Worst case scenarios

[kempiejon]

The future worse case scenario can always exceed anything that has happened in the past.... so while it can be fun to speculate, the truth is that no one has a clue, and imo it's not a good use of energy to try to project such things. Que sera sera etc

Yup. I like playing with firecalc Monte Carlo calculations but it's not the way I plan my early retirement. Several income streams, ability to downsize or belt tighten and asset mix to mitigate sequence of returns risk.

[NotSure]

I'm not sure an investment forum is the best place to be asking about worst case scenarios. By their nature, they are populated by those who have experienced nearer to best case scenarios - balls out, all in on niches, and got away with it.

Folk with knowledge of worst case scenarios tend to be all in cash and keeping their heads down

[tjh290633]

I'm not sure an investment forum is the best place to be asking about worst case scenarios. By their nature, they are populated by those who have experienced nearer to best case scenarios - balls out, all in on niches, and got away with it.

Folk with knowledge of worst case scenarios tend to be all in cash and keeping their heads down

On the contrary. We have survived several worst cases from 1974 to date. Staying fully invested was the key. Regular investing each month helps, because you then take advantage of the low prices in the dips.

TJH

[Lootman]

I'm not sure an investment forum is the best place to be asking about worst case scenarios. By their nature, they are populated by those who have experienced nearer to best case scenarios - balls out, all in on niches, and got away with it.

Folk with knowledge of worst case scenarios tend to be all in cash and keeping their heads down

A few years ago I went to a talk by Nassim Taleb, the guy who popularised the Black Swan concept in investing. He said that for his own portfolio, he was 90% in T-Bills and 10% in options to make leveraged directional bets. That 10% was the most he could lose.

[vand]

I'm not sure an investment forum is the best place to be asking about worst case scenarios. By their nature, they are populated by those who have experienced nearer to best case scenarios - balls out, all in on niches, and got away with it.

Folk with knowledge of worst case scenarios tend to be all in cash and keeping their heads down

A few years ago I went to a talk by Nassim Taleb, the guy who popularised the Black Swan concept in investing. He said that for his own portfolio, he was 90% in T-Bills and 10% in options to make leveraged directional bets. That 10% was the most he could lose.

He bets on fat tails, which usually do not play out, but when they do they produce outsized returns. You can certainly lose more than 10% if you have a long string of bets that don't pay off. In fact that is generally what happens.

In any case it is not a strategy that is available to the general public.

[dealtn]

I'm not sure an investment forum is the best place to be asking about worst case scenarios. By their nature, they are populated by those who have experienced nearer to best case scenarios - balls out, all in on niches, and got away with it.

Folk with knowledge of worst case scenarios tend to be all in cash and keeping their heads down

A few years ago I went to a talk by Nassim Taleb, the guy who popularised the Black Swan concept in investing. He said that for his own portfolio, he was 90% in T-Bills and 10% in options to make leveraged directional bets. That 10% was the most he could lose.

So when he loses that 10% does he never take on any bets and stay 90% (well 100% then) in TBills. Remember "a few years ago" these paid (very close to) zero interest.

Unlikely. He then takes other fat tail bets, further (potentially) diminishing that original 90%.

He is a great guy, understands more than most the concepts of risk, and mathematics. He doesn't have a 10% maximum portfolio downside though.

[NotSure]

I'm not sure an investment forum is the best place to be asking about worst case scenarios. By their nature, they are populated by those who have experienced nearer to best case scenarios - balls out, all in on niches, and got away with it.

Folk with knowledge of worst case scenarios tend to be all in cash and keeping their heads down

On the contrary. We have survived several worst cases from 1974 to date. Staying fully invested was the key. Regular investing each month helps, because you then take advantage of the low prices in the dips.

TJH

I was referring to the 100% equity (or even 100% niche equity) strategy that is widely supported here, both during accumulation and even into draw down.

When it works, it does indeed deliver the best returns. But imagine if you had retired a few months before one of those equity calamities?

But fair play to you for holding the line through several white knuckle rides!

[Lootman]

A few years ago I went to a talk by Nassim Taleb, the guy who popularised the Black Swan concept in investing. He said that for his own portfolio, he was 90% in T-Bills and 10% in options to make leveraged directional bets. That 10% was the most he could lose.

He bets on fat tails, which usually do not play out, but when they do they produce outsized returns. You can certainly lose more than 10% if you have a long string of bets that don't pay off. In fact that is generally what happens.

In any case it is not a strategy that is available to the general public.

It is absolutely possible for a small investor to invest that way. You can buy T-bills or short-dated gilts. And you can trade options - I do that myself.

And sure his options bets fail a lot. But there are ways to control that - the whole point of using options is to define and limit losses. And tail-risk bets are very cheap to make precisely because they are so far out of the money.

Anyway I was not recommending that approach, only noting that some investors find it works for them.

[XFool]

On the contrary. We have survived several worst cases from 1974 to date. Staying fully invested was the key. Regular investing each month helps, because you then take advantage of the low prices in the dips.

I was referring to the 100% equity (or even 100% niche equity) strategy that is widely supported here, both during accumulation and even into draw down.

When it works, it does indeed deliver the best returns. But imagine if you had retired a few months before one of those equity calamities?

Does this conversation not have a slightly old fashioned ring to it?

OK - A defined contribution pension, mostly invested in equities. At retirement, all cashed in to buy the pension annuity. Before that, market crashes: Calamity!

But I thought this scenario was no longer the case? If not, why should it continue to be so important? OK, I am not here to preach the virtues of HYP etc.
However...

[NotSure]

Does this conversation not have a slightly old fashioned ring to it?

OK - A defined contribution pension, mostly invested in equities. At retirement, all cashed in to buy the pension annuity. Before that, market crashes: Calamity!

But I thought this scenario was no longer the case? If not, why should it continue to be so important? OK, I am not here to preach the virtues of HYP etc.
However...

I am not quite sure what you are getting at here? Just because annuities went out of fashion, sequence of returns risk did not vanish. A big drop in capital (or income) occurring early in retirement still means your pot will dwindle faster than planned, and being 100% equities still means that the size of any drop is maximised.

[Lootman]

Just because annuities went out of fashion, sequence of returns risk did not vanish. A big drop in capital (or income) occurring early in retirement still means your pot will dwindle faster than planned, and being 100% equities still means that the size of any drop is maximised.

I retired at the height of the dotcom boom and was (almost) 100% in equities. There was of course an immediate crash, followed by a global financial crisis crash and then a Covid crash. And yet my net worth is now 3 to 4 times higher than it was at retirement.

My investment focus was global and not on high yield, both of which probably helped a lot.

[NotSure]

Just because annuities went out of fashion, sequence of returns risk did not vanish. A big drop in capital (or income) occurring early in retirement still means your pot will dwindle faster than planned, and being 100% equities still means that the size of any drop is maximised.

I retired at the height of the dotcom boom and was (almost) 100% in equities. There was of course an immediate crash, followed by a global financial crisis crash and then a Covid crash. And yet my net worth is now 3 to 4 times higher than it was at retirement.

My investment focus was global and not on high yield, both of which probably helped a lot.

Fair enough.

I'll hazard a guess though that you did not require to drawdown at 4% and/or had some bond-like back up in the form of DB pension or BTL property?

[SalvorHardin]

Retired in 2003 with almost 100% in equities and no other source of income. My portfolio rose by about 280% between retirement and the onset of the 2008 financial crisis; my portfolio fell by 51% in 2008. It bounced back fairly quicky due to remaining fully invested, albeit with a big switch out of oil and reinvesting (and topping up) in Buffett-style wide moat shares (North American railroads have been particularly good to me). Currently my portfolio is just over six times what it was at the low point in 2008.

Say I suffered say a 50% fall in capital and income overnight; I'd be a bit put out but this would have no effect upon my lifestyle. A 2.9% yield on the portfolio produces more than three times the income I need. When you have such a big margin of safety you can afford to remain 100% in shares, particularly if you heavily diversify around the world.

I've never been convinced that fixed interest will offer more security over shares during the medium and long term. Seeing the effect that inflation had on my pocket money in the 1970s has been a huge influence over how I invest.

Anyway, investing is also a hobby for me and has been so for several decades. It's much more interesting (and entertaining) to own shares in the Atlanta Braves, the Canadian Pacific Railroad, Juventus and Nathan's Famous Hot Dogs than 4.5% Treasury 2028.

EDIT - Like Lootman, my investing is global, rather than sticking to Britain, and I generally don't seek out a high yield. Though recently I've been tempted by lots of American REITs where yields of over 10% can easily be found (though I'm mostly investing for capital appreciation as I think that American offices in particular have been oversold (particularly in the Sunbelt, though I'm avoiding (for now) the crazier Democrat-run cities such as San Francisco).

[Lootman]

I retired at the height of the dotcom boom and was (almost) 100% in equities. There was of course an immediate crash, followed by a global financial crisis crash and then a Covid crash. And yet my net worth is now 3 to 4 times higher than it was at retirement.

My investment focus was global and not on high yield, both of which probably helped a lot.

Fair enough.

I'll hazard a guess though that you did not require to drawdown at 4% and/or had some bond-like back up in the form of DB pension or BTL property?

No pensions back then as I was only in my late 40s at the time.

But I had BTLs until 2010. And my wife still works and pays some of the running costs of our household.

[NotSure]

This century has been very kind to equities and property, and bonds have just been weird by historical norms (QE).

Going forward however, with the possible prospect of positive real interest rates again. I wonder how things will look over the next twenty years?

And the point by SH regarding global diversification is another consideration - much "standard wisdom" did not factor this in. Indeed, even single-index trackers were not the norm until relatively recently, let alone global ones holding literally thousands of shares with tiny costs (e.g. the 60/40 theory is based on decades of data, much of which had neither negative real rates or global trackers).

But as of today (to return to the thread) I think it is fair to say that the worst case scenario for 100% equities (particularly if not globally diversified) is more dire than for a mixed/multi-asset portfolio. And if one's circumstance mean that worst case = penury, worth consideration.

[JohnW]

‘But as of today (to return to the thread) I think it is fair to say that the worst case scenario for 100% equities (particularly if not globally diversified) is more dire than for a mixed/multi-asset portfolio.

It always was surely. If equities were always the most volatile asset you’re likely to have held, then adding any other less volatile asset must make the worst case less dire I’d have thought. I don't think we have a new paradigm as of today.

[NotSure]

‘But as of today (to return to the thread) I think it is fair to say that the worst case scenario for 100% equities (particularly if not globally diversified) is more dire than for a mixed/multi-asset portfolio.

It always was surely. If equities were always the most volatile asset you’re likely to have held, then adding any other less volatile asset must make the worst case less dire I’d have thought. I don't think we have a new paradigm as of today.

Indeed. However roll back 12 months when (especially long dated) bonds had YTM of very nearly zero, and I can understand why they were considered bargepole territory (myself included). Bonds had scope for large capital losses, and indeed this happened. So bonds weren't really "doing their job" in balancing/derisking a portfolio.

I just feel that now bonds are more 'sensibly' priced, with yields that may well become real positive, many still treat them as they did a year or two ago.

[Bubblesofearth]

Headline from a Google search of 'club of Rome standard run';

"In 2008, a study by Graham Turner of the Australian research organisation CSIRO found that "30 years of historical data compare favorably with key features of a business-as-usual scenario called the "standard run" scenario, which results in collapse of the global system midway through the 21st century."

I'm probably lucky to be part of the last generation that will get away with it.

BoE

[vand]

Since 1999 The FTSE100 with dividends reinvested is up 4% a year according to Schroders’ calculations.
https://www.schroders.com/en-gb/uk/inte ... nvestment/
https://d2csxpduxe849s.cloudfront.net/m ... F862F4.jpg

I think it looks like it doubled in the past 10 years.
https://uk.investing.com/indices/ftse-1 ... turn-chart

which is effectively a 2% real return over a 25 period... which is, frankly, terrible (especially for the amount of risk crried and their underperformance to safer fixed income) but not too out of line with what valuation models predicted could happen.

People look at the US market and ask why they have done so much better from similar valuations, but then consider the US as the norm when in fact it should be considered as the outlier.

Todays valuations are much more positive for the FTSE. That doesn't promise us better returns, but it turns a powerful headwind into strong tailwind.

anyway, realise have gone somewhat off topic

[1nvest]

I've written a spreadsheet for estimating my net worth into the future. So this has my income, pensions, spend, tax etc. It iterates to get a new figure for each year.

I can set 2 percentage constants, INF (inflation) and RETURN (return on my net worth, not inflation adjusted).

My investments are mostly in shares, pretty diversified, but certainly overweight in the UK by international standards (much less than a HYP though!)

I'm curious as to what people would think a reasonable worst case for INF and RETURN would be over the long term (say 20 years)? I'm toying with INF = 5% and RETURN = 2%. But I guess it comes down to how many black swan events we get, and how the heck can you predict this?

Index Linked Gilts are recently around 1% real across the yield curve. Target 2.33% withdrawals provided by a ILG ladder and a 33.3% allocation ... and that sources a ladder out to 19 years. Another third in stocks, paying a 3% dividend yield, 1% proportioned to total portfolio and combined with ILG's that's 3.33%. I like another third in gold, so initially thirds each stocks/gold/bonds (ILG). As those bonds and stock dividends are spent, that transitions to ending 19 years with just stocks/gold remaining, time averaged around 42/42/16 stock/gold/bonds. After near 20 years of stock and gold price only holdings, there's a reasonable prospect of some real gains, enough to cover at least another decade or more of spending. A high probability that after 30 years of 3.33% SWR (inflation adjusted withdrawals) - return of your money via instalments, that you'll still have a decent residual portfolio value remaining, often 100% of the inflation adjusted start date portfolio value

Asset allocate appropriately and you might revise your 2 figures to real values, so 0% INF, 3.33% RETURN for instance, and where with the first 19 years mostly covered by inflation bonds the volatility/risk is relatively low (RETURN reasonable certain).

For stocks, US$ invested in US stocks is preferable IMO. Initial third £ 'deposited' into gilts that don't have £85K deposit protection limits, are fully covered no matter how much third US $ primary reserve currency, third gold global currency. stocks/bonds/commodity asset diversity.

Over a bad case I would imagine all of bonds spent at around 20 years, stock and gold prices 0% real, portfolio down -33% down in real terms overall. Could be a case of where stock priced had halved, gold prices doubled in real terms, or vice-versa, more typically I'd expect both to have individually somewhat aligned to 0% real.

Over the worst case, 0% left. Armageddon. But no one would care.