100% equity

[GeoffF100]

Historically long dated governments with a top credit rating have more often than not gained value in an equity crash, and will usually dilute your loss. These are unprecedented times in the bond markets with low or even negative yields. Huge amounts of money have been pumped into the economy, which could stoke high inflation, which would devastate bond holdings. Nonetheless, equities have historically been even more risky. Only two equity markets have survived 100 years (unless others have joined that club recently). Nobody knows what will happen. Spread your bets if you can.

[Urbandreamer]

I've always had a high opinion of equities and a low one of bonds. Hence have argued in the past for 100% equites. Despite that I moved a small part of my pension capital into bonds in January 2020. We all know what happened to the equity markets in the following months.

Bond's didn't do as badly, but they didn't move in the oposit direction. Indeed recently bonds have tended to move in the same direction as equities.

I currently have about 2% of my investments* in bonds and am looking to retire in two years when I'm 60. I might increase the percentage to 5% at that time. I also am only 40% invested in passives.

That said I have a high risk tollerance, am entitled to a full state pension when I reach that age and have a small DB scheme that should pay when I'm 65.

Of course my risk tollerance didn't stop me feeling a bit ill when my retirment capital fell by 30-40%. Some value avoiding those feelings quite highly. Only you can decide what value you put upon such things.

*I don't include the value of the house in my investments and am mortgage free.

[JohnB]

I'm 52 and I'm 100% tracker equity (bar SP and £6k DB and very foolish p2p). Any market correction that could sink me would sink society.

[xxd09]

You are a tough lad with a high tolerance to risk
That is unusual in most investors and probably not a sensible route for most of them to follow
If you have made a huge pile you can be 100% equities( like Warren Buffets wife) or you can as conservative as you like -either way your vast pot size ensures failure is not likely
Some unfortunately have not saved enough and are using 100% equities to gamble their way to a happy retirement
A market drop for some years at retirement will undo them completely
You pays your money and takes your choice
Personal confession-made enough so been 30/65/5 equities /bonds /cash for many years
Certainly can sleep at night!
xxd09

[scrumpyjack]

If I had 30 years to retirement, I wouldn't hold any bonds but would prefer to go for the likes of Personal Assets Trust or the other value preserver funds for the low risk element of my portfolio.
It really depends on what you feel comfortable with but having been a young man in the 1970's and seen what inflation did, I went all equity. Hairy ride at times with the market losing 70% in early 1974 but it all came good in the end.

[Sobraon]

Hi Joey, I am very much an amateur compared to the seasoned cognoscenti of this board so feel free to ignore my ramblings! I'm sure someone who knows what they are doing will come along soon.

My equity portfolio is almost 100% passive global all share index funds and I am a lot older than you. I hold a small proportion of bonds (less than 10%) using Vanguard LifeStrategy 80% Equity Fund (80% shares, 20% bonds), and an even smaller amount in Vanguard LifeStrategy 40% Equity Fund (40% shares, 60% bonds).

During the Spring 2020 'drop' Vanguard LifeStrategy 40% Equity Fund went from 165 to 142 in a month so didn't seem to offer me protection in that period as is sometimes suggested as the reason for holding bonds. Today LifeStrategy 40% is 3.3% up on the year so just about keeping up with inflation with no 'real' return.

On the other hand only about 50% of my total investable capital is invested in the stock market and I do have the benefit of a DB pension. Whether this means I am 50% bonds, 50% shares I will leave you to decide.

[tjh290633]

I have got to 87 without owning bonds, since I got rid of a few inherited from my mother in 1970. I have never had any passive investments, the arguments for which seem to be that if you hold them you cannot underperform the market(s). In fact they always underperform by the costs of managing them, which is not negligible. That reduces the dividend income, which reduces the compounding effect. If the costs are 0.5% and the dividend income is 2.5%, that is a 20% reduction, as an example. The same applies to actively managed funds and investment trusts, but they do at least have the chance to outperform the market in which they invest. Not all do, but some do.

You can avoid most of the costs by investing direct in equities. You still have the cost associated with your platform, but the fees are likely to be much lower. My own, for a portfolio of about 35 shares varies with the capital value, but averages 0.037% of that value. Brokerage charges depend on the frequency of trading, in my case averaaging 0.15% of the capital value at 23 trades per year.

I did run a small portfolio of Gilts for my late mother-in-law, and the fundamental rule for me was only to buy stock standing below par, with a reasonable time to maturity. This was at a time when interest rates were up to 14% or more.

I would not touch them now.

TJH

[dealtn]

Hello all,

I am in the process of consolidating some old pensions into a SIPP. It's been on my todo for about five years (don't ask). Anyway, my question is: are there others out there who go with a 100% equity portfolio in passive funds? Is it a stupid idea in your opinion? I am considering 100% allocation to VWRL or similar, or possibly 90/10 allocation to VWRL/VAGP (or similar). I have about 27-30 years to go for a retirement date so I feel I can be more aggressive than maybe others who on a shorter time frame.

I'm not exactly experienced with bonds (read: never owned them). My understand is that having an allocation to them would allow a rebalancing to occur when equities have crashed, as bonds are likely to have gone in the opposite direction to the equities. That's my naive understanding so please correct me if I'm wrong.

There is no guarantee equities will crash.

There is no guarantee bonds will go in the opposite direction.

There is no guarantee bonds won't crash.

Understand each asset class and don't look for certainties where they don't exist.

[Leif]

I'm 52 and I'm 100% tracker equity (bar SP and £6k DB and very foolish p2p). Any market correction that could sink me would sink society.

Exactly. Passive funds funds tend to recover in 2-5 years, although we have seen significantly longer timescales in the past. Anything that obliterated the markets would be an apocalypse event.

If you have 30 years ahead before retirement, equities make sense. You might as well accept the risk on the grounds that risk is reduced by time. Trackers also make sense, although I am 90% active. There is always the danger with active funds that the manager will either do a Woodford, or simply make a judgement that turns out wrong eg pick stocks in sectors that are hit especially badly by covid 19. That can be largely mitigated by having plenty of active equity funds, and choosing wisely. (That raises the question of how to choose wisely ...) Bear in mind that most active funds underperform the index.

I haven’t gone for a global tracker, they are IMO too US weighted. I prefer more spread over the UK and Europe, and small, medium and large caps. But that’s my subjective judgement.

You have to ask what are the alternatives. Bonds are not doing well. Property requires work, and is now less tax efficient, but is worth consideration. Care choosing tenants is essential. Savings accounts are useless.

As for the future, I believe there will be war with China, maybe by 2030, and that will hit markets. We depend heavily on China, so the impact of war will be severe especially given the proximity of Taiwan, Japan, Vietnam etc.

[vrdiver]

Hello all,

I am in the process of consolidating some old pensions into a SIPP.
...
I am considering 100% allocation to VWRL or similar, or possibly 90/10 allocation to VWRL/VAGP (or similar).
I have about 27-30 years to go for a retirement date so I feel I can be more aggressive than maybe others who on a shorter time frame.

I'm not exactly experienced with bonds (read: never owned them). My understand is that having an allocation to them would allow a rebalancing to occur when equities have crashed, as bonds are likely to have gone in the opposite direction to the equities. That's my naive understanding so please correct me if I'm wrong.

(my bold)

Hi Joey,
With that sort of timetable, I personally would steer clear of bonds, especially at their current inflated prices (demonstrated by low or negative yields).

Putting everything into something like VWRL is a fire-and-forget approach; it won't make your SIPP a star performer, but the VWRL diversification should protect you from, say, a FTSE / UK slump whilst the rest of the world carries on.

In the "old days" (pre Pension "A" day) when you HAD to buy an annuity, investors were concerned that a stock market crash the day before annuity purchase could destroy their pension value, so the accepted wisdom was to gradually move your investments from equities into bonds, over quite a few years, locking in any achieved market performance but accepting that you were giving up an ever-increasing fraction of any future market growth as you approached retirement age. It was probably sensible, especially for risk-averse investors.

In today's world, you don't have to buy an annuity, so that bad-timing risk is no longer an issue. Retirement has become much longer (we survive longer, even though retirement age has increased) which now leads to the idea that whilst you are currently investing for your "old age", when you get there you should continue to invest for your "very old age"! Even at retirement, not everybody wants to switch to bonds. Provided you don't have to sell your investments for cash to live off, ups and downs in the market can be ignored. Many people with self-managed pensions have a cash reservoir (1 to 3 years expenditure) and an excess of SIPP income planned into their finances, so that sudden market drops (like last year) don't force sales at low points. There are other discussions on TLF on how people plan this if you want to go deeper into it.

VRD

(Currently retired and 100% in equities and with a 3-year cash buffer)

[Lootman]

Add my vote to the "nothing in bonds" camp. I recall when gilts were giving yields-to-maturity of 12% and that was certainly a risk-free return worth having, even if inflation was much higher back then. But at current rates you are almost guaranteed negative returns from bonds going forward.

But that is different from being 100% in equities. I have 2/3 years worth of living expenses in cash, and a few percent in gold. But still well over 90% in equities.

[Adamski]

VWRL is good for diversification as includes emerging markets. As said above, could include a few percent in gold. And dare i say as long term put some in more risky investments SMT, Fidelity China etc.

[JohnW]

I’d say you’re on the right track, but don’t take too many steps before you better understand the terrain you’re dealing with. Do some reading, get some books, thus avoiding all dopey goof-ups one doesn’t need to make. Little goof-ups are forgivable.
The passive funds idea is not stupid. You can get close to market returns (falling short by fees, trading costs, taxes etc, all of which affect active funds - likely more adversely). And the SPIVA reports show us that when active funds can be compared with a market return benchmark they commonly outperform the market over a year or two, but after about 3 years the majority will underperform the market with an increasing majority as time goes on. As you’ve got 27 years to retirement and 25 years investing after that, be careful of active funds. No one has described how to pick the ones that will outperform for 40 years, or how to chop and change successfully if you are to start off with the outperformers and dump them before their underperformance eats their outperformance (and then choose the next outperformers). If all that is true, I think they have to be viewed as a bit of a gamble; no criticism, some people are more comfortable with gambling that others, so make your own choice.
All equities is ok, but you might benefit from looking at some long term charts of diversified stock and bond funds in different proportions to get a feel for swings in value and long term gains/losses. Portfoliovisualiser and portfoliocharts are useful sites. Books have been written on choosing ‘asset allocation’, is the jargon; W Bernstein’s The Intelligent Asset Allocator isn’t a bad one.
The idea of a bond holding is, or was, to dampen stock volatility. You own stocks as they provide good returns, but as their values can swing wildly you also hold bonds which hold their value steady (or increase with a crisis) so the equity swings are ameliorated. You should know a bit about bonds, or read it up if you don’t (there are suitable books and websites), which will tell you that not all bonds will do what you want in a crisis; they need to be as safe as possible from default (that means national government) and not too subject to interest rate risk.
If that’s a sound idea - bonds to reduce stock volatility - then the argument to not hold bonds now because their return is so low is invalidated (or invalidates that sound idea). Their returns are always likely to be less than equity returns, so if we were happy to give up equity returns for lower bond returns in the old days, why wouldn’t we be accepting of it today? We might be giving up more, but to be confident about that means you have to be confident about equity returns AND bond returns in the future; good luck with that one. Yes, we can make a good guess, and possibly be right in which case you’d hold less in bonds than the old days, or even none, but how much equity volatility can you tolerate? The reality is, there are times when the returns on investing are less than they were and will be; do you accept those lower returns, or do you take more risk in the hope of compensating?
If a 30/70 mix is right for some, and a 70/30 mix for others, then a 100/0 should be right for some too, it depends on personal circumstances and attitudes.
Yes, bonds do allow rebalancing when equities crash, but it takes balls to sell an asset that’s holding up and buy one that’s falling week after week. For the purists, rebalancing is about maintaining your assets at the mix that suits your risk tolerance (as much in equities as you can stomach, and no more). Rebalancing does not ensure higher returns than not rebalancing, so to hold bonds only as a way to rebalance into falling equities doesn’t sound like a long term winner to me. Rebalancing makes money in a swinging market if you get the timing a bit right; in a trending market where equities keep going up you’d be losing out with bonds, and in a long falling market the new equities you just bought with bond money keep falling in value. More balls needed, and bonds.

If I had 30 years to retirement, I wouldn't hold any bonds but would prefer to go for the likes of Personal Assets Trust or the other value preserver funds for the low risk element of my portfolio.

That sounds like it's aiming for returns better than bonds, with similar safety to bonds. The holy grail?
Despite their appealing titles I don't see how they improve on low cost, passive diversified equities for returns, mixed with low cost passive government bonds for volatility moderation. Add to that, you have to untangle what's in the 'preserver' funds to get a feel for how much is equity-like and how much is safe bond-like. They're active funds. So it comes back to gambling doesn't it, with that choice?

...I have never had any passive investments...
..actively managed funds and investment trusts, but they do at least have the chance to outperform the market in which they invest. Not all do, but some do.

Unfortunately, a minority after more than about 3 years. And no one knows how to reliably identify that minority. Gamble, that's fine, but let's call it for what it is.

[1nvest]

If a 30/70 mix is right for some, and a 70/30 mix for others, then a 100/0 should be right for some too, it depends on personal circumstances and attitudes.

... be mindful that stocks are leveraged instruments, borrow to invest, broadly around 1.5x leveraged. In a mindset that 100% is deemed acceptable, so also might 200%. The reality however is that leverage just broadly scales up volatility, not rewards, a 2x leveraged stock holding will over full cycles tend to reward the same as 1x, but endures twice as much volatility along the way, has a lower risk adjusted reward factor (Sharpe Ratio). Accordingly more commonly investors opt to deleverage 100% stock that has a 1.5x leverage factor down to 1x i.e. via a 67/33 stock/bonds asset allocation.

Here's a portfoliovisualizer link showing a comparison of 67/33 versus 100/0 https://tinyurl.com/19i63hos

This is another https://tinyurl.com/6p6tg3fl that compares 33/67 in a 2x stock (SSO)/bond blend compared to 67/33 in a straight stock/bond blend.

i.e. subjectively 100% stock and 33/67 stock/bond can compare in reward subject to the characteristics of the choice of stocks held.

In other cases some bonds can be more volatile than some stocks. Stocks were around 66% as volatile as EDV for example since 2009.

[ursaminortaur]

As for the future, I believe there will be war with China, maybe by 2030, and that will hit markets. We depend heavily on China, so the impact of war will be severe especially given the proximity of Taiwan, Japan, Vietnam etc.

Somewhat off topic but who do you see as going to war with China ?
Smaller countries look unlikely to attack China and although China may try and make its influence felt in the South China Sea and continue to make claims against Taiwan it's unlikely it will push things too far and risk an armed conflict with the West since such a conflict could easily escalate into a nuclear exchange. For similar reasons the major western powers are unlikely to start an armed conflict with China. Of course if there was a miscalculation which escalated into a nuclear conflict between China and the West then we would all have rather more to worry about than the markets.

[Urbandreamer]

I thought that I'd add a bit in response to JohnW lengthy post. I'm not disagreeing, but I hope shedding some light.

I’d say you’re on the right track, but don’t take too many steps before you better understand the terrain you’re dealing with. Do some reading, get some books, thus avoiding all dopey goof-ups one doesn’t need to make. Little goof-ups are forgivable.
The passive funds idea is not stupid.

The real difference between active and passive is a matter of preference and effort. Passive funds are far from stupid, even though I prefer to be more active myself.

The idea of a bond holding is, or was, to dampen stock volatility.

This theory is known as CAPM, that is what you want to read up on to understand why people argue to include a "risk free" investment. However the theory assumes government bonds (well US government bonds actually) as the closest thing to a risk free investment that you can get. Some might argue that risk free investments don't exist. It is also not the only argument about bonds and pensions. The previous "lifestyling" argument, increasing the amount of bonds as one reaches retirement is another.

If I had 30 years to retirement, I wouldn't hold any bonds but would prefer to go for the likes of Personal Assets Trust or the other value preserver funds for the low risk element of my portfolio.

That sounds like it's aiming for returns better than bonds, with similar safety to bonds. The holy grail?

I can't answer for Jack, however is a Vanguard 60-40 lifestyle fund (they do other mixes) a "holy grail"? It too aims for a better return than bonds, by including equities. The likes of "Personal Assets Trust" (PNL) et-al do the hard work of building and adjusting a general portfolio to manage risk. I won't be investing because I want to do that work myself. But anyone who wants someone else to do it for them has a good choice of providers. Or if they think that a given mix of bonds and index trackers suits, then Vanguard provide good offerings.
PNL

The Company invests in equities and fixed income securities and it may also hold cash and cash equivalents

https://www.hl.co.uk/shares/shares-sear ... p12.50-ord
Vanguard 60-40
https://www.hl.co.uk/funds/fund-discoun ... cumulation

[scrumpyjack]

I certainly agree that there is no such thing as 'risk free'. To me 'risk free' means maintaining purchasing power.

Bonds and cash denominated assets have the massive long term risk of erosion by inflation. This is usually a slow salami slicing effect in the UK, though at one point in the '70s the monthly annualised inflation rate reached 27%. If that's not 'risky' I don't know what is. Obviously for longer dated bonds they can go up or down substantially due to changes in interest rates, but that cycle can't have much further to go so IMO the risk is high of a fall in their value, in nominal terms let alone real terms.

The 'wealth preservers' like Personal Assets aim to at least maintain the real value of their investments, and have generally succeeded in that, without the volatility and risk of sudden sharp drop of equities.

I have never invested in them, but if I was thinking of holding bonds, I would much prefer PNL etc in place of bonds. The only time I ever held bonds was to hold Index Linked Gilts for a while.

So If I had 30 years til retirement I would still be 100% worldwide equities

[GeoffF100]

I already have said that nobody knows what will happen in these unprecedented times. There is no right answer here. Nonetheless, I have had to make a choice. Overall, I have 60% equities (75% overseas and 25% UK trackers). The other 40% is two thirds term deposits guaranteed by the FSCS, with an average time to maturity of 2.5 years, and one third index linked gilts with 8 years to maturity. I have a cushion if equities crash, and I am not particularly vulnerable to inflation. I also have more than enough income from index linked pensions, and a house.

[JohnW]

I can't answer for Jack, however is a Vanguard 60-40 lifestyle fund (they do other mixes) a "holy grail"?

No, clearly not, and sorry, I shouldn't have inferred the holy grail for PNL or other value preservers simply because someone said they prefer them over government bonds as a low risk asset. It only muddied the waters.
The PNL objectives are: 'to protect and increase (in that order) the value per share for the funds of shareholders over the long term.' I think one can similarly seek that aim with a mix of low cost diversified equities and government bonds. Even accepting that PNL may have been a good performer recently, what is it that makes this active fund a better choice than a mix of index trackers when the evidence strongly points to active funds underperforming beyond about 3 years in general, and that persistence is not a consistent feature of outperformance? I'd like to be convinced if it's going to be a better investment choice for me.

The 'wealth preservers' like Personal Assets aim to at least maintain the real value of their investments, and have generally succeeded in that, without the volatility and risk of sudden sharp drop of equities.

I have never invested in them, but if I was thinking of holding bonds, I would much prefer PNL etc in place of bonds. The only time I ever held bonds was to hold Index Linked Gilts for a while.

Perhaps just for the benefit of anyone thinking to follow your lead, could you say why you'd prefer a PNL over a global equity tracker mixed with a government bond fund in suitable proportions to match risk tolerance?

[scrumpyjack]

I can't answer for Jack, however is a Vanguard 60-40 lifestyle fund (they do other mixes) a "holy grail"?

No, clearly not, and sorry, I shouldn't have inferred the holy grail for PNL or other value preservers simply because someone said they prefer them over government bonds as a low risk asset. It only muddied the waters.
The PNL objectives are: 'to protect and increase (in that order) the value per share for the funds of shareholders over the long term.' I think one can similarly seek that aim with a mix of low cost diversified equities and government bonds. Even accepting that PNL may have been a good performer recently, what is it that makes this active fund a better choice than a mix of index trackers when the evidence strongly points to active funds underperforming beyond about 3 years in general, and that persistence is not a consistent feature of outperformance? I'd like to be convinced if it's going to be a better investment choice for me.

The 'wealth preservers' like Personal Assets aim to at least maintain the real value of their investments, and have generally succeeded in that, without the volatility and risk of sudden sharp drop of equities.

I have never invested in them, but if I was thinking of holding bonds, I would much prefer PNL etc in place of bonds. The only time I ever held bonds was to hold Index Linked Gilts for a while.

Perhaps just for the benefit of anyone thinking to follow your lead, could you say why you'd prefer a PNL over a global equity tracker mixed with a government bond fund in suitable proportions to match risk tolerance?

I happy to hold the global equity tracker (eg VWRL) to get the equity exposure.

But for the lower risk wealth preserver part of the portfolio (if I wanted that, which I have not so far), the chances of a PNL holding its real value, without sudden price collapse, are IMO, better than that of government bonds which I think are virtually certain to lose purchasing power over the long term and could fall sharply in price, if other than short dated, in the event of a rise in interest rates.

Holding VWRL plus bonds as the wealth preserver element doesn’t make sense to me.

But there are no certainties (and no risk free options) and each investor must do what they feel comfortable with.

A huge amount of government bonds and index linked are held by pension funds that are forced to hold them for regulatory reasons. It is likely that distorts their price.