33% domestic stocks bias

thegentleway

Alexland said:

thegentleway said:

Very impressive. Must have made some serious contributions or have a very modest lifestyle, probably both to get financial independence so early. 

Yes probably an average of around 25% total pension contributions since I got my first proper job which worked great because having that income automatically taken each month has always given me the motivation to work at a slightly higher level to get enough take-home pay than I otherwise might have settled at.

Annoyingly I'm not financially independent yet as I had to take out a new mortgage to buyout the family home in the divorce so am paying for the same house again (previously we had ISAs bigger than the old mortgage value) it's just my pensions that are sorted and it's still quite a number of years before my earliest pension access age.

Wow 25%, that's awesome. How come you have the financial nous to do that!? My first proper job was for a University and was auto-enrolled into DB scheme.  Which is good because back then I thought I was going to cover my retirement with property portfolio so I probably wouldn't have enrolled.

I've covered PLSA minimum needs for retirement, quite close to moderate but I'm aiming for comfortable so 60% on the way there. And 38% of the way to building ISAs same size as mortgage. I feel like I'm financially independent though as I do my hobby for a living (I run my own company and I would be doing this even if I won the lottery).

Alexland said:

thegentleway said:
Do you have any children? Mine are very young so the world has plenty of time to change until they get to working age but currently the young generation don't have the opportunities I had to make money. In particular home ownership is out of reach and University comes with ridiculous debt. 

Yes it's a worry. I'm using JISAs to invest for their university (if it's still worth going in future) and my LISA to help with their house deposits as when I am 60+ they will be in their 20s. As a result of the divorce they might eventually inherit 2 houses so the current financial pain won't have been for nothing. I might eventually downsize to a smaller house to further help them as this is bigger than I need and an inheritance tax liability. When we first moved in, having sold our 2 previous individual properties, sales people would come to the door and ask if our parents were home.

That's hilarious about sales people asking if your parents are home. We're using JISAs for Uni fund as well and agree that going to Uni isn't as worthwhile these days but who knows what the future holds. I'm optimistic we'll change trajectory and my children's prospects will better than mine when they get to working age but I'm preparing like a pessimist.

Alexland said:

thegentleway said:

Very interesting. Isn't it the same though. I.e. growth stocks are massively overvalued but not value stocks so makes sense to diversify into value stocks, like it makes sense to diversify into fixed income?

But the index tracker already owns lots of value stocks they just look like a smaller proportion of the fund because they are cheaper share prices. I guess you could tilt further into value or away from the US if you wanted to but I don't see the need to do that for my purposes it's fine and easy owning global trackers and I would rather make decisions at asset class level (as they need to be made anyway) than get into the weeds of trying to be smart on geographic, factor, etc within equity investing.

I see, that makes a lot of sense. I prefer this strategy as well. I think I'm going to move to 90% global equities and 10% government bonds once I've found a suitable fund/ETF. I can switch back to 100% global equities when there is a crash and valuations are more attractive, or increase bonds if equity valuations continue to balloon. 

Alexland

masonic said:

If we see recession tanking equity prices while governments slash interest rates, then fixed interest could once again soar in price and again deliver paltry YTM, and in that scenario I would likely over-rebalance to greater than 60% equities and/or shift to shorter duration.

If we go back to near zero interest rates and the bond crash reverses then your TR56 would go from trading at a 44% discount back to a 148% premium (or maybe a bit less as the duration will be a few years shorter by then) which would multiply the value of your asset in a life changing way. However if that happened would you really wait for a full recovery before selling out in the same way someone with equities might hold while unit prices are below historic highs?

masonic said:

In contrast if inflation starts to bite again and interest rates resume an upward trend, I might see my portfolio valuation shrink somewhat, but it will be pushing cashflows into the future rather than depriving me of capital. Or perhaps there really will be a new AI industrial revolution. I can live with any opportunity costs because I will still meet my objectives.

I've considered the scenarios where equities keep rising faster or conventional bonds deliver more due to a low-inflation environment and yes that would be an opportunity missed but as you say we would still have met out objectives of derisking while also getting a good rate of return on the money. A bird in the hand.

Alexland

thegentleway said:

Wow 25%, that's awesome. How come you have the financial nous to do that!?

On my first proper job they had just closed the DB scheme to new entrants (while still allowing existing members to build up extra years) and people I worked with kept telling me that I had an inferior DC pension so I've always felt that I have to put more in to compensate. I think it was only 16% to start with but eventually exceeded 25% as I got into the habit of contributing whatever was required (bonuses, car allowance, whatever) to avoid higher rate tax so it's more 25% as a rough long term average. I was also doing lumpy sal sac for a while to increase the NI saving.

I am now at the end of my pension stuffing journey as the tax free lump sum is capped at £268k and any further contributions will probably be taxed at higher rate on withdrawal due to the freezing of income tax bands until 2031 and IMHO it's not worth locking the money away in pensions for just the 2% NI saving (or maybe a bit more with lumpy, until sal sac is stopped in 2029) so from next tax year I am dropping my contributions to only what is required for employer matching.

So for me it's mostly ISA (and LISA until the ability to earn bonuses might be somehow withdrawn or age 50 whichever comes first) stuffing and paying back mortgage although I don't want to pay the mortgage off too fast as I want to have a high enough loan balance at retirement to store the pension lump sum and any inheritance I may get. I also have to level-up the kids JISAs as the eldest is way ahead of the youngest.

thegentleway said:
I'm preparing like a pessimist.

I think it makes a lot of sense being pessimistic about factors outside your control as it helps the brain think creatively about ways in which you might positively influence the outcome regardless.

thegentleway said:

I see, that makes a lot of sense. I prefer this strategy as well. I think I'm going to move to 90% global equities and 10% government bonds once I've found a suitable fund/ETF. I can switch back to 100% global equities when there is a crash and valuations are more attractive, or increase bonds if equity valuations continue to balloon. 

I guess it gives you a little dry powder but it's not going to affect the portfolio volatility much or provide much of a buying low opportunity all single digit stuff. If you want a single multi asset fund for that then something like the HSBC Global Strategy Adventurous however if you are looking to rebalance into a crash I find it's better to hold the asset classes in different funds so you don't need to sell the equites part you want to keep in order to increase your equities exposure as time out the market can easily work against you in volatile situations.

masonic

Alexland said:

masonic said:

If we see recession tanking equity prices while governments slash interest rates, then fixed interest could once again soar in price and again deliver paltry YTM, and in that scenario I would likely over-rebalance to greater than 60% equities and/or shift to shorter duration.

If we go back to near zero interest rates and the bond crash reverses then your TR56 would go from trading at a 44% discount back to a 148% premium (or maybe a bit less as the duration will be a few years shorter by then) which would multiply the value of your asset in a life changing way. However if that happened would you really wait for a full recovery before selling out in the same way someone with equities might hold while unit prices are below historic highs?

Wouldn't that be a nice problem to have! But let's say the discount just evaporated, it would inflate by nearly 80%, while perhaps at the same time equities tumble to valuations in line with historical norms or better. Annuity rates might then be below 3% for index linked, and the real yield to maturity for my TR56 would be hovering around zero. At that point equities would look to be a far superior long-term inflation hedge once again and I'd probably look to rebalance up to, say 70:30, with consideration for switching into short duration with what remains of my bonds. But the devil would be in the detail, and I'd try not to become too attached to any particular building blocks if fundamentals were to shift.

tigerspill

Alexland said:

masonic said:

I'm taking a similar approach to Alex. I have just over 20% of my portfolio in Index Linked Gilts, including a lump sum in TR56 which will be just over 15 years to maturity when I hit 60, giving me an index linked annuity lock-in option near today's ~4.4% RPI/CPIH-linked rate, which beats a typical SWR for a UK retiree. To cover the years before that, I have a ILG ladder covering my 50s (intended to be used as rolling) and cash as insurance for my late 40s. I have not yet pulled the trigger, but it could be imminent.

I'm looking forward to reinvesting my modest TR50 coupons in other ILG durations that will hopefully look more attractive at the time as the yield curve changes (and maybe reallocating the capital into other durations if/when they overtake the TR50 yield). I have found that the INXG distributions cover both the coupons and inflation on the capital so it's a similar income as a conventional bond fund. I've quite enjoyed learning more about ILGs now they are attractive again and as you say they support a decent drawdown rate so no need to be too conservative about sequence of return risk if retiring early.

However I hesitate to build the full gilt ladder now as it's a lot of trading, other ILG durations are currently lower yield. and if ILG prices rise and they start offering a lower or negative real yield again then I might take profit back into equities if they are looking attractive at the time (or if not, it's still fine I can just hold to redemption and still get the expected total return). If ILG prices reduce and yields get higher then that will help coupon reinvestment so I have a plan that wins whatever happens. It's only bad if the UK government goes into debt restructuring.

On your last sentence about the government restructuring debt - how might this affect ILGs?  I assume there would be no effect if ILGs are held to maturity?

Alexland

masonic said:
I'd try not to become too attached to any particular building blocks if fundamentals were to shift.

It's hard not to get sentimental about investments where you have seen a good return. Like the M&G FTSE100 tracker that helped me towards buying my first home (I didn't know that I lacked a suitable investment timeframe and was lucky to sell before the GFC although house prices dropped a similar amount) or VEVE that's powered most of my returns in the past 5 years.

masonic

tigerspill said:

Alexland said:

masonic said:

I'm taking a similar approach to Alex. I have just over 20% of my portfolio in Index Linked Gilts, including a lump sum in TR56 which will be just over 15 years to maturity when I hit 60, giving me an index linked annuity lock-in option near today's ~4.4% RPI/CPIH-linked rate, which beats a typical SWR for a UK retiree. To cover the years before that, I have a ILG ladder covering my 50s (intended to be used as rolling) and cash as insurance for my late 40s. I have not yet pulled the trigger, but it could be imminent.

I'm looking forward to reinvesting my modest TR50 coupons in other ILG durations that will hopefully look more attractive at the time as the yield curve changes (and maybe reallocating the capital into other durations if/when they overtake the TR50 yield). I have found that the INXG distributions cover both the coupons and inflation on the capital so it's a similar income as a conventional bond fund. I've quite enjoyed learning more about ILGs now they are attractive again and as you say they support a decent drawdown rate so no need to be too conservative about sequence of return risk if retiring early.

However I hesitate to build the full gilt ladder now as it's a lot of trading, other ILG durations are currently lower yield. and if ILG prices rise and they start offering a lower or negative real yield again then I might take profit back into equities if they are looking attractive at the time (or if not, it's still fine I can just hold to redemption and still get the expected total return). If ILG prices reduce and yields get higher then that will help coupon reinvestment so I have a plan that wins whatever happens. It's only bad if the UK government goes into debt restructuring.

On your last sentence about the government restructuring debt - how might this affect ILGs?  I assume there would be no effect if ILGs are held to maturity?

They have some leeway to meddle with inflation measures, as they will be doing in 2030. In some sort of runaway crisis, it could be conceived that QE and inflation could effectively move the burden of the debt away from taxpayers onto bondholders without that being considered a formal default.

Any forced restructuring would be incredibly damaging to the economy and future borrowing costs, and likely another pensions crisis. But there is precedent for voluntary schemes accompanied by lots of encouragement, such as the 1932 war loan conversion into a perpetual bond at a lower rate.

Alexland

tigerspill said:

On your last sentence about the government restructuring debt - how might this affect ILGs?  I assume there would be no effect if ILGs are held to maturity?

I understand the debt restructuring in Greece circa 2012 required bond holders to crystalise around 50% losses via various complicated mechanisms. However in the UK we control our own currency and most of our debt is now in sterling (so we are unlikely to need IMF bailout anytime soon) which makes debt restructuring less likely and more likely the government would default on it's national debt by changing the inflation metric (ILGs will soon move away from RPI) or just printing more money creating inflation and devaluing the conventional bond holders without ever actually defaulting although there are limits to how much they can do this while maintaining international confidence.

masonic

Alexland said:

masonic said:
I'd try not to become too attached to any particular building blocks if fundamentals were to shift.

It's hard not to get sentimental about investments where you have seen a good return. Like the M&G FTSE100 tracker that helped me towards buying my first home (I didn't know that I lacked a suitable investment timeframe and was lucky to sell before the GFC although house prices dropped a similar amount) or VEVE that's powered most of my returns in the past 5 years.

I think I owe most of my success to Emerging Markets (which at the time made up 30% of my early 2000s portfolio, and thankfully I cut down before a decade of underperformance), UK small caps (which during the 2010s made up a third, but I trimmed during Covid), and commodities (which at various times made up to 20%, but at other times 0%). The S&P500 in the form of CSP1 was the consistent factor and has consistently been 40%+ of my portfolio until recently. I've managed to overcome any sentimentality thus far, so hopefully I'll be able to do so with bonds in the future. With bonds I think it is easier, because the upside is capped, so if I see the majority of my returns realised in the short term, there will be little to gain from hanging on to secure the final cashflows. The only pull would be the inflation protection, but I will just have to take a view on that in the circumstances. I don't think I'd attach too much value, because I was revolted by the prospect of locking in a small negative real return and think even tracking inflation would seem inferior to active cash and other investment options.