Retirement Asset Allocation - 100% Equities?

EthicsGradient

masonic said:

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?!!

Well, the "leverage" bit was what they suggested while building up a pension pot - it's unclear if they thought it should be retained once retired, or unwound. And one was realistic enough to add they didn't expect many people would take that advice. Though it might mean "keep a mortgage as long and as high as you can, and invest in (government) bonds and stocks instead", which some might. Still not quite the equivalent of borrowing at government rates.

tichtich

Linton said:

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.

Thanks for your reply. Let me clarify that I haven't just bought the highest yielding shares. I've been selective and thought carefully about the sustainability (in real terms) of the dividends. My largest holding is UK Greencoat Wind (UKW), which has a policy of increasing its dividend in line with RPI. While that's not a guarantee, of course, it has done this in each of its 10 years so far, and based on recent figures it will be able to do so for at least the next 5 years, even on some very pessimistic assumptions. (In fact this year it increased the dividend by significantly more than RPI. I would have preferred them to stick to their policy, and spend the extra money on reducing debt instead.)

Not all my shares are quite as predictable as this, but I think they're pretty safe overall. True, being less diversified than a tracker or broad managed fund has its own risks.

Unless their dividend prospects worsen very significantly, it's hard to see the prices of such shares falling by as much as 50%  from their already low levels, even in a major market crash. If they do, it would be a fantastic buying opportunity, as long as it happens during my few remaining investing years. After that, it would be a shame not to have bonds to sell to take advantage of such an opportunity. But I can live with that. (Of course even bonds can fall in price, as we've seen in the last 2 years, though bonds bought at today's rates shouldn't fall so much.)

You also make a good point about the possibility of needing to raise a large cash sum, at a time when I might have to sell shares at a loss. Given my personal circumstances, I don't think that's likely, but I do intend to keep a reasonable cash buffer, and perhaps I will put some of that cash into shorter-duration bonds.

There's no perfect investment strategy, and I'm not saying my one is right for other people, but I think the pros outweigh the cons for me.

Bostonerimus1

tichtich said:

Linton said:

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.

Thanks for your reply. Let me clarify that I haven't just bought the highest yielding shares. I've been selective and thought carefully about the sustainability (in real terms) of the dividends. My largest holding is UK Greencoat Wind (UKW), which has a policy of increasing its dividend in line with RPI. While that's not a guarantee, of course, it has done this in each of its 10 years so far, and based on recent figures it will be able to do so for at least the next 5 years, even on some very pessimistic assumptions. (In fact this year it increased the dividend by significantly more than RPI. I would have preferred them to stick to their policy, and spend the extra money on reducing debt instead.)

Not all my shares are quite as predictable as this, but I think they're pretty safe overall. True, being less diversified than a tracker or broad managed fund has its own risks.

Unless their dividend prospects worsen very significantly, it's hard to see the prices of such shares falling by as much as 50%  from their already low levels, even in a major market crash. If they do, it would be a fantastic buying opportunity, as long as it happens during my few remaining investing years. After that, it would be a shame not to have bonds to sell to take advantage of such an opportunity. But I can live with that. (Of course even bonds can fall in price, as we've seen in the last 2 years, though bonds bought at today's rates shouldn't fall so much.)

You also make a good point about the possibility of needing to raise a large cash sum, at a time when I might have to sell shares at a loss. Given my personal circumstances, I don't think that's likely, but I do intend to keep a reasonable cash buffer, and perhaps I will put some of that cash into shorter-duration bonds.

There's no perfect investment strategy, and I'm not saying my one is right for other people, but I think the pros outweigh the cons for me.

I would not implement a 100% equity strategy with anything other than a broadly diversified portfolio and if I was concentrating on a dividends I would not be focused on a single sector. The dangers of a dividend strategy remain the same as they've always been ie stock crashes and company troubles that reduce dividends so I think it's best to be diversified. I would feel far more sanguine about your approach if you had secured a foundation of guaranteed income from a combination of SP, DB and/or an annuity. Of course the risk and losses you can stand are going to depend on the size of your pension pot relative to the income you need to generate.

Swipe

dunstonh said:

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. 

Then surely you are only 50% equities?

dunstonh

Swipe said:

dunstonh said:

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. 

Then surely you are only 50% equities?

If you look at it your way, then nobody would ever be 100% equities.

In reality, you should look at the overall weighting of your investable assets.   However, far too many people look at each product they have independently of the rest.

e.g.
£200,000 overall investable money currently held in cash.  New investor says I don't want a lot of risk. So, I will
 put my £20k ISA allowance in VLS40.   They think they have 40% stockmarket but in reality, they have 4% when looking at their overall investable assets.     If they had put the £20,000 into 100% equities (e.g. global tracker) then it would still only be 10% of the investable assets.

gabiieve

dunstonh said:

Swipe said:

dunstonh said:

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. 

Then surely you are only 50% equities?

If you look at it your way, then nobody would ever be 100% equities.

In reality, you should look at the overall weighting of your investable assets.   However, far too many people look at each product they have independently of the rest.

e.g.
£200,000 overall investable money currently held in cash.  New investor says I don't want a lot of risk. So, I will
 put my £20k ISA allowance in VLS40.   They think they have 40% stockmarket but in reality, they have 4% when looking at their overall investable assets.     If they had put the £20,000 into 100% equities (e.g. global tracker) then it would still only be 10% of the investable assets.

I've been finding choosing which bonds to invest on such a minefield that I've had some paralysis over it. I don't think 100% equities match my risk profile, but if I consider how much cash I have saved, then it's not actually 100%.. I hadn't considered this before. Maybe this is a good excuse to give up on figuring out bonds

Bostonerimus1

gabiieve said:

dunstonh said:

Swipe said:

dunstonh said:

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. 

Then surely you are only 50% equities?

If you look at it your way, then nobody would ever be 100% equities.

In reality, you should look at the overall weighting of your investable assets.   However, far too many people look at each product they have independently of the rest.

e.g.
£200,000 overall investable money currently held in cash.  New investor says I don't want a lot of risk. So, I will
 put my £20k ISA allowance in VLS40.   They think they have 40% stockmarket but in reality, they have 4% when looking at their overall investable assets.     If they had put the £20,000 into 100% equities (e.g. global tracker) then it would still only be 10% of the investable assets.

I've been finding choosing which bonds to invest on such a minefield that I've had some paralysis over it. I don't think 100% equities match my risk profile, but if I consider how much cash I have saved, then it's not actually 100%.. I hadn't considered this before. Maybe this is a good excuse to give up on figuring out bonds

When I was working I had a very basic 60/40 portfolio allocation using a couple of index funds and a multi-asset fund. If you are having trouble choosing a bond fund use one of the many multi-asset funds available from reputable companies like L&G, HSBC, Vanguard etc.

Just before retirement I had the chance to buy into a DB plan with a lump sum so I did that with some of my bond allocation. That DB pension and the income from a rental property that I own cover my retirement income needs. So I have moved more of my investable assets into equities and I'm now 85/10/5 (equity/bond/cash) and I intend to increase the equity percentages as I get older, but I could (or perhaps should) include my DB pension and rental property in my asset allocation as they generate my income. 

Bostonerimus1

FYI the paper being discussed is here

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406

It isn't surprising that a 100% equity portfolio has historically out performed one that includes bonds, but the volatility of 100% equities will be a psychological issue for many people and will also increase sequence of returns risk for those close to retirement age. There are active discussions about the paper over on bogleheads.org and the high equity allocation approach has long been popular in the boglehead and early retirement community. But it amuses me that so much effort goes into retirement portfolio strategies when probably the biggest influence you can have on financial success and funding your retirement is to budget and be frugal. Simply reducing your spending and and contributing more to your pensions and ISAs should be everyone's first step.

Hoenir

tichtich said:

Linton said:

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.

My largest holding is UK Greencoat Wind (UKW), which has a policy of increasing its dividend in line with RPI. While that's not a guarantee, of course, it has done this in each of its 10 years so far, and based on recent figures it will be able to do so for at least the next 5 years, even on some very pessimistic assumptions. 

Just my thoughts as in the dim and distant past I too thought that I knew better. Working on the basis that markets collectively are fairly efficient in the pricing of companies with a multi billion pound market capitalisation. Why are professional investors shunning a company with a yield approaching 7.75% and a 20% discount to NAV. Something in the balance sheet must have spooked them. The risk premium on offer isn't yet high enough to warrant an investment.