Equity market crash ?

Alexland

Albermarle said:

For the past few days I've been trying to think of any good reason to still hold any equities in my pensions.

So you can make more and more money and have a really BIG pension pot. ( even if you do not really need one  )

Maybe but at current valuations it's hard to see the short to medium term opportunity in global equities unless there is going to be a melt-up similar to Japan in the late 80s.

With bonds and an annuity I can see a path to getting an inflation linked retirement income from 55 around double my current spending on bills and living expenses. An attractive low risk option. A bird in the hand paying 50% more than the drawdown one in the bush.

So yes it might be market timing but tactically following asset valuations and taking risk where I see opportunity has generally worked well for me over the years. I'll probably keep some equities just for diversification as they are not quite as unattractive as bonds were.

InvesterJones

I'm getting slightly confused by your talk of 'opportunity', 'market timing' and 'tactically following asset valuations' - it makes it sound like you think there will be an outperformance and that's why you're doing it.. but then your middle paragraph sets out that actually you don't need any additional gain in wealth - you're where you need to be and it's just wealth preservation via inflation linked bonds and annuities. The latter makes complete sense to me, the former.. not so much. If you have made it, congratulations. If you need additional performance.. then there's obviously an opportunity risk in dialling down the volatility too much - but I completely get the urge to derisk if you're approaching end of working age.

Alexland

InvesterJones said:

I'm getting slightly confused by your talk of 'opportunity', 'market timing' and 'tactically following asset valuations' - it makes it sound like you think there will be an outperformance and that's why you're doing it.. but then your middle paragraph sets out that actually you don't need any additional gain in wealth - you're where you need to be and it's just wealth preservation via inflation linked bonds and annuities. The latter makes complete sense to me, the former.. not so much. If you have made it, congratulations. If you need additional performance.. then there's obviously an opportunity risk in dialling down the volatility too much - but I completely get the urge to derisk if you're approaching end of working age.

Don't worry about me - I'm young enough to take the risk of going heavy on equities if valuations become attractive again but fortunate in that I don't need to as the bonds to annuity path with my exiting pension pots should provide enough to retire early with a good income.

I think it's a mistake to assume that each asset class provides a constant risk/reward profile in portfolio construction as anything can become higher-risk/lower-return when it gets too expensive. It was bonds and now it seems to be global equities. I'm not predicting a crash just observing that the risk/reward on them is looking less attractive than at other times.

masonic

Alexland said:

dunstonh said:
As this is a UK site, the US 4% SWR won't apply.     UK is closer to 3.5% in your 60s and 3.0% in your 50s.

I agree and have for many years been planning 1/35th drawdown from 55 around 2.86%.

However with inflation linked annuity rates at around 4.25% from 55 then it seems rational to take profits from the equities and switch into long dated inflation linked bonds to synchronise with annuity prices until 55 to get around 50% more income without needing to worry about when markets might next crash. It's quite a mindset change after being 100% equities during the years bonds were so overvalued. For the past few days I've been trying to think of any good reason to still hold any equities in my pensions.

I'd be interested in your approach for this. I've been working towards something similar, although to date I've focused on purchasing individual ILG to match to years prior to my private pensions being accessible (no protected pension age here, so I'm going out to 60). I do also intend to include an annuity in my plans beyond 60.

Are you looking at a fund that would maintain its approximate duration for your hedge, or implementing some sort of glide path? I suppose the former is what would lock in the future cashflows, but I've not yet looked into the relationship between annuity rates and ILG prices to understand what sort of duration gives a good match. I know there are some specific pension funds designed around this, but from what I've seen they tend to be based on flat gilts and tend to have durations of 15+ years.

This was something I was planning to dive into once the impact of the upcoming budget had sunk into the market.

OldScientist

masonic said:

Alexland said:

dunstonh said:
As this is a UK site, the US 4% SWR won't apply.     UK is closer to 3.5% in your 60s and 3.0% in your 50s.

I agree and have for many years been planning 1/35th drawdown from 55 around 2.86%.

However with inflation linked annuity rates at around 4.25% from 55 then it seems rational to take profits from the equities and switch into long dated inflation linked bonds to synchronise with annuity prices until 55 to get around 50% more income without needing to worry about when markets might next crash. It's quite a mindset change after being 100% equities during the years bonds were so overvalued. For the past few days I've been trying to think of any good reason to still hold any equities in my pensions.

I'd be interested in your approach for this. I've been working towards something similar, although to date I've focused on purchasing individual ILG to match to years prior to my private pensions being accessible (no protected pension age here, so I'm going out to 60). I do also intend to include an annuity in my plans beyond 60.

Are you looking at a fund that would maintain its approximate duration for your hedge, or implementing some sort of glide path? I suppose the former is what would lock in the future cashflows, but I've not yet looked into the relationship between annuity rates and ILG prices to understand what sort of duration gives a good match. I know there are some specific pension funds designed around this, but from what I've seen they tend to be based on flat gilts and tend to have durations of 15+ years.

This was something I was planning to dive into once the impact of the upcoming budget had sunk into the market.

The duration of an annuity is very roughly half the life expectancy at the age at which it is bought (it actually varies with yield too, potentially quite a bit either side of that). The delay time should then be added.

In principle, two funds in a ratio such that their average duration is close to the duration of the annuity + remaining delay would lock in the income (you could use the 'all stocks' version of inflation linked gilts and a 0-5 year fund e.g., the one offered by ishares and others). There is some material on bogleheads about duration matching (mainly for the similar problem of matching to a TIPS ladder where people cannot buy individual TIPS in their pension accounts).

FWIW, I've begun modelling this using historical gilt yields (nominal since there is more history!) with a preliminary result (i.e., take with a pinch of salt) that for an annuity purchase at 65yo, a single gilt held until purchase with an initial maturity of delay+annuity duration would have locked in the income within about 4% in about 50% of historical cases and within about 15% in the worst cases).

* This is not a good way of duration matching, but will form a useful baseline against which to compare more sophisticated matching strategies. I was surprised that it gave fairly reasonable result most of the time.

Alexland

masonic said:

I'd be interested in your approach for this.

Yes it's something I am still figuring out too after years of being a mostly equities investor.

My workplace pension offers two annuity matching funds - one is for people who intend to buy a fixed income annuity and uses conventional gilts and the other is for people who intend to buy an inflation linked annuity which uses inflation linked gilts.

The inflation linked annuity matching fund holds gilts that go out until the 2060s but the average duration is still only around 15 years. That's longer than their normal inflation linked bond fund at around 10 years.

However by the time that I am able to buy the annuity there won't be many years left on the bonds that were bought at current prices. The duration is not long enough to match the cashflow from an annuity bought in the future. To lock in at current annuity rates then I probably need a portfolio with average maturity somewhere around the middle of my retirement which would be around 25 years from now?

So the annuity matching fund is probably more designed for people who are on the cusp of buying the annuity not those of us trying to lock in the rate around a decade in advance.

It might be good enough for that pension but I'll need to have a much longer average duration in my main SIPP so that the blend of the two is around 25 years. However it's that SIPP with the protected access age so it will need to also have some short dated ones too to cover the early years. It might be better to buy the ILGs directly on Fidelity (if they support that) than mess around with ETFs with average durations that keep needed to get shorter as I get older. Lower costs and less trading required.

Ideally I would like to buy 2 annuities - a fixed term one to provide the higher income in pre-SP years and then a lifetime one to cover the SP onwards period when I might be able to better judge my heath outlook and use IL gilts to lock in the rate now.

masonic

Thanks both. Very helpful.

dont_use_vistaprint

I listened to a Ted talk about corrections & how loss aversion & recency bias come into play and thought to myself of people really that dumb, and yes it seems they are….

Albermarle

dont_use_vistaprint said:

I listened to a Ted talk about corrections & how loss aversion & recency bias come into play and thought to myself of people really that dumb, and yes it seems they are….

Loss aversion is nothing to do with being dumb. It is a common trait in most humans, and is thought to be hard wired in from prehistoric times.