Asset allocation- cash and shares

Ecee76

Thinking ahead here because I'm not close to retirement yet...my understanding is that the traditional way of lifestyling a DC pension is a bit out of date if you're not buying an annuity, but that standard advice is still to bring some of your pension into bonds as you approach retirement.

I'd be grateful for people's thoughts on having cash and shares only (no bonds). In recent years the bond markets seems to have been as volatile as equities, and not negatively correlated either.

If you had a very large cash buffer (5 years' income say) could you stay 100% in equities?

Grateful for any thoughts on this.

QrizB

If you had a very large cash buffer (5 years' income say) could you stay 100% in equities?

If you're holding a lot of cash you're not 100% in equities, though?

If we imagine an idealised 25-year retirement, during which we spend 100% of our pot, 5 years' income in cash is ~20% at the start of retirement escalating to 100% at the end.

Linton

The only bonds we hold are higher risk ones which together with high dividend equity funds provide a useful steady income. Then we have more than 5 years drawdown needs and cash for holidays in PBs and low risk investments .

All long term growth investments are 100% equity.

So, no you don’t need to hold safe bond funds alongside equity. However if you are taking this route you do need a strategy with appropriate asset allocations that will provide for ongoing income without the need for short term selling of equity.

Hoenir

Ecee76 said:

 In recent years the bond markets seems to have been as volatile as equities, and not negatively correlated either.

The post GFC QE era has past. Look forwards not backwards. 

squirrelpie

We don't own any bonds, and retired some years ago. But we both have state pensions and other DB pensions, so we're not dependent on a continual steady income from DC pensions.

Hoenir

Ecee76 said:

.my understanding is that the traditional way of lifestyling a DC pension is a bit out of date if you're not buying an annuity, 

In what regard.  The only predictable thing about the future is uncertainty.  

DT2001

We have about 15% in ultrashort bonds (which pretty much perform like cash) with the rest in global trackers. The 15% covers 5/6 years of equivalent of OH’s SP to fund the gap on the assumption she’ll retire in the next two years and my ‘poor initial returns sequence’ fund. The SP cover together with my SP and 2 moderate DB’s, will give us £18/20k above expected fixed ‘necessary’ costs. We can then draw up to about 4% of the global trackers fluctuating year on year. This appears to be a riskier strategy than necessary as I could adopt Linton’s approach and guarantee a steady income however I have one eye on inheritance and another on plans B and C (downsizing which is necessary sale of an overseas property). So to answer the OP’s question I think it depends on the overall situation and how you decide when to use the cash. Our cash/nr cash % by OHs SPA will, in theory, be about 10%.

Triumph13

We have no bonds simply because some little DB schemes, plus 2 x SP will fill that role, with cash standing in until they come on line.  If we didn't have those DBs, then we would definitely have been holding gilts preparatory to buying an annuity with some of our DC funds to give us a secure floor.

With a floor in place, we are happy to be nearly 100% equities in the rest of our DC funds, with a little cash to smooth the income taken.

Albermarle

Ecee76 said:

Thinking ahead here because I'm not close to retirement yet...my understanding is that the traditional way of lifestyling a DC pension is a bit out of date if you're not buying an annuity, but that standard advice is still to bring some of your pension into bonds as you approach retirement.

I'd be grateful for people's thoughts on having cash and shares only (no bonds). In recent years the bond markets seems to have been as volatile as equities, and not negatively correlated either.

If you had a very large cash buffer (5 years' income say) could you stay 100% in equities?

Grateful for any thoughts on this.

You can probably see from the replies already that the answer will vary due to peoples circumstances and their personality.

Most lifestyling nowadays is aimed at the customer aiming for drawdown, although you usually can still opt for an annuity lifestyling ( and for some older pensions, this may have been the only option) .
The typical default lifestyling pension fund, with start with 70 to 80% equities. Then around 10 years out from the provisional retirement date will start to slowly reduce this down to 40/50% and the a few years post retirement down to maybe 30%.
I think most regular posters on here would think that 30% equities was too low and many will be much higher. The traditional figure is 50% .
Regarding the split with non equities, in a simplistic view you could count bonds/gilts and cash as the same.

The main problem with 100% equities is that most investors can not stomach the volatility, especially in retirement. even if they have a large cash buffer. Plus there is always the nagging fear that there could be a very prolonged downturn one day.

kempiejon

I tried a few simulations and at about 85% equity 15% bonds/cash a safe withdrawl rate of 3.7% can be maintained. The same SWR can be obtained with 100% equities with more volatility and a larger average residual. Those lucky enough to have enough money to set aside for retirement that can reach their objectives with 30% equities do not need to risk as much chasing gains.
Of course early in the financial independance journey with a job and an income rolling in 100% equities is more bearable as losses can be recouped. It's a different story say 3 years from retirement with an idea to pay off the mortgage with a lump sum and buy an annuity with the balance.
I rode the 100% equity roller coaster and I had my FU money in place before my 50th birthday, I now collect a few gilts and other fixed interest and by my late 60s I expect to have altered that allocation towards the 80:20 prehas higher though with decades in retirement I doubt I would drop to 30%, perhaps I'd consider an annuity.

Linton

kempiejon said:

I tried a few simulations and at about 85% equity 15% bonds/cash a safe withdrawl rate of 3.7% can be maintained. The same SWR can be obtained with 100% equities with more volatility and a larger average residual. Those lucky enough to have enough money to set aside for retirement that can reach their objectives with 30% equities do not need to risk as much chasing gains.
Of course early in the financial independance journey with a job and an income rolling in 100% equities is more bearable as losses can be recouped. It's a different story say 3 years from retirement with an idea to pay off the mortgage with a lump sum and buy an annuity with the balance.
I rode the 100% equity roller coaster and I had my FU money in place before my 50th birthday, I now collect a few gilts and other fixed interest and by my late 60s I expect to have altered that allocation towards the 80:20 prehas higher though with decades in retirement I doubt I would drop to 30%, perhaps I'd consider an annuity.

Do those simulations simply assume a fixed % equity allocation with money proportionally taken from  both bonds/cash and equity or do they model the effect of managing the equity and non-equity in different ways? I would expect the results to be rather different.