Invest equities long term

[moneymakeover]

I have been considering how to allocate
my pension , what risk to take

One rationale regarding investing in equities is: we can depend on one thing: currency devaluing.

Every time there is a crisis governments across the world will respond by printing money.

The value of the sp500 (say 4400) market cap is around $38 trillion.

Economic activity has been reduced if anything during the pandemic and yet it has doubled over past 5 years.

Further money printing, in the next crisis will see the markets go even higher.

I say all this by way of explanation as to why it makes sense to remain invested in equities long term in a pension portfolio.

To illustrate,

Money Supply: A Good Predictor For S&P 500 Index

The relation between the stock market and money supply is examined at different lags to formulate a predictive model for the stock market.

seekingalpha.com

 

[Steven Barrett]

Further money printing, in the next crisis will see the markets go even higher.

But isn't there a major correction on the way? I know because loads of people have told me so. Although none were able to tell me when or why, just we are due one.

I 100% agree with your approach.

 

[joe sod]

Economic activity has been reduced if anything during the pandemic and yet it has doubled over past 5 years.

Further money printing, in the next crisis will see the markets go even higher.

But the S&P 500 is tech heavy and has done extraordinary well because of the money printing and ultra low interest rates. Now the environment is changing and inflation is rearing its head, not necessarily good for the S&P 500 but good for energy , commodities and that most hated sector the banks.
Basically the sectors that have done terrible since the financial crash now look to outperform, return to the mean. Tech could get hit heavily now with the likelihood of "big government" coming after "big tech", it's already happening

 

[time to plan]

But isn't there a major correction on the way? I know because loads of people have told me so. Although none were able to tell me when or why, just we are due one.

I 100% agree with your approach.

I've successfully called 10 out of the last 2 corrections.

 

[moneymakeover]

But isn't there a major correction on the way? I know because loads of people have told me so. Although none were able to tell me when or why, just we are due one.

I 100% agree with your approach.

Exactly

I get a regular email giving me financial tips in particular in relation to pension planning.
And one week ago I got my regular bulletin but this time was telling me to prepare for the crash.

It made me very nervous.

It said if you are within 10 years of retirement and I'm 10 years from retirement and was very nervous thinking something was going to happen. That day the markets dropped.

But I think there are people who regularly "nay say" the market, just so afterwards they can say "told you so". Just have to recognise that. And I suppose in this particular case it's too soon to say they are wrong, with their particular crystal ball. Wherever they're getting their information.

 

[Sarenco]

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” Peter Lynch.

"The stock market is a device for transferring money from the impatient to the patient" Warren Buffett.

Just stick to your guns and tune out the noise.

 

[noproblem]

I've successfully called 10 out of the last 2 corrections.

All I can say is, well done you

 

[noproblem]

Exactly

I get a regular email giving me financial tips in particular in relation to pension planning.
And one week ago I got my regular bulletin but this time was telling me to prepare for the crash.

It made me very nervous.

It said if you are within 10 years of retirement and I'm 10 years from retirement and was very nervous thinking something was going to happen. That day the markets dropped.

But I think there are people who regularly "nay say" the market, just so afterwards they can say "told you so". Just have to recognise that. And I suppose in this particular case it's too soon to say they are wrong, with their particular crystal ball. Wherever they're getting their information.

Well, I'm retired and nearer to 7 decades than 6. In the last couple of weeks i've noticed that funds i'm invested in have taken a bit of a slackening off, some might say a hammering. I'm in the 65% equity managed fund category, with others in an 65% aggressive fund category. Am I worried? Not really, even though age is not on my side, i'm still quite happy to leave them there because over the last 7/10 years they've done quite well considering the times we're all living in, and we don't need them for anything right now. Standard life and Zurich are the companies i'm with and intend living for a couple more decades. In any case I don't need the money at the moment, I'm guessing it might make its way to the next generation at this stage. Guess there's some people in a fortunate position, others not so much so and others who couldn't care less.

 

[moneymakeover]

The net effect past 8 days or so, it's only down 2%

If bonds make little sense in rising interest rate environment then that leaves... cash and property? Commodities?

Does it make sense from pension perspective to say, "my goal is s&p500 reaching 5000. When that happens I'll put 30% into cash for safety".

Does that seem reasonable?

 

[Sarenco]

Does it make sense from pension perspective to say, "my goal is s&p500 reaching 5000. When that happens I'll put 30% into cash for safety".

Does that seem reasonable?

Not really, no.

You should determine your asset allocation in advance by balancing your need/desire for return against your tolerance for the risk required to achieve that return.

Only you can make that decision.

However, as a crude default position you might consider holding your age minus 20 in a Eurozone government bond fund, with the balance in a global equity fund. So, if you are 50 you would hold 30% of you portfolio in bonds, with the balance in equities.

The important thing is to determine your asset allocation in advance and then stick with it regardless of the news flow, rebalancing as necessary. It's also important to take all your assets - not just your pension fund - into account in determining your asset allocation.

 

[noproblem]

However, as a crude default position you might consider holding your age minus 20 in a Eurozone government bond fund, with the balance in a global equity fund. So, if you are 50 you would hold 30% of you portfolio in bonds, with the balance in equities.

Holding 30% in bonds would more than likely leave you in negative territory I would have thought. The idea of doing it at 50 is the wrong mindset too. In my opinion.

 

[Sarenco]

The idea of doing it at 50 is the wrong mindset too.

Well, you obviously have a high tolerance for risk if you are investing for the next generation.

Most of us won't have that luxury - we will need our retirement portfolio to fund our expenses.

There is no "right" asset allocation - it all depends on an individual's circumstances and goals.

 

[noproblem]

Well, you obviously have a high tolerance for risk if you are investing for the next generation.

Serenco,
Don't get me wrong, I do understand where you're coming from and i'm not looking for confrontation or argument. For too long, supposedly older investors are told that they need to pull back when they get to 50/60 yrs old, and i'm of a mind that this is wrong. In todays world, a 50/60 yr old dearie will on average live for at least another20 to 30 years, with good health and pretty active as well. An awful lot of them have a few bob, won't in many cases need as much as when they worked, are smarter with what they have and know what a bargain is. On top of that there's free travel, and lots of other perks to make life easier. I just made a point that I will most likely have enough when i'm gone, to see that the next generation will more than likely inherit "my good fortune". I have no intention to go out of my way to make sure that this happens, but neither have I lost the appetite in taking pleasure out of watching some investments grow. Putting my money, or a good part of it into govt bonds, etc, is like telling me I need to go into a home where i'll be safer and good care would be taken of me. Life is for living, money's made to go around, you win some, you lose some. Like I said, I don't need as much as I used to, but a safety net just because i'm seen by some as old and might lose it all is all well and good, but the ould wans today are cuter than you might like to believe. I always like to tell the whizz kids today that we never had the internet, etc, when we were young. That's why we invented it for them.

 

[DK123]

Great post no problem and if an investor panics in a correction and sells what do they do well of course they only turn a temporary loss into a permanent loss unless it is the end of the world. you gotta look long term in my humble opinion and ignore the corrections which are going to happen anyway[took me along time to learn this] but i think it is important for us older people with much wisdom and experience after working hard all our life to gather up a few bob not to invest in anything remotely risky which will sometimes be forced upon us by so called professional advisers so they can earn fees [ e g risky shares etc]why for the simple reason that we my not have enough time to get it back if it all goes badly wrong,

 

[Steven Barrett]

Exactly

I get a regular email giving me financial tips in particular in relation to pension planning.
And one week ago I got my regular bulletin but this time was telling me to prepare for the crash.

It made me very nervous.

It said if you are within 10 years of retirement and I'm 10 years from retirement and was very nervous thinking something was going to happen. That day the markets dropped.

But I think there are people who regularly "nay say" the market, just so afterwards they can say "told you so". Just have to recognise that. And I suppose in this particular case it's too soon to say they are wrong, with their particular crystal ball. Wherever they're getting their information.

We we look at long term projections for an investor, we typically use annualised returns of 6%. Investors tend to be happy with that level of return over the long term.

Over the last 10 years, the MSCI World Index has returned 14.08% and the S&P 500 17.77%. To get anywhere near our 6% return, there will have to be a major crash (we seem to have completely discounted the -33% fall in one month when Covid struck and the world's economy shut down)
Now, that is not to say that crashes aren't unpleasant and no one likes seeing the value of their money fall like a stone. But it is part of investing and it is factored into your long term returns. People tend to think of returns like a straight line, 6% every year for 20 years will get me €x at the end. But it doesn't work like that, some years are great, some are terrible. But if you stick it out, your average return ends up at 6% per annum.

For example, I did a review recently for a client who made a single premium contribution in 1995. That money has seen the dotcom crash, the credit crunch as well as the Covid crash. It has also experienced the upsides too. The annualised rate of return over the 25.5 years the money was invested? 6.2% per annum.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[NoRegretsCoyote]

The annualised rate of return over the 25.5 years the money was invested? 6.2% per annum.

Out of curiosity, was this before or after fees?

 

[Steven Barrett]

Out of curiosity, was this before or after fees?

After fees. 100% equity fund

 

[NoRegretsCoyote]

One rationale regarding investing in equities is: we can depend on one thing: currency devaluing.

Interest rates have been very loose globally since 2008. Pretty much everywhere at or near zero. Far lower than anyone (c 2005) thought they could be sustained at without stimulting inflation.

What has happened globally to inflation? It is has fallen, fallen, fallen. Not just in rich countries. Global inflation was just 2% last year. Probably the lowest since fiat currencies were introduced.

There are many reasons why this is the case, many of them speculative. But what it tells me is that the world economy seems able to tolerate "loose" monetary policy without runaway inflation anymore.

 

[DK123]

Out of curiosity, was this before or after fees?

And also out of curiosity are these are these returns per annum quoted in real terms i e after being adjusted for inflation. Im sure everybody would be very interested in having this clarified.Thanks p s lets use the average inflation over say the last 50 years inflation may be low now but sooner or later it will rear its ugly head again as it always has.Sorry this question is for Steven.

 

[NoRegretsCoyote]

And also out of curiosity are these are these returns per annum quoted in real terms i e after being adjusted for inflation.

Inflation in Ireland is about 2% over the last 25 years. So a real return of 4%.

I would take a 4% real return over 25 years if you offered me.