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Staying safe costlier than living with risk.

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
hiriskpaul
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Re: Staying safe costlier than living with risk.

#429595

Postby hiriskpaul » July 22nd, 2021, 11:55 am

tjh290633 wrote:
1nvest wrote:January 1969 retiree, applying a 4% SWR. End of 1974 their portfolio value was down to around a third of the inflation adjusted start date value. By the end of 1979 20% remained. 1985 they were broke. Accumulators in contrast added new money (savings) into relatively lower prices, so broadly did well.

I have posted this before, but it is a record of my portfolio in the 1970s, when I was an "accumulator".

.        Change    From      Previous Year
. Cost @ Value @ Income
. 31 Dec 31 Dec

Dec-71
Dec-72 -7.25% 8.60% -17.07%
Dec-73 7.25% -20.60% 1.17%
Dec-74 -1.06% -36.61% 24.81%
Dec-75 23.15% 118.96% 3.00%
Dec-76 5.72% 3.00% 22.35%
Dec-77 -32.06% -10.48% 16.57%
Dec-78 8.56% 15.72% -24.94%
Dec-79 11.82% 10.45% 27.23%
Dec-80 23.92% 34.35% 27.17%

You can see the change in value for 1974, but note the increase in income. 1977 was a year when I sold some investements to fund the deposit on our current property. Hence the fall in income during 1978.

Somebody using an SWR might have had problems, while somebody living on Dividends would have fared better, because dividends held up.

TJH

Living off dividends does not provide a fixed SWR and reducing the amount being drawn obviously reduces the risk of running out of money. Also, living off dividends does mean that only in extreme circumstances will the income stop, but there is no guarantee it will keep up with inflation. Dividends from the UK stock market were 37% lower in real terms in 1976 from where they were in 1965. The income did not exceed 1965 levels in real terms until 1987. There have been far worst periods than the late 60s/early 70s as well, eg 1915 income was 68% down from that in 1906 and the payout did not rise back above the 1906 level until 1988!

The UK market was one of the success stories and we can easily get blase about assuming the worst outcomes from the UK or US market are all we need to worry about for the future. As steveam has indicated, things can get far worse.

1nvest
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Re: Staying safe costlier than living with risk.

#429611

Postby 1nvest » July 22nd, 2021, 12:24 pm

hiriskpaul wrote:
TahiPanasDua wrote:A couple of snippets: a simple 60/40 stocks/bonds portfolio underperformed the S&P 500 alone by over 250% cumulatively over the past 25 years. The author claims the cure is worse than the disease often with hidden costs. Interventions against looming market crashes ultimately lead to lower compound returns than those crashes would have cost them. Markets have scared us far more than they have harmed us.

I have not found the article, but I really don't find these observations particularly illuminating. Take more risk (compensated risk) and you can expect a higher return and most of the time, but not all of the time, that is what will happen.

Retirement years drawdown presents a great risk. A bad decade of negative total returns compounded with also drawing income can draw down the portfolio value to unrecoverable lows, potentially relatively quickly (handful of years). History is littered with those who bought into stocks, did well, hit a bad era and ended up capitulating such that they would have been better served if they'd just held T-Bills throughout. The average investor on average underperforms the 'average' by 2% annualised, greed/fear, bad behaviour can result in substantial risk exposure for very poor overall rewards/outcome.

Playing with the stock market is like playing chicken with a freight train... no matter how many times you win, you only get to lose once. -Mike Masters

Taking the opposite stance can be highly rewarding. Mostly 'safe' but dipping in (and out) at opportune times can yield fantastic overall rewards. 25% annualised real type rewards over 20 year 'dipped-in' periods. Rather than running with constant fear of large declines, looking instead for there to be 'blood on the streets' as potentially highly rewarding opportunities.

In the 19th century investing was conceptually easy, money and gold were pegged, broadly there was no inflation, but with periods of clustered high inflation/deflation being the primary risk. The state paid you a decent real returns i.e. it made more sense to hold money deposited and earning interest than gold, as that bought back more gold as and when each T-Bill matured.

Following the collapse of the British Empire and transition over to the US$ as the primary reserve currency that benefit vanished. However a reasonable transition would have been over to a third each in £, $ and gold (or silver). With the currencies deposited into their respective T-Bills that still yielded a broad 2% real, enough such that a 4% SWR would see you through 30+ years, 3% would still have around half as much inflation adjusted capital remaining at the end of 30 years, 2% SWR would see 90% still intact after 30 years. But that ignores taxation risk, which tends to rise as/when inflation/interest rates spike. A more tax efficient alternative might have been to hold US$ invested in US stocks. That 'safe' choice combined with going heavily into opportunities as/when they presented (and later back out again) and rewards could have been bolstered significantly, higher overall actual real gains than all-stock, with considerably less risk.

Even without opportunistic dipping in/out, for all 30 year periods since the 1930's (yearly granularity), UK gilts, US stock, gold third each yearly rebalanced with a 3% SWR would on average seen more inflation adjusted capital available at the end of the 30 years than at the start. In the worst case 30 years only a modest decline. Partnered with dipping in/out at opportune times and the overall rewards on average would have exceeded that of a successful all-stocker.

Safe of ...
£ domestic, US$ primary reserve, and global currency gold currency diversification
Bonds, stocks, commodity asset diversification
Dive in when there's blood on the streets, revert back to 'safe' again when broad extreme greed is again apparent.
3% SWR if the intent is to leave some for heirs, otherwise 4% SWR. Regular/reliable inflation adjusted income stream. More often the residual portfolio value will see reasonable gains that support additional periodic discretionary withdrawals.

Bad 1970's where a 3% SWR was being applied saw the capital value of the residual having risen 7% annualised by 1980. The stock lows/gold high of 1980 when the Dow/Gold ratio was at near 1.0 levels and a transition over to all-stock and by the late 1990's when the Dow/Gold had risen to over 40 levels provided great gains. Rotation back during the 1990's into 'safe' and rewards to recent have still be reasonable and bad years seeing relatively light losses despite all of the dot com, financial and Covid crises. Rotating into stocks from 'safe' at each/any of those dips would have seen great subsequent 'rebound' rewards.

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Re: Staying safe costlier than living with risk.

#429630

Postby 1nvest » July 22nd, 2021, 1:14 pm

tjh290633 wrote:
TUK020 wrote:Terry,
You and 1nvest are not talking on the same basis, He was discussing inflation adjusted, you have posted nominal figures. Over this period, the difference is considerable
tuk020

Yes, of course inflation played a part, but the peak in 75-77 would have had less effect around 74, when the RPI was c.7% increase.

TJH

IIRC I posted how 2007 and 2017 start retirement dates saw TJH HYP enduring dividends having halved within a few years in real terms. Holding some back in reserves to cover shortfalls and maybe another reserve for emergencies such as having to unexpectedly pay for a new roof at a time when stocks were also down, leads to a stock/bond type portfolio that can exhibit totally different outcomes compared to 100% pure stock. Fine if you have other sources of income that largely cover expenses such that investment income is for fun expenditure that might be reduced or even totally cut to get through the bad times. But potentially critical if solely reliant upon investment income alone and that runs very close to the drawdown to critical levels risk. 4 out of 100 dividend initial rate, might rise to being a 16 rate i.e. dividends halved, stock values halved in real terms. Historically such lows have managed to scrape through, good subsequent gains supported a effective 16% withdrawal rate, but where that was very touch and go and a additional unexpected expense could have resulted in devastation - such as increased taxation as can often become policy during such financial stressful times, or having to pay for a new roof/whatever.

Again its as Mike Masters put it ... playing with the stock market is like playing chicken with a freight train... no matter how many times you win, you only get to lose once. The broad higher reward from all-stock does have higher worst case risks

At 30 years 3.75% SWR 75/25 or 50/50 were less risk than 100% stock (US data).

Image
Or at 4% 30 years 75/25 was safer than 100% stock.

But where all-stock on average is more inclined to yield the highest average reward i.e that additional risk is 'compensated' on average, but individuals who get wiped out by the freight train don't get a second chance.

There are also other periods often excluded from the likes of the above table, where declines of -85% in both capital and dividends in real terms have occurred against all-stock. Pretty much guaranteed wipe-out for those drawing/retired. OK/good for accumulators for whom such declines provided great cost averaging opportunities for new savings being added to the portfolio.

Taking on risk, for instance 5% SWR, 30 years, all-stock ... more often works out fine. 82% success rate from the above table. Great, providing you're not in the 18% group/case and were heavily dependent upon that income.

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Re: Staying safe costlier than living with risk.

#429791

Postby Hariseldon58 » July 22nd, 2021, 11:38 pm

There have been periods when having a (say) 4% SWR ended in disaster, however if in a poor period withdrawals are reduced for a period that can make a significant difference and recovery is possible.

It’s not unreasonable to change behaviour in such times.

Back to the original theme of the OP, an all stock portfolio with a good start is likely to build up a sizeable lead against the 60:40 such that when a major market fall occurs it’s still ahead.

My own experience of retiring late 2007 with a 95% equity portfolio had a rude shock within a year, however it came right and now the portfolio could have a 50% permanent loss and I’d still be ahead of where I was in 2007 ( in inflation adjusted terms) this is the essence of the argument that if you survive the first (say) ten years with a high risk portfolio you may well be build a sufficient lead against the lower risk portfolio that the risk doesn’t matter.

It could be argued that I could put the 50% of the portfolio, that is the equity risk ‘winnings’ into a ‘safe’ asset portfolio and the remaining risk portfolio is still ahead of where I started and I have had 14 years of a good lifestyle, plus a sizeable safe portfolio. Logically this is the most sensible option but I quite like equity investing and will carry on in the ‘casino’ !

It’s a matter of personal attitude to risk. How much risk you need to take, how much you can afford to take and how much as an individual you can tolerate.

We all have different tolerance to these risks and thus the wide range of approaches seen in this interesting thread.

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Re: Staying safe costlier than living with risk.

#429806

Postby 1nvest » July 23rd, 2021, 1:49 am

Hariseldon58 wrote:There have been periods when having a (say) 4% SWR ended in disaster, however if in a poor period withdrawals are reduced for a period that can make a significant difference and recovery is possible

A reasonable risk reduction method is to average in. For UK stock 30 year 4% SWR since 1939 for instance if you started 2 or 3 'separate' runs instead of all-in at a single start date, then the otherwise worst cases were diluted. The 'cost' for that risk reduction is the delay before loading in, so typically stock total return minus cash return times the delayed time/amount.

As a means of "visualisation" the following image shows data for all 30 year runs since 1939 with a 4% SWR applied to UK stock total returns. Each column shows the progression of the inflation adjusted real gain factor of the remainder total portfolio value after each years 4% SWR withdrawal at the start of each year. The first/top row just shows the last years value in each case (so the exact same as the very last rows value), below that is the year range for which that applied.

https://i.postimg.cc/TR0CH853/3pct-SW-RUKstock.png

I've yellow highlighted the adjacent runs either side of the worst cases in that image/data, which provides a feel for how averaging in might have compared to that of having solely started at the worst possible time/date.

The relatively small lower average reward from averaging in might be considered worth it in comparison to less likelihood of failure.

1973 start year and by the end of the second year the portfolio was down to 24% of its inflation adjusted start date value. In effect 4% initial SWR had risen to being a 16% SWR relative to the ongoing portfolio value. Despite that it still hung-in-there and continued to sustain for 24 years before all of capital was spent. 1969 was worse, exhausting capital 10 years prior to the target 30 years. There is however the risk factor of a 60 year old retiree not getting to see another 20 years.

In the median case you ended 30 years with more than 2.5 times the inflation adjusted start date portfolio value. Given such average reward expectancy you could opt to perhaps reduce the loading to 80%, keep 20% in inflation bonds and draw income from bonds if stock performance had been relatively poor, and in good stock years where some of bonds had been spent consider replenishing bonds. Again that helped historically with reducing worst case outcomes, but averaged lower overall rewards, maybe (0.8 x 2.5) + 0.2 average (2.2 times the inflation adjusted start date portfolio value).

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Re: Staying safe costlier than living with risk.

#429829

Postby GoSeigen » July 23rd, 2021, 7:45 am

In 2007 my retired father was well aware of my caution about the property market. To my astonishment he even sold his studio flat in West London for £1/4m in late 2007 which was a decent sum for about 500sqft in those days. What I didn't reckon with was his extreme aversion to any sort of risk in investing his cash pile. He reluctantly agreed to put a small sum in bank bonds and gilts but spooked immediately when the value of the bank bonds dropped by a few thousand. Since then he's left it in the bank, than got divorced and I reckon is left with close to £125,000 after 14 years.

Now if he'd invested that £250,000 the same way as my mother it would have grown to more than £1m by now -- and I expect he would not be divorced. LOL.

He repeatedly ignored warnings that putting all his eggs in the cash basket would be disastrous, but being 75% down after 14 years was worse than even I anticipated....


GS

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Re: Staying safe costlier than living with risk.

#429832

Postby Itsallaguess » July 23rd, 2021, 8:03 am

GoSeigen wrote:
In 2007 my retired father was well aware of my caution about the property market.

To my astonishment he even sold his studio flat in West London for £1/4m in late 2007 which was a decent sum for about 500sqft in those days.

What I didn't reckon with was his extreme aversion to any sort of risk in investing his cash pile. He reluctantly agreed to put a small sum in bank bonds and gilts but spooked immediately when the value of the bank bonds dropped by a few thousand. Since then he's left it in the bank, than got divorced and I reckon is left with close to £125,000 after 14 years.

Now if he'd invested that £250,000 the same way as my mother it would have grown to more than £1m by now -- and I expect he would not be divorced. LOL.

He repeatedly ignored warnings that putting all his eggs in the cash basket would be disastrous, but being 75% down after 14 years was worse than even I anticipated....


Out of interest, what would the West London studio flat be worth today?

Cheers,

Itsallaguess

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Re: Staying safe costlier than living with risk.

#429841

Postby GoSeigen » July 23rd, 2021, 8:35 am

Itsallaguess wrote:
GoSeigen wrote:He repeatedly ignored warnings that putting all his eggs in the cash basket would be disastrous, but being 75% down after 14 years was worse than even I anticipated....


Out of interest, what would the West London studio flat be worth today?


Very hard to tell as comparative sales have been rare. A larger flat in the same street sold for £400,000 in Jan 2007, and the last flat sold in that same block went for £445k in Aug 2016.

Terraced properties in the same street have sold for £492k in Jan 2018 and lately £780,000 in Feb 2021.

So I think it would be fair to say values have risen by some 50% in that period and there would additionally have been around c2.5% net rental yield had the property been retained, so roughly 5.5%CAGR (c.f. 12% on my mother's bond and share investments.).

Incidentally 6% fixed for 5 years was available on bank account savings in 2007-2008! And 5% was the yield on long gilts. Madness...

GS

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Re: Staying safe costlier than living with risk.

#429851

Postby Hariseldon58 » July 23rd, 2021, 8:58 am

1nvest wrote:
Hariseldon58 wrote:There have been periods when having a (say) 4% SWR ended in disaster, however if in a poor period withdrawals are reduced for a period that can make a significant difference and recovery is possible

A reasonable risk reduction method is to average in. For UK stock 30 year 4% SWR since 1939 for instance if you started 2 or 3 'separate' runs instead of all-in at a single start date, then the otherwise worst cases were diluted. The 'cost' for that risk reduction is the delay before loading in, so typically stock total return minus cash return times the delayed time/amount.
.


The problem with looking at a start date for retirement and then averaging in, is that you probably don’t get to that date with a large lump of cash and then look to a drawdown portfolio for income. Going the drawdown route suggests that you got to that point with an equity portfolio, perhaps in a DC pension, SIPP, ISA etc You start with a major equity portfolio, it would be a brave individual that sells up a lot of the portfolio and then averages back into equities.

I know there has been quite a lot of research that suggests you increase equity holdings as retirement progresses, as a means of minimising sequence of returns risk. https://www.aier.org/research/the-case-for-increasing-stock-exposure-in-retirement/

Market timing makes these decisions tough, with 10+ years of rising markets generally, FOMO would make that a tough call now ( logically its a good time of course) when markets are battered, selling down and missing a market upswing thats tough too.

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Re: Staying safe costlier than living with risk.

#429870

Postby Itsallaguess » July 23rd, 2021, 10:06 am

GoSeigen wrote:
Itsallaguess wrote:
GoSeigen wrote:
He repeatedly ignored warnings that putting all his eggs in the cash basket would be disastrous, but being 75% down after 14 years was worse than even I anticipated....


Out of interest, what would the West London studio flat be worth today?


Very hard to tell as comparative sales have been rare. A larger flat in the same street sold for £400,000 in Jan 2007, and the last flat sold in that same block went for £445k in Aug 2016.

Terraced properties in the same street have sold for £492k in Jan 2018 and lately £780,000 in Feb 2021.

So I think it would be fair to say values have risen by some 50% in that period and there would additionally have been around c2.5% net rental yield had the property been retained, so roughly 5.5%CAGR (c.f. 12% on my mother's bond and share investments.).

Incidentally 6% fixed for 5 years was available on bank account savings in 2007-2008! And 5% was the yield on long gilts. Madness...


Thanks - I was just trying to gauge which was more costly to him - you're initial caution regarding property, or his later caution regarding cash!

Cheers,

Itsallaguess

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Re: Staying safe costlier than living with risk.

#429936

Postby 1nvest » July 23rd, 2021, 2:23 pm

Hariseldon58 wrote:
1nvest wrote:
Hariseldon58 wrote:There have been periods when having a (say) 4% SWR ended in disaster, however if in a poor period withdrawals are reduced for a period that can make a significant difference and recovery is possible

A reasonable risk reduction method is to average in. For UK stock 30 year 4% SWR since 1939 for instance if you started 2 or 3 'separate' runs instead of all-in at a single start date, then the otherwise worst cases were diluted. The 'cost' for that risk reduction is the delay before loading in, so typically stock total return minus cash return times the delayed time/amount.
.


The problem with looking at a start date for retirement and then averaging in, is that you probably don’t get to that date with a large lump of cash and then look to a drawdown portfolio for income. Going the drawdown route suggests that you got to that point with an equity portfolio, perhaps in a DC pension, SIPP, ISA etc You start with a major equity portfolio, it would be a brave individual that sells up a lot of the portfolio and then averages back into equities.

I know there has been quite a lot of research that suggests you increase equity holdings as retirement progresses, as a means of minimising sequence of returns risk. https://www.aier.org/research/the-case-for-increasing-stock-exposure-in-retirement/

Market timing makes these decisions tough, with 10+ years of rising markets generally, FOMO would make that a tough call now ( logically its a good time of course) when markets are battered, selling down and missing a market upswing thats tough too.

At the point of transition from accumulation to drawdown/retirement, how the available capital was sourced is irrelevant. Beit a large lump sum inheritance or having been accumulated over many years. In historic bad all-stock cases £1M start date value might for instance be down to just a quarter of that inflation adjusted value after a couple/few years. The 4% SWR is a indicator that historically despite such declines the portfolio muddled on and more often still got to supporting 30 years, but not always. Good gains can follow big declines and those gains can be good enough to sustain the objective of inflation adjusted income for 30 years, similar to successfully applying a 16% SWR to £250K started at a market low - but where that is very touch-n-go.

Buy and hold is no different to costless lumping in each and every day. Towards/at the transition to retirement its suggested that you de-risk early retirement years sequence of returns risk, such as via a bond-tent (arbitrary google search : https://hackyourwealth.com/asset-allocation). Generally the risk of a substantial decline, albeit relatively rare is greater than the risk of lower average rewards during retirement, maybe good instead of great gains that are largely superfluous to requirements.

Other methods include shifting a chunk into bonds at/near retirement and spending bonds first, so if for instance you shifted to 60/40 stock/bonds and after a decade had spent all bonds to be left holding 100/0, then over that decade you averaged 80/20 stock/bonds. The 'cost' of that compared to 100% stock can be acceptably small whilst if a bad sequence of years occurred in the first years 60/40 might have preserved considerably more capital than 100% stock

The amount to allocate to bonds is subjective. If large declines had already occurred little/no bonds might be OK. If fast/large gains had occurred then maybe a heavy weighting of bonds might be more appropriate. CAPE and other relative measures might be used as part of that assessment. I maintain a paper version of Robert Lichello's AIM for instance applied to S&P500 real price only history that provides a indicator of appropriate amounts of cash (bonds) over time.

Image

Back in the early 1980's when the Dow/Gold ratio was down at 1.0 type levels that suggested 100% stock was fine. At the late 1990's highs it suggested large amounts of bonds to be appropriate (30/70 stock/bonds). This link provides a indicator of the differences between a 4% SWR started in 2000 (US data) applied to each of 30/70 and 100/0. Click the inflation adjusted tickbox in the chart and that indicates at the 2009 lows 100/0 was down -74% whilst 30/70 was down -30%

More recently that indicator is suggesting around 60% bonds to be appropriate, i.e. after large/fast gains in US stocks a newly retired individual might be best served by rotating into 40/60 stock/bonds. If stocks continue to do great that will obviously miss out on a chunk of those benefits. If there's a large drop they'll be better protected and at those lower prices might shift some or even all of bonds into stocks.

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Re: Staying safe costlier than living with risk.

#429943

Postby 1nvest » July 23rd, 2021, 2:40 pm

GoSeigen wrote:Now if he'd invested that £250,000 the same way as my mother it would have grown to more than £1m by now

How (what in) did mum invest :)

My version of 'safe' is a third each US stock, gold, UK cash deposits, three currencies, stocks/commodity/bond assets. For that This (US data) indicates 250K doubled since the start of 2008, whilst all stock quadrupled to just under 1M. FX added a further 1.44 gain factor when adjusted into £'s, so £250K to £800K for 'safe', £250K to £1.4M for all US stock.

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Re: Staying safe costlier than living with risk.

#429960

Postby 1nvest » July 23rd, 2021, 4:00 pm

TahiPanasDua wrote:What I would prefer to see is strategies that openly admit the precarious nature of assumptions about the future and offer a small range of solutions to cater for different personalities.

Conservative investors might dislike volatility, hate seeing their 'wealth' enduring large paper declines at times. Run the figures and broadly safe and aggressive (all stock) need to be limited to similar worst case SWR values in order to reduce the risk of failure. Around 3% SWR is near perpetual/safe. In the average case the aggressive investor tends to yield much greater outcome/results, final end date portfolio value at the end of 30 years. Typically several magnitudes more, 3.5 times more than the inflation adjusted start date value compared to 1.5 for the more conservative investor.

For less year on year portfolio value fluctuations it is suggested that investors pay quite a high premium, missed opportunity gains compared to had they instead opted for all-stock. However at times all-stock year on year volatility can be large. 1973 -30%, 1974 -50% stock total return declines when you're also drawing a income was enough to see many capitulate to 'preserve what little remained'. 1975 went some way to compensate, providing +150 gain. but only if investors persisted in continuing to hold stocks and hadn't capitulated. The average tendency is to see such capitulations, many investors go into stock-heavy, may do very well for a period, opine tht they'd be OK riding through high negative side volatility but then a short period of time and large losses/declines actually scares them out, such that they end up worst off than had they just held cash deposits throughout. Even some who opine they are prepared for such periods may still end up making emotional changes when 'bad times' are actually endured.

There's also the factor that historic stock 'average' gains aren't really a true representation, the average figure is according to a mathematical model (stock index) that has evolved over time. FT30 used to be the popular 'average' indicator for instance, but where other 'better' choices have stepped up to take over. Factor in costs and taxes etc. and the average investor typically historically expected longer term average historic rewards but achieved less than that in practice. A exception is since the 1980's where large losses endured across the 1970's were compensated by above longer term average rewards.

Either way there's likely to be regrets. Conservative investor regretting they hadn't partaken in more of stock great gains, aggressive investors regretting they'd been more conservative during large declines. Given two options and doubts either way 50/50 is always a good alternative towards helping reduce regrets.

A viable choice of conservative asset allocation might be a third each in stocks/bonds/gold, whilst a aggressive asset allocation is all-stock. 50/50 of the two can lead to the path of least regret US example

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Re: Staying safe costlier than living with risk.

#429975

Postby Hariseldon58 » July 23rd, 2021, 6:06 pm

One of the great issues in de-risking at the time of the retirement to avoid a sequence of returns risk is the arbitrary nature of the decision.

I retired 14 years ago and lets imagine I de-risked at the time ( would have been fortuitous if I had…) , when do I return to a riskier, higher proportion of equities ? 5 years , 10 years, 14 years ? (The correct answer with hindsight was March 2009 after 16 months)

If we argue that we return slowly to an equity heavy portfolio, then after 14 years that would presumably have me in a portfolio with a high proportion of equities. I am still a few years away from a state pension, we would argue I should be in an equity heavy portfolio, but my neighbour George, who is the same age and is retiring next week, should have an equity light portfolio ?? That is clearly nonsense, we are in the same position, with a similar lifespan ahead….

I can see the logic of what 1invest is suggesting and it may well suit some individuals, but it’s very hard to formulate general rules and principles when the greatest unknown is an individuals ability to live with uncertainty.

We each have to assess our ability to withstand what might happen and adjust our behaviour accordingly, this is going to be very difficult for most people who have neither the knowledge or relevant experience.

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Re: Staying safe costlier than living with risk.

#429981

Postby TUK020 » July 23rd, 2021, 7:22 pm

Hariseldon58 wrote:One of the great issues in de-risking at the time of the retirement to avoid a sequence of returns risk is the arbitrary nature of the decision.

I retired 14 years ago and lets imagine I de-risked at the time ( would have been fortuitous if I had…) , when do I return to a riskier, higher proportion of equities ? 5 years , 10 years, 14 years ? (The correct answer with hindsight was March 2009 after 16 months)

If we argue that we return slowly to an equity heavy portfolio, then after 14 years that would presumably have me in a portfolio with a high proportion of equities. I am still a few years away from a state pension, we would argue I should be in an equity heavy portfolio, but my neighbour George, who is the same age and is retiring next week, should have an equity light portfolio ?? That is clearly nonsense, we are in the same position, with a similar lifespan ahead….

I can see the logic of what 1invest is suggesting and it may well suit some individuals, but it’s very hard to formulate general rules and principles when the greatest unknown is an individuals ability to live with uncertainty.

We each have to assess our ability to withstand what might happen and adjust our behaviour accordingly, this is going to be very difficult for most people who have neither the knowledge or relevant experience.

One of the key considerations is how easy it is for you to tighten your belt if you get an unfortunate sequence of returns outcome. If you are retiring on a "comfortable" level, then the ability to pull back on the income you are taking (ok, so I wont take a cruise this year) makes a major difference. If your retirement income is close to the wire for affording rent/heating/beans, then you are into a different risk proposition.

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Re: Staying safe costlier than living with risk.

#430067

Postby GoSeigen » July 24th, 2021, 8:01 am

Itsallaguess wrote:Thanks - I was just trying to gauge which was more costly to him - you're initial caution regarding property, or his later caution regarding cash!



It was a no-brainer to me -- 2.5% net yield on a UK property vs 10%+ yield on lending to UK mortgage issuers (i.e. banks) or 5% on gilt-edged securities. Even gilts trounced property over that period.

GS

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Re: Staying safe costlier than living with risk.

#430125

Postby 1nvest » July 24th, 2021, 3:07 pm

Hariseldon58 wrote:One of the great issues in de-risking at the time of the retirement to avoid a sequence of returns risk is the arbitrary nature of the decision.

I retired 14 years ago and lets imagine I de-risked at the time ( would have been fortuitous if I had…) , when do I return to a riskier, higher proportion of equities ? 5 years , 10 years, 14 years ? (The correct answer with hindsight was March 2009 after 16 months)

Yes there are many methods, some bonds and spend bonds first so it transitions to being 100/0 stock/bond after however may years bonds might last; Or constant x/y stock/bonds ...etc choices. One way might be to diversify across several choices as no doubt one will prove to be the best/worst and averaging/diversifying avoids being all-in on the worst choice. Rather than all that added paperwork of running separate portfolios however you might opt for a broadly average choice, which wont be 100% stock.

Reference that Trinity SWR table (US based) I posted earlier and for 4% SWR 30 years 75/25 stock/bonds were safer (99% success rate) than 100/0 (97% success rate). For the UK the 75/25 actually slips into being a 100% success rate, 100/0 still fell short (was riskier).

Average adjacent runs, similar to loading half in at the start of year, half in at the end of year averaging-in, and the SWR was further uplifted by around 0.4% (to 4.4%). 67/33 was near the same as 75/25 so opting for 67/33 where stock is split 50/50 UK/US, and also swap out bonds for gold, 33% each UK stock, US stock, gold ... and the SWR figure increased to 5.7%. At least for data since 1939. Yes that's rear view mirror driving however forward time the outcome might rhyme.

Reward wise and its very subjective, this US data/period suggest similar overall total returns, but that can be spun other ways, select time periods to suggest better/worse outcomes however you like.

Fundamentally its holding a asset allocation you're really comfortable with such that you're less inclined to capitulate at the worst possible time. Stock heavy can endure massive declines at times and scare the pants of most. Or regrets when comparing ones own choice of asset allocation/approach relative to other 'better performing/outcome' choices can lead to profit chasing that more often leads to under-performance. Safe isn't necessarily costlier than living with risk, potentially the opposite. As with computers one of the greatest risks sits between the keyboard and back of the chair, similar in finance.

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Re: Staying safe costlier than living with risk.

#430150

Postby NotSure » July 24th, 2021, 5:28 pm

1nvest wrote:...The amount to allocate to bonds is subjective. If large declines had already occurred little/no bonds might be OK. If fast/large gains had occurred then maybe a heavy weighting of bonds might be more appropriate. CAPE and other relative measures might be used as part of that assessment. I maintain a paper version of Robert Lichello's AIM for instance applied to S&P500 real price only history that provides a indicator of appropriate amounts of cash (bonds) over time.

Image

Back in the early 1980's when the Dow/Gold ratio was down at 1.0 type levels that suggested 100% stock was fine. At the late 1990's highs it suggested large amounts of bonds to be appropriate (30/70 stock/bonds).This link provides a indicator of the differences between a 4% SWR started in 2000 (US data) applied to each of 30/70 and 100/0. Click the inflation adjusted tickbox in the chart and that indicates at the 2009 lows 100/0 was down -74% whilst 30/70 was down -30%

More recently that indicator is suggesting around 60% bonds to be appropriate, i.e. after large/fast gains in US stocks a newly retired individual might be best served by rotating into 40/60 stock/bonds. If stocks continue to do great that will obviously miss out on a chunk of those benefits. If there's a large drop they'll be better protected and at those lower prices might shift some or even all of bonds into stocks.


You may be interested in/amused by this video of Robert Lichello: https://jjjinvesting.com/meet-robert-lichello-the-man-who-invented-aim-automatic-investment-management/

I am interested in a mechanical approach to asset allocation based on things like CAPE. Lichello is very entertaining, and I've not run the numbers, but surely this far into a bull run (Covid 'glitch' aside, as it was quite short-lived), if applying AIM you would have already been 100% cash/bonds a long time ago? I'd certainly be interested in the workings behind your plot - I understand AIM is 'damped' to try to avoid ending up all-in either cash or bonds?

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Re: Staying safe costlier than living with risk.

#430170

Postby 1nvest » July 24th, 2021, 7:32 pm

AFAIK AIM wont ever sell out of shares, but can exhaust cash reserves. There's some detail of the method here https://www.gummystuff.org/AIM.htm

Tends to be a cash-cow, throws off lots of cash, which is useful for those in drawdown. I apply it to the S&P500 index/price once/month adjusted for inflation, which is a bit speculative i.e. a approximation of the most recent (US) inflation CPI index each month ahead of actual formal reporting. Periodically I revise the history in reflection of actual reported inflation rates and find that the differences tend to be relatively small. Standard AIM is applied to nominal price, I find that applying it real price worked better, otherwise I use the exact same method, 10% SAFE, 5% of stock value minimum trade size, monthly reviews.

I just use it as a guide, all on paper. It tends to do OK at indicating appropriate levels of risk to hold over time so is a form of comfort when buying into dips when otherwise fear of further declines to come might have you failing to actually trade/buy. RIP Robert Lichello is saying its appropriate to trade now, to x% amounts and he's more often been right in the past type comfort.

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Re: Staying safe costlier than living with risk.

#430174

Postby 88V8 » July 24th, 2021, 8:16 pm

Mike4 wrote:..a slightly different aspect to this effect is how difficult I've found it to make any decisions about in what to invest a lump of cash I have slowly deteriorating in the bank. Years have slipped by as I have tried to fully understand any given option (as is received wisdom), but failed.

Well I can't talk as I sat on six figures for quite a while, then the panpanic came along and saved me by crashing the market so I could invest it all. Well, nearly all. It takes a certain psychology to be fully invested, and I don't have it.
But in terms of timing, sometimes one gets lucky.

However, not often... what's that cliche... 'it's not timing the market, it's time in the market'.

Here, unsupported by any figures, begins an entertaining illustration from a random website on that very point:
No one likes to be the schmuck who invests at the peak, only to watch their investments tumble the next day, and month, and perhaps years.
Meet Bob, the investor we all try not to be. He’s the worst market timer in the world and only invests right before the market crashes.

In summation, someone who invested [in the US] just before the crashes of 72, 87, 99 and 07 would still have an IRR <10% by 2018.
https://endowus.com/insights/https-endowus-com-insights-the-know-i-ll-invest-when-the-market-crashes-7215add4b1/

V8


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