Timing the market?

SouthCoastBoy

Sunnylifeover50plan said:

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MK62

michaels said:

MK62 said:

michaels said:

MK62 said:

michaels said:

Bostonerimus1 said:

MetaPhysical said:

I am not an IFA, I'm an engineer so take what I say with a large pinch of salt.  However, in my view you shouldn't change strategy just because of a slight downturn, even a larger downturn.  Emotion has zero place in investing.  This downturn is not even in the top thirty of "bad periods" in the markets.  All the big companies - with the possible exception of Tesla and its future with Elon - are minting it still and their businesses are sound.  A few downturns are not a bad thing,  The only "bad" thing about a downturn is if you need to crystallise into cash - so don't if you can avoid it.

I de-risked £100k into cash Money Markets inside my pension just before all of this because of the very real and tangible reason that I am retiring next March and so do not want to sell into cash at the bottom of the market.  However, the rest of my DC fund - £500k - I am still continuing to heavily invest in, infact, I have moved more into equities because I do not think there is a fundamental problem.  I get more for the contributions in a downturn.  Sure it may go down more. But it could all explode back up as well when the markets have adjusted to the orange man.

Keep calm and carry on is my mantra - this is a long term game.  You can be a goal down and still win,  Where there is risk there is opportunity.

As I say, just my opinion FWIW.

If you aren't too close to retirement then I think it's probably ok to keep on with your strategy and not react other than maybe doing some rebalancing. However, this all underlines the importance of having a cash buffer and an asset allocation that you can live with through market fluctuations. The tricky thing now is the specter of a recession and with so much uncertainty in the world, companies as well as individuals are going to be scared to invest which will hit growth. So I think global markets will be down until there are some policy changes.

All the modelling based on historic experience shows a cash buffer to actually be a costly mistake but if it makes people seep better at night then why not?

The historic modelling I've read suggests that "on average", a retiree would have been better off with a cash buffer about a third of the time......and better off without one the other two thirds. 

That said, you also have to account for "how much better or worse off" you would have been in your own circumstances.......and its going to be different for everyone, as in reality, "on average" has little real meaning to each individual retiree.
For me, the potential of being "worse off" outweighs being "better off", despite the historical statistics suggesting the latter to be more likely.....the potential consequences of the former outweigh any benefit of the latter in my view. Others take a different view on this, but that's fine.....none of us is blessed with any real foresight to know what the future holds.

I tend to look at avoiding a worst case scenario of running out of money and what the highest real terms income consistent with that is and in this case my understanding is that a cash pot of whatever duration gives a lower 'never fails' income than not having one 

....but that's not the case all the time. 
Granted, it gets complicated, and it depends on what exactly you define as "cash buffer".......eg, how do you classify a gilt ladder?

Ultimately though, generally speaking, a cash buffer is not about maximising income, but more about smoothing the variation of income which is otherwise inevitable when that income is supplied by volatile assets. Personally, I want to be able to plan things for a few years into the future, and not worry too much about whether the income will actually be there to support those plans.
Fair enough, a retiree in drawdown with a 50-50 equity/fixed income portfolio might have little need for a cash buffer......and employing one might cost some......but you also need to consider how much the 50-50 portfolio might have cost in terms of returns that the retiree never got.

Personally find it strange that the cash buffer approach is derided as being a potential drag on performance......but an eg 50-50 portfolio allocation is not, despite historical statistics which say otherwise. In fact, a 100% equity portfolio is statistically most likely to deliver the maximum income........but I'll wager few will risk that in, or approaching, drawdown.

I am fine with the idea of 'cash' being part of an asset mix to reduce volatility/avoid correlated returns. 

What I don't get is this thought that it forms a pot that will be drawn on in certain 'not well defined' periods when you 'decide' that equity valuations are in some way 'low'.  Can you explain how you make such a call and that if you are in a situation where you are basically deciding that your asset allocation should move more to equities (this is what drawing cash from a cash pot will do), how you are deciding that your new mix is only adjusted by the rate of your draw down - by your own logic, there will be circumstances when you want to shift out of cash into equities (when you are drawing from the cash buffer) but you are also saying in those times it is only to a limited degree that you are backing equities because the change in asset mix is limited by your rate of draw down.

And that is even before you define the circumstances in which you move your asset mix the other way or 'replenish the cash buffer' as you would refer to it.

There's an almost infinite number of ways to operate a cash buffer approach........but one way could be to simply include it as as part of your normal rebalancing strategy.
My own approach is to spend everything from the cash buffer and simply top the buffer up from equity or fixed income investments as needed/desired.........yes, decisions have to be made about what to sell, and when to sell it, but that's no different to operating without a cash buffer, unless you take the view that you will sell X on say the 10th of April each year, come what may.......
If in drawdown, how do you determine what to sell and when to sell it?..........all a cash buffer does really is take the pressure off those decisions........if it's a bad year or two, you don't need to sell anything........if it's been a good year, you might sell more than just that year's worth of income. I also use a gilt ladder now, which means money is coming into the cash buffer each year without me having to do anything .....
There's an old saying......don't have money invested in the stock market which you might/will need within X years (usually quoted as 5, but ymmv on that).......I tend to heed that (loosely at least)......

All that said, IF the next few years are good ones, at least from an investment perspective, then you are correct in that my approach might cost me a little, in terms of extra returns I might have made if fully invested over those years vs being only c.90% invested.......that's the trade off you must accept in return for the bit of extra "safety" IF those years are not good.......but nobody has ever claimed that a cash buffer approach is a magic pill.




 

Hoenir

DRS1 said:

  But I had always imagined that when you went into drawdown you would switch investments to income producing assets like High yield shares bonds prefs PIBS and so on and then try to just draw the income while preserving the capital. 

Shares with high yields do so for good reasons. If they offered value markets would reprice them. Not a route to preserve capital. 

DRS1

Hoenir said:

DRS1 said:

  But I had always imagined that when you went into drawdown you would switch investments to income producing assets like High yield shares bonds prefs PIBS and so on and then try to just draw the income while preserving the capital. 

Shares with high yields do so for good reasons. If they offered value markets would reprice them. Not a route to preserve capital. 

Yes.  That is why there are all those rules about how you construct a High Yield Portfolio (if you are buying individual shares).  But there are also plenty of Investment Trusts which have a bias towards high yielding companies (although I grant you some of them (HFEL for example) are not much good at preserving capital).

DrSparsamkeit

SouthCoastBoy said:

Sunnylifeover50plan said:

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It may be beneficial to disclose that fact when applying for an annuity.

Hoenir

DRS1 said:

Hoenir said:

DRS1 said:

  But I had always imagined that when you went into drawdown you would switch investments to income producing assets like High yield shares bonds prefs PIBS and so on and then try to just draw the income while preserving the capital. 

Shares with high yields do so for good reasons. If they offered value markets would reprice them. Not a route to preserve capital. 

Yes.  That is why there are all those rules about how you construct a High Yield Portfolio (if you are buying individual shares).  But there are also plenty of Investment Trusts which have a bias towards high yielding companies (although I grant you some of them (HFEL for example) are not much good at preserving capital).

Over 10 years HFEL has seen a fall in NAV. Been no capital preservation. Investment fads come and go over the years. Stick around long enough. You'll experience the cycle. 

FIREDreamer

Sunnylifeover50plan said:

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