend focussed index fund (IUKD) crashed by about 60% and is still  50% below its pre-2008 price 16 years later.

So I suggest you include an allocation to a wide range of non-equity dividend/interest payers and should avoid focussing on those that provide the very highest income.  It would be prudent to include a range of investments that do not pay high dividends.  Also it would be sensible to include dividend payers from across the world.

Another question with a 100% equity dividend strategy is how you manage one-off expenditure.  Do you sell your investments which you rely on for future income?

This is not to criticise the use of dividends.  A well diversified set of dividend paying funds provides about 25% of my day to day expenditure.  But you do need to be very aware of the potential problems, and plan acordingly.