Anyone in high equity allocation whilst retired?

michaels

I go with the maths/history (facts) approach that a 'cash buffer' is very much an artificial psychological prop rather than a serious de-risking strategy.

A cash/MM percentage of holdings is a reasonable risk reduction strategy as it effectively dampens big equity movements but does increase inflation risk.

Bonds were the traditional equity hedge as not only do they dampen movements but at times have moved counter cyclically to equities although obviously recent experience shows this is not a rule, just a historic correlation.

Finally in terms of the OP specifically (and indeed most UK pensioners) the State Pension (and DB if held) components already mean that some proportion of total income is already hedged against all equity movements (and generally also against inflation) so basically the impact of equity movements on total returns is already dampened in the same was as holding a chunk of a DC pot in an ILG ladder so holding dampeners in this part of a portfolio as well may mean that you are effectively choosing a very conservative asset mix.  EG 50% of income from DB/SP plus 40% of DC pot in bonds/MM implies a 30:70 split between equities and less volatile but potentially lower growth assets which is conservative compared to the 60:40 or 70:30 figures sued as optimum for SWR (removal of SORR)

Hoenir

michaels said:

Bonds were the traditional equity hedge as not only do they dampen movements but at times have moved counter cyclically to equities although obviously recent experience shows this is not a rule, just a historic correlation.

Perhaps the QE era changed the rules temporarily. The incoming QT era is resulting in reversion to the mean. The Nobel Prize given for Modern Portfolio Theory all those years wasn't a fluke . More a case of recency bias influencing people's outlook's. 

Sarian

Hoenir said:

Sarian said:

Hoenir said:

Sarian said:

 "Usually" markets recover to within a few percent within six months of a crash. 

How many of these "crashes" have you personally experienced ? 

Well I guess that depends on the definition of a "crash" and whether having money purchase pensions invested for over forty years counts as personal. In the early days (1980's) I was oblivious to it! I'm no investment guru (far from it) but I did look back over the last 50 years of the FTSE to see what happened after "sharp" falls. I'm happy to be educated...

Corrections are part and parcel of economic cycles. Did the GFC pass you by?  

Never found the FTSE to be a reliable indicator as not an index that's been a must have for retail investors. Virgin tried launching a tracker in the late 90's in the Vanguard model. Eventually was closed due to lack of interest. 

Take a look at the S&P500 post the 2000 Dot Com boom and the GFC post 2007. Very easy to see the trends. 

At the time of the collapse of the Nikkei 225 in 1990. Japan accounted for 40% of the global world index. The USA just 30%.

I was lucky with the GFC...I'd just taken out a massive tracker mortgage a few days before being made redundant and invested it in bonds at a profitable interest rate...pure luck!

The impact of Dot Com and Nikkei on me were smaller due to diversification and a longer investment timeframe at that point in time but you're right, the charts don't look good.

My "usually" comment was more targeted at Trumps Tariffs, the Pandemic, Brexit etc. If there is another seismic event we'll all be poorer.

Notfarfromtheborder

I'm in a similar boat, 55 at present with maybe an exit in 1/2 yrs
I already changed funds to those below to 'protect' the early years as I didn't want something like a crash derailing my plans, maybe too early and maybe too cautious but helps me sleep, I wanted the reassurance that if I wanted to go before 1/2 yrs then I would have a cash buffer to cover any downturns. 

Current        (After PCLS)

17%            (23%) Cash (MMF) 
14%             (13%) Target Ret date fund (low risk)
11%             (10%) Uk Equity
24%             (22%) World Equity (Ex UK)
35%             (32%) Multi Asset (Risk 7/7)

Also due DB lump sum from my wife's pension in Oct this year of around 8% of total DC fund value so that adds some more security and will change the % splits to those in brackets (if lump sum kept in cash). My further pension contributions will be in Target ret date fund

Currently all looking good from SRA onwards as 2 x sp and 2 more db on stream then, just need the funds above to bridge next 10-12 years depending when I go.

Pat38493

michaels said:

I go with the maths/history (facts) approach that a 'cash buffer' is very much an artificial psychological prop rather than a serious de-risking strategy.

A cash/MM percentage of holdings is a reasonable risk reduction strategy as it effectively dampens big equity movements but does increase inflation risk.

Bonds were the traditional equity hedge as not only do they dampen movements but at times have moved counter cyclically to equities although obviously recent experience shows this is not a rule, just a historic correlation.

Finally in terms of the OP specifically (and indeed most UK pensioners) the State Pension (and DB if held) components already mean that some proportion of total income is already hedged against all equity movements (and generally also against inflation) so basically the impact of equity movements on total returns is already dampened in the same was as holding a chunk of a DC pot in an ILG ladder so holding dampeners in this part of a portfolio as well may mean that you are effectively choosing a very conservative asset mix.  EG 50% of income from DB/SP plus 40% of DC pot in bonds/MM implies a 30:70 split between equities and less volatile but potentially lower growth assets which is conservative compared to the 60:40 or 70:30 figures sued as optimum for SWR (removal of SORR)

Agree with most of this.  Just adding a counterpoint to the last paragraph - if you are on a bridging strategy where your withdrawals are a lot higher for the first x years than later, it might make sense to reduce the risk exposure as your SORR impact of a major event in the first 5 years will be higher due to much higher required drawdowns.

This is the situation I am in - we have DB and SP incomes which covers 90%+ of our needs by the time we both reach SP age.  Running out of money after age 67 is not disastrous.  Running out at 64 is a much bigger issue that would require major spending adjustments.  

After doing a lot of backtesting and reading, even though we have a lot of DB/SP assets in play, I am planning to start retirement with less than 60% equities, with a glidepath where the equity % will go up year by year, driven by a cash flow ladder.  In my case this is even worse as my spending in the first 2 years is particularly much higher than all the other years.  Most of the internet case studies are not going to cover my particular situation.

Granted the differences are not big - if I just used an 80/20 mix with no cash buffer at all, I would probably get a very similar result, but with the risk of not sleeping at night if there is a 3 year drawdown.  It’s one thing knowing the history, another living through the reality.

I agree with your first point about the psychology - probably I could achieve the same or better results by just picking a % mix and sticking to it throughout, but this approach gives a bigger comfort level that if things go pear shaped, you at least have a year or two to change your approach.

OldScientist

MetaPhysical said:

^^^?
Wondered if anyone who is retired maybe had a large equity allocation - 80% plus in a global tracker- whilst protected by a cash buffer MM fund in the event of a crash?  I am retiring next March at 58 and would describe myself as moderately adventurous sort of person without being reckless and I am aware of risks.

Half of my pension income would need to be fuelled by this with the other half from some DB pensions that I also have and I am becoming increasingly attracted to this idea of a large equity allocation the more reading I do.  Doesn't seem that bonds these days offer quite the diversification they once did.

If I held two - three years of cash withdrawals in a MM fund inside the pension wrapper that should hopefully be enough for crash and recoveries.  If the equities boomed I could always move some more into cash as I got older.

Appreciate the collective thoughts please.

Not quite as high as 80% equities, but close to 70% for reasons given below.

1) Like you, a substantial portion of our retirement income is provided by guaranteed income (and SP in due course). Therefore, in the long-term our equity allocation will be around 80%.
2) In the short-term, prior to SP age, my early death would leave my OH with a lower fraction of guaranteed income and more reliant on portfolio income. Therefore at retirement we started with just under 60% equities and set an upward glidepath.
3) For fixed income we currently have about 20% of the portfolio in 'cash' and about 6% in global bonds (the remainder is in equities and a small amount of gold) with the cash being in two 1-year fixed rate savings account set to mature 6 months apart (corresponding to our portfolio withdrawal frequency). The relative allocations of bonds and cash is an area where I am willing to be 'active' with a target duration of about 1.5 years with variation allowed depending on my assessment of where yields are likely to go (falling yields=>higher duration and vice versa). The effect on outcomes will be minimal, but it satisfies my unfortunate habit of portfolio tinkering!

Albermarle

A cash/MM percentage of holdings is a reasonable risk reduction strategy as it effectively dampens big equity movements but does increase inflation risk.

Of course there have been periods where cash has lost out to inflation, but it is not a given.
Cash savings/MM funds have been beating inflation for about 16 months now, and this looks set continue for a while yet. There have also been significant  periods in the past where cash has beaten inflation.
OK we know in the long term investing will beat cash, but that's a slightly different argument.
The current interest rates vs inflation are obviously tempting people to have more cash/MM than they perhaps normally would.

DT2001

I am retired however my OH continues to do OMY as she enjoys her work and work/life balance (self employed with the ability to fit in 10+ weeks holiday p.a. around work). We are increasing our equity holdings to about 90% as we are already covering ‘necessary’ expenditure from guaranteed income with my SP due next year. We have drifted up to this % as any bridging requirement reduces and cash gifted to help one child onto the property ladder. We’ll end up leaving a portfolio to our children so factored in long term growth. I have forecast a hit to the market for the first 3 years of retirement and can cope with a minor adjustment to drawings. We have both been self employed for many years so variable income is the norm and my ‘discretionary’ spend is well above our current figure.
 I am in the midst of simplifying our holdings and intend to use a MM ETF inside our SIPPs until 2027 (outside estate for IHT purposes).

Linton

If your objectives are long term growth I see no advantage in not holding 100% equity. But in retirement one probably has other objectives. In particular, in the absence of a substantial DB pension, secure ongoing income.

Hence my advocacy of separate very different portfolios to cover the short and medium terms. One can maximise income by ceasing to worry about inflation in the expectation that over decade timescales this will be provided by the growth portfolio.

For the growth portfolio I would repeat previous pre-Trump warnings that 60% or more invested in any one area is a serious and unnecessary risk. 40% US and 30% in each of Europe and the rest of the world (mainly SE Asia and Japan) is better.  I was going to say EM but China has clearly “emerged”.

MK62

michaels said:

I go with the maths/history (facts) approach that a 'cash buffer' is very much an artificial psychological prop rather than a serious de-risking strategy.

....but this isn't really supported by the facts, which actually show that in drawdown a cash buffer reduces the plan failure rate compared to a 100% equity portfolio........admittedly at the cost of a lower average final balance.

So it really depends what your main priority is.......however, a cash buffer is arguably of less use if a variable withdrawal is acceptable.