Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Assessing risk of varied asset classes

A helpful place to also put any annual reports etc, of your own portfolios
Berzelius
Posts: 4
Joined: March 1st, 2020, 3:15 pm
Has thanked: 4 times

Assessing risk of varied asset classes

#424611

Postby Berzelius » July 4th, 2021, 10:34 am

I'm trying to understand the overall risk of my current investments as I move into retirement.

For the listed funds that I have in my ISAs, there is the SRRI (synthetic risk and reward indicator) that is quoted in the KIID. While I understand that the SRRI isn't perfect, I'm happy to go with it for this purpose.

My problem is that a subtantial part of my overall portfolio is elsewhere - in housing equity, in a DB company pension, a DC company pension, and cash. Clearly it would misleading to ignore these assets when coming up with an overall risk assessment. So I would like to assign each asset an SSRI rating that I can then value-weight to give a consolidated view of my portfolio risk.

Taking cash as an example, the main risk is inflation eroding its value - but where does that put it on the scale? Obviously that assessment may change over time to reflect current conditions, as it can do for equity-based assets. And with my DB pension, I suppose the main risks for that are inflation (the annual increments to payments are limited by a 5% cap) and also the risk of the company going bust and the scheme falling into the lifeboat, with a consequent payment reduction. But apart from those risks - those that could affect me personally - the rest of the risks are borne by the scheme. So, even if I could get hold of a list of all the individual scheme investments, it would be wrong to calculate a risk based on them; the risk to me personally is going to be lower (but how low?). By contrast, the risks of my DC scheme investments impinge on me directly.

I've done a lot of searching about SRRI but I can find very little that will assist me in this. I see that it is calculated on the historical volatility and returns for the asset, and have found the actual formula referenced in several places. But the focus is always very much on equities (understandably so, given its origins). What I would like to see - but have yet to find - is a broader guide to the SRRI scale that attempts to position assets like cash and physical property, even if that's just a range. Better still, a guide that is updated periodically to reflect economic conditions.

Has anyone attempted to do this kind of assessment themselves, and come across such a guide?

Alaric
Lemon Half
Posts: 6033
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1399 times

Re: Assessing risk of varied asset classes

#424619

Postby Alaric » July 4th, 2021, 10:57 am

Berzelius wrote:I've done a lot of searching about SRRI but I can find very little that will assist me in this. I see that it is calculated on the historical volatility and returns for the asset, and have found the actual formula referenced in several places. But the focus is always very much on equities (understandably so, given its origins). What I would like to see - but have yet to find - is a broader guide to the SRRI scale that attempts to position assets like cash and physical property, even if that's just a range. Better still, a guide that is updated periodically to reflect economic conditions.


I doubt you will find anything. For cash, property and defined benefit pensions, a risk is that of economic or asset failure. Measures based on market price volatility aren't going to be useful when there isn't a market price and downright misleading when the asset is valued but only infrequently marked to market.

88V8
Lemon Half
Posts: 5769
Joined: November 4th, 2016, 11:22 am
Has thanked: 4098 times
Been thanked: 2560 times

Re: Assessing risk of varied asset classes

#424701

Postby 88V8 » July 4th, 2021, 3:49 pm

Berzelius wrote:....as I move into retirement.

Mmm, interesting idea.

Depending how near you are, your funds may already be in post-retirement mode in terms of generating income.
So what with that and your pensions, you would already have a handle on your forthcoming income and the extent of its surplus.

Unless your pensions are a significant component and in financially unsound pension schemes, I would not worry about them.
Short of moving them, there is nothing you can do.

Over the next five years one might assume that cash will erode at, what... 2% pa? I don't deliberately hold any cash. Dead money.
OK, we hold five figures, but that's not deliberate it's just uninvested at the mo.

Property... what... where... in terms of monetising property, how... sale? equity release? rent? All different and somewhat unknowable. If you don't intend to monetise it and the mortgage is paid off, where's the risk....

And as regards Funds and SRRI, I wonder what risk they allocated to Shell slashing its divi.
And then there's tax and what Rishi might do. It's not so long ago that divis were untaxed.

To me I'm afraid it smacks of trying to predict the unpredictable. Although I do say so from a position of ample income.

Assuming you have a decent surplus of income and your income streams are diversified and have weathered the last 18 months with aplomb, I would not worry about risk analysis.
If however you have seen a large drop, I would be more concerned with addressing that in terms of insulating against the next crash.

V8

Berzelius
Posts: 4
Joined: March 1st, 2020, 3:15 pm
Has thanked: 4 times

Re: Assessing risk of varied asset classes

#425170

Postby Berzelius » July 6th, 2021, 10:24 am

"Property... what... where... in terms of monetising property, how... sale? equity release? rent? All different and somewhat unknowable. If you don't intend to monetise it and the mortgage is paid off, where's the risk...."

There's one main residence, another currently rented out, mortgages on both <5yrs now.
The plan is to consolidate the equity into a single, "final" home once mortgages paid off. We probably wouldn't need to monetise that in our lifetimes, but might do some equity release if needed down the line. The risk to that scenario would be falling house prices, but as we would be needing at most a smallish proportion for equity release, then as you say, the effective risk to us is zero (but some risk to those hoping to inherit from us).

"Unless your pensions are a significant component and in financially unsound pension schemes, I would not worry about them.
Short of moving them, there is nothing you can do."

They are significant. The DC scheme I can alter the split between funds to change the risk profile, and have done once already. The DB scheme: yes, I'm very unlikely to move it, though the scheme does have a substantial hole in it at the moment.

"your income streams are diversified and have weathered the last 18 months" ... yes I think that they are, and they have. I wasn't forced to liquidate funds at all last year because other sources of income were sufficient, so they did recover substantially (and I was even able to invest a little more after the crash, which averaged a 28% return).

"it smacks of trying to predict the unpredictable" - yes, I suppose I am trying to go beyond the scope of the SRRI and into "black swan" territory, hedging against the unknown unknowns. But thank you for your comments, I'm perhaps better placed with respect to risk than I was thinking.

88V8
Lemon Half
Posts: 5769
Joined: November 4th, 2016, 11:22 am
Has thanked: 4098 times
Been thanked: 2560 times

Re: Assessing risk of varied asset classes

#425189

Postby 88V8 » July 6th, 2021, 11:10 am

Berzelius wrote: I'm perhaps better placed with respect to risk than I was thinking.

Just thinking about the risk mitigates the risk.
One takes necessary steps, or decides that no steps are necessary, but either way one feels better.

I hope you enjoy your retirement and have the health and income to do whatever you wish to do.

Perhaps we'll see more of you on the Lemon's various boards.

V8

Steveam
Lemon Slice
Posts: 974
Joined: March 18th, 2017, 10:22 pm
Has thanked: 1745 times
Been thanked: 534 times

Re: Assessing risk of varied asset classes

#426414

Postby Steveam » July 10th, 2021, 12:45 pm

I did a similar exercise a few years ago. I approached it in a different way but my thoughts were along these lines:

For each asset class (or sub class where I thought it useful) I asked myself about volatility (not the same as risk), risk of likely/possible long term decline of greater than 20%, tradability (easy market for most shares; more difficult for property). With the exception of cash I ignored inflation but this is because most of my assets are equities (individual stocks, ITs and ETFs). I also assumed the state pension to be inflation protected.

I did the exercise both for asset values and for income (which is actually more important to me in retirement.

The whole exercise was interesting but didn’t lead to any changes in investment allocation. Some issues, such as income volatility, can be addressed by cash buffers. This exercise was done before COVID.

Best wishes,

Steve

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Assessing risk of varied asset classes

#456290

Postby 1nvest » November 7th, 2021, 3:35 pm

Volatility is a doubled edged sword. Consider stock and gold, both might have around 20% standard deviation in yearly returns, both might be broadly expected to pace inflation over time, but in a volatile manner. If stocks (gold) are down -20% real one year, up +25% the next then that compounds to 0% real. If in years stocks are up gold is down and vice versa then 50/50 of both yearly rebalanced captures the simple average 2.5% benefit that otherwise is lost to each individual assets compounded gains.

Add in some cash, perhaps a 10 year gilt ladder third, alongside a third each in stock and gold and each year spend the maturing Gilt. If stocks are up then sell some and add another 10 year gilt, or if gold is up sell some of that instead to fund the 10 year Gilt purchase. If neither is up then leave a Gilt hole that might be filled in another better outcome year.

Broadly portfolio risk will be relatively low, despite what the risk measures of the individuals might indicate. Better to look at the collective risk/diversity. Currency diversification of UK Gilt in £, US stock ($), global currency (gold) and as gold is also a commodity that's stock/bond/commodity asset diversity. In most years either stock or gold will tend to have done OK/well, the other asset maybe less so or even poorly, the average of the yearly best and yearly worst historically reveals 'good odds' something like +20% for the average of the yearly best, 0% for the yearly worst type figures. Somewhat like having a couple of assets where each year one makes 20% the other makes 0% ... good enough.

Positive volatility, one asset popping +20% that then has some of those gains sold to buy a 10 year Gilt to cover spending in 10 years time can be a good thing, especially if the next year that 20% gain is given-back.

Owning a home provides yet further diversification, avoids having to find and pay rent (liability matches 'rent') and might serve as a late life fallback, downsize to release some capital for spending or sold to fund late life care home costs.

State and occupational pension risks ... there's little you can do about anyway. Comparable to personal health/longevity risk, if in x years time you have a medical condition that requires expensive and prolonged care then even the best of plans/cover/insurance might be blown out of the water. Or you could make financial plans to cover perhaps 30 years only to a year later be given weeks left to live. Some risks just have to be accepted on a hope for the best basis.


Return to “Portfolio Management & Review”

Who is online

Users browsing this forum: No registered users and 5 guests