My pension investment strategy S&P500. Wise or foolish ?

DATMAN_2

Hi all

At 53 with wanting to retire at 58 I have been in saving a large part of my salary each month into my Pensions and ISA for the past 8 years. This has resulted in me becoming frugal and not buying exotic cars and holidays as I did in my 30’s.

I took the decision to take matters into my own hands and transferred all my DC pensions from Royal London to to a SIPP with Interactive investor a few years ago. I have mixed portfolio but a large part of my pension is now in the S&P 500 ETF and individual mag 7 shares.

Over the past 100 years the S&P has averaged 10% a year growth.The last few year 20 plus % a year which has been great.

There is no life-styling with my pension pot as I get older but I am also contributing to a cash ISA and will have say 4+ years of spending when retired safeguarded against so I need not dip into my pension during any market crash. My pension can remain invested and untouched for the market to rebound after a crash.

Is this a strategy anyone else is using? Am I missing any points? 

El_Torro

Since one of the key points of investing is to diversify I wouldn’t call having all your investments in the S&P 500 wise. Not sure I’d go so far as to call it foolish though. While the S&P500 has a great track record nobody knows how it will perform vs a global tracker in fhe future. Looking at its 100 year track record doesn’t tell us a lot either, a lot has happened in that time that won’t be replicated in the next 100 years.

Having 100% equities and a 4 year cash buffer is a decent strategy I would say. Riskier than what many would do, though at least your cash buffer is big enough to ride out a lot of volatility. 

DT2001

Bold move. There are plenty of people saying good returns over the next decade will be hard to come by as valuations are high.

Personally we are 80%+ in global ETFs. SP is due next year and that together with small DBs cover our basic spend. Ultra short bonds cover 5/6 years of my mid range guesstimated expenditure. I intend to take a fixed % of my pot so the bonds will last even longer in a downturn. My reasoning for a riskier than needed strategy is that we intend to gift excess as we go into retirement and are also happy to flex our budget.

What return do you need to reach your ‘number’ and what is your drawdown plan? If the market crashes at the beginning of your retirement and takes more than 4 years to get back to the starting point what will you do. I thought  “what happens with a 50% drop on day 1”  - initial answer was take 50% less from equities and top up from ultra short bonds - very simple but a VPW is probably better. In reality the market is unlikely to fall off a cliff that quickly and not recover to some extent over the next few years so, at the moment, I intend to draw quarterly. I have based my figures on £X and when it reached X+ I realised some of the paper profits so have an 5/6 or 4/5 years of cover.

dunstonh

Over the past 100 years the S&P has averaged 10% a year growth.The last few year 20 plus % a year which has been great.

Included in that was a golden age and a period the US moved from an emerging market to an economic powerhouse.   So, that isn't going to happen again.

Also, you are in Sterling. Not dollars.  So, unless you have currency hedged, you wont be getting the returns of the S&P500. 

Is this a strategy anyone else is using? Am I missing any points? 

Yes. Many people rely on recency and overlook currency movements and the historical fact that global growth, excluding the US, versus US only only alternates in cycles.   You have got lucky in a a cycle that favoured the US.  

bownyboy

Me and my wife are 90% in Vanguard Global ETF (VWRP) in our SIPPs and ISAs, plus 10% cash. We early retired in 2022. We intend to keep it that way for the foreseeable future. No indiviual shares for us. We like to keep things simple. 

But we also both have full new state pensions coming online of £12k in 6.5 and 15 years to help with things. Also a paid off house. 

It really depends on your situation (do you have a partner? kids? what is your expected expenses? what are your current savings / investments etc).

Those answers will influence your choices. 

Labtebricolist

Lack of geographical diversification plus doubling up on mag 7 is certainly at the racier end, but ultimately it’s down to individual risk appetite.

Personally I prefer global rather than just US equity index and, like the poster above, have a large chunk of VWRP.

I do worry a little about FX, at least over the medium term - I think a lot of what is going on in the US with tariffs is aimed at pushing countries to revalue vs USD, and this won’t be great news for many UK investors.  However I’m not keen on hedging equity exposures, so will look to ride some of this out with hedged bonds.

GazzaBloom

dunstonh said:

Over the past 100 years the S&P has averaged 10% a year growth.The last few year 20 plus % a year which has been great.

Included in that was a golden age and a period the US moved from an emerging market to an economic powerhouse.   So, that isn't going to happen again.

Also, you are in Sterling. Not dollars.  So, unless you have currency hedged, you wont be getting the returns of the S&P500. 

Is this a strategy anyone else is using? Am I missing any points? 

Yes. Many people rely on recency and overlook currency movements and the historical fact that global growth, excluding the US, versus US only only alternates in cycles.   You have got lucky in a a cycle that favoured the US.  

It's also worth mentioning that 41% of the S&P500 companies revenues come from outside the US, a trend that has risen over time, making comparisons with the past performance and future predictions in relation to global growth and economic cycles far more complex.

GazzaBloom

Labtebricolist said:

Lack of geographical diversification plus doubling up on mag 7 is certainly at the racier end, but ultimately it’s down to individual risk appetite.

Personally I prefer global rather than just US equity index and, like the poster above, have a large chunk of VWRP.

I do worry a little about FX, at least over the medium term - I think a lot of what is going on in the US with tariffs is aimed at pushing countries to revalue vs USD, and this won’t be great news for many UK investors.  However I’m not keen on hedging equity exposures, so will look to ride some of this out with hedged bonds.

Some companies choose to domicile on the US stock exchange but collect revenues from across the global markets. Alphabet, for example, seen as a US company, generates 50% of their revenue from outside the US. Viewing the S&P500 as a "100% US" index is too simplistic when considering global diversification.

With regards to the Mag 7, they remain a group of companies with very strong fundamentals. The beauty of index investing, whether global or S&P500, is that as their top stars starts to fade, which they will, the index will rebalance as new stars rise over time.

Anyone holding the S&P500 in 2001 when Nvidia joined the index didn't have to change a thing to benefit from the companies meteoric rise. 

kempiejon

When I was investing primarily in the FTSE100 by tracker and then into single shares too knew I was investing internationally because companies like Unilever, Shell, HSBC, Rio Tinto et all are global players. However compare the UK index with the US for 10 odd years and you can see that buying the American by way of S&P was more profitable.
To look at the OPs solution of everything invested in the American market and cash for spending I think misses out on some of the fun that can be had from owning the other regions. I know I can't know where S&P or FTSE, Europe, Asia, emerging markets, commodities, soverign debt, gold or any other market will be next decade but I wouldn't exclude them in my portfolio just because, for the past few years, America has been best. But with enough money just the S&P'd be good enough - it was good enough for Warren's wife's trust should he predecease her. Since January mind FTSE is the clear winner vrs S&P.

jimjames

DATMAN_2 said:

Over the past 100 years the S&P has averaged 10% a year growth.The last few year 20 plus % a year which has been great. Is this a strategy anyone else is using? Am I missing any points? 

It's not one I use or would as it's not diversified enough.
If the last 100 years growth has averaged 10% and the last few years 20% then if you assume the average will continue it means it's more likely the next few years could be below 10%. Not every market grows highest forever. In the mid 2000s it was emerging markets and USA was bottom.

Roger175

Your strategy would scare the hell out of me. Arguably the S&P500 is in a bubble (huge debate on this and not wishing to get into it here), but given the current high, I would be minded to sell some of my holding and diversify.