# Pension risk bonds Vs equity Vs cash Vs property fund



## moneymakeover (3 Sep 2019)

Say individual with 12 years to retirement, in today's environment (low bond yields)

What is most/least risky of the main asset classes


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## cremeegg (3 Sep 2019)

*Historically* the return on equities is the most volatile, hence equities are described as the most risky. But the past is not a reliable guide to the future, and the definition of risky is of much less use than is immediately apparent.

No one can see into the future, but bonds are very highly valued and unless negative interest rates become the norm their capital values cannot increase much beyond present levels.

For me, property is the place to be.


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## Conan (3 Sep 2019)

12 years to retirement is half the issue. Also what you intend to do with the funds after retirement is relevant.
If it was the case that you could take most/all of the accumulated funds as part of a retirement lump sum, then yes you can take a 12 year view and also perhaps take a low risk investment approach (since the tax relief itself represents a significant return). 
If however you have to invest the bulk of the funds to provide an income in retirement- either an Annuity or an ARF- then your time horizon may be longer, particularly if you intend going down the ARF route. 
It is hard to figure out the best investment strategy at present with all the uncertainty that exists. Property may offer attractive returns currently, but it can be an illiquid asset, hard to sell if we have another property downturn. Lots of pension investors thought property was the answer back in the early 2000’s and we all know how that worked out. So it really depends whether you are considering investing in a Property Fund (diversified) or investing in a single property (high risk).


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## moneymakeover (3 Sep 2019)

Speaking for myself I would be thinking of property fund, not physical property

And while property /rent might be undervalued in this country can we say same for USA and UK?


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## Gordon Gekko (3 Sep 2019)

I would have no hesitation backing global equities over a 12 year period from today based on current valuations.

It is worth taking a look at historic returns over the following 12 years when Earnings/Price has been at it’s current level of circa 6.5%.

I would venture that nobody has ever lost money.


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## Sarenco (4 Sep 2019)

It’s important, in my opinion, to look at different asset classes from a portfolio perspective and not in isolation.

So, when the stock market crashes, high quality government bonds tend to rise in value - particularly long dated bonds.  Usually, not not always, bond prices “zig” when equities “zag”.

It’s also important to understand that when yields rise, that automatically means that bonds prices fall.  But, conversely, it means that the income generated by bonds can now be bought more cheaply.  Provided your investment horizon is not longer that the duration of your bond fund, it’s pretty much a wash.

Equities are always more volatile than bonds.  But more importantly, adding an allocation of bonds to a portfolio of equities reduces the volatility of the portfolio as a whole to a greater extent than it reduces the expected return of the portfolio.  In other words, it increases the risk-adjusted return of the portfolio.

With a reduced investment horizon (eg when a retiree is drawing down their savings, or a few years off doing so), it makes a lot of sense to think about reducing the volatility of a portfolio.


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## Sarenco (4 Sep 2019)

Gordon Gekko said:


> I would venture that nobody has ever lost money.


Are you saying that global equities have never lost value over a 12 year period?

That’s obviously not the case.


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## cremeegg (4 Sep 2019)

Gordon Gekko said:


> Earnings/Price has been at it’s current level of circa 6.5%.



Where are you getting that from. It is equal to a P/E of 15.38%, seems lower than my understanding of where the market is.

Are you by any chance using some mean ratio of individual stocks rather than the normal market average ratio.


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## Steven Barrett (4 Sep 2019)

moneymakeover said:


> Say individual with 12 years to retirement, in today's environment (low bond yields)
> 
> What is most/least risky of the main asset classes



Most risky is equity but even then you have varying degrees of risk. Small cap is riskier than large cap, emerging markets more risky than developed countries. 

Cash is the least risky. If you put it on deposit, you will know the return in advance. As with bonds...but if you are invested in a bond fund, you don't know the exact make up of the fund, what price they bought them at, will they be kept to maturity.

Commodities is the other asset class that hasn't been mentioned. Like equities, there are loads of different commodities, gold, oil, steel, concentrated orange juice etc. But they all have one thing in common, they don't earn a return while you hold them. 


Steven
www.bluewaterfp.ie


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## Gordon Gekko (4 Sep 2019)

cremeegg said:


> Where are you getting that from. It is equal to a P/E of 15.38%, seems lower than my understanding of where the market is.
> 
> Are you by any chance using some mean ratio of individual stocks rather than the normal market average ratio.



Median


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## Gordon Gekko (4 Sep 2019)

Sarenco said:


> Are you saying that global equities have never lost value over a 12 year period?
> 
> That’s obviously not the case.



Nice selective quote there Sarenco!

What I actually said was “with valuations at their current levels” or words to that effect.


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## cremeegg (4 Sep 2019)

Gordon Gekko said:


> Median



The median P/E ratio is hardly helpful. Market returns are arithmetically based on market cap. Current valuations are on the high side in historical terms.


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## Gordon Gekko (4 Sep 2019)

cremeegg said:


> The median P/E ratio is hardly helpful. Market returns are arithmetically based on market cap. Current valuations are on the high side in historical terms.



You’re just making stuff up and the danger is that people will listen to you. Focussing on an index’s median rather than its mean is best practice, as one can be assured that the valuation metric is not skewed by individual outliers, such as may occur with one-time write-offs or other material accounting trickery. The “markets are expensive/12 years isn’t a long time horizon/put your money in State Savings Bonds” nonsense is as reckless as it is dangerous.


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## Sarenco (4 Sep 2019)

Gordon Gekko said:


> Nice selective quote there Sarenco!


I simply asked for clarification because I am unclear what you are saying.  I doubt I’m alone in that regard.

You now seem to be predicting a specific market return over some future period based on some price metric relating to the median stock of some index.  Is that correct?

I’m not trying to antagonize you, I’m genuinely confused.


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## moneymakeover (4 Sep 2019)

Are there rules of thumb for asset allocation?

And would people say global economy is entering recession?


I found this on Davy website from August 2018
Are we even closer now to global recession than then?
If so this is even more relevant

*Phase 4 Recession:* The end of the cycle when the economy slows and production and employment figures fall. Demand from corporates and households is low so there is no fundamental driver of the real economy. Margins tighten and it is unlikely that corporates will post positive profits. Cash and bonds are prudent investments to offer downside protection.


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## Gordon Gekko (5 Sep 2019)

Sarenco said:


> I simply asked for clarification because I am unclear what you are saying.  I doubt I’m alone in that regard.
> 
> You now seem to be predicting a specific market return over some future period based on some price metric relating to the median stock of some index.  Is that correct?
> 
> I’m not trying to antagonize you, I’m genuinely confused.



You’re doing your usual. Come on Sarenco...you’re better than that.


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## Sarenco (5 Sep 2019)

If you’re not prepared to explain your position why bother posting?

Frankly, I find your posts increasingly unintelligible but perhaps that’s just me.


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## Sunny (5 Sep 2019)

Gordon Gekko said:


> You’re just making stuff up and the danger is that people will listen to you. Focussing on an index’s median rather than its mean is best practice, as one can be assured that the valuation metric is not skewed by individual outliers, such as may occur with one-time write-offs or other material accounting trickery. The “markets are expensive/12 years isn’t a long time horizon/put your money in State Savings Bonds” nonsense is as reckless as it is dangerous.



Was trying to understand this as the phrasing of it is very strange especially when you say 'best practice' and just as I thought, you are copying it...….If you are going to take other peoples work, then as least credit the source.

From the source below:
By focusing on the S&P 500® Index’s Median P/E, we can be assured that the valuation metric is not being skewed by individual outliers, such as may occur with one-time write-offs or other accounting maneuvers.









						Median P/E As Valuation Indicator - CMG AdvisorCentral
					

My favorite valuation indicator has long been the Median price to earnings ratio or P/E.  The P/E Ratio is the measure of the share price relative to the




					advisorcentral.cmgwealth.com


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## Gordon Gekko (5 Sep 2019)

Sunny said:


> Was trying to understand this as the phrasing of it is very strange especially when you say 'best practice' and just as I thought, you are copying it...….If you are going to take other peoples work, then as least credit the source.
> 
> From the source below:
> By focusing on the S&P 500® Index’s Median P/E, we can be assured that the valuation metric is not being skewed by individual outliers, such as may occur with one-time write-offs or other accounting maneuvers.
> ...



A further disingenuous contribution from you, Sunny, with zero value add. You’ll note that it is not copied, albeit it’s similar, because I’d read the same piece. But then you and your pal, Sarenco, prefer to engage in petty pedantry and point-scoring rather than helping people, which is the primary purpose of this site. For you both, it seems more important to squirm down a meaningless rabbit-hole and win an argument that doesn’t even exist. I for one won’t be engaging with either of you again; it’s simply not worth it and I remain unclear regarding your respective agendas and motives.


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## Sunny (5 Sep 2019)

Gordon Gekko said:


> A further disingenuous contribution from you, Sunny, with zero value add. You’ll note that it is not copied, albeit it’s similar, because I’d read the same piece. But then you and your pal, Sarenco, prefer to engage in petty pedantry and point-scoring rather than helping people, which is the primary purpose of this site. For you both, it seems more important to squirm down a meaningless rabbit-hole and win an argument that doesn’t even exist. I for one won’t be engaging with either of you again; it’s simply not worth it and I remain unclear regarding your respective agendas and motives.



If you don't think that it is copied because you changed the odd word then fair enough. If you have an opinion, give it as your own opinion. If you wanted to share someone else's opinion, then link the piece of research instead of trying to impress people. If you don't to engage further that's fine too. Other people can make their minds up how much value you added by your comment that was taken from a research piece written by someone else and you decide to claim it is best practice based on that....As zero value added as my posts I would suggest.


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## Sarenco (5 Sep 2019)

I’ve never heard the phrase “median P/E” before and, having read the article posted by @Sunny, I’m inclined to think it’s completely bogus as an indicator of future equity index returns.


Gordon Gekko said:


> A further disingenuous contribution from you, I remain unclear regarding your respective agendas and motives.


That’s absolutely fine with me.

I’m surprised that you think I have an undisclosed motive - I simply give my personal opinion on here without any vested interest.


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## Sunny (5 Sep 2019)

Gordon Gekko said:


> You’re just making stuff up and the danger is that people will listen to you. Focussing on an index’s median rather than its mean is best practice, as one can be assured that the valuation metric is not skewed by individual outliers, such as may occur with one-time write-offs or other material accounting trickery. The “markets are expensive/12 years isn’t a long time horizon/put your money in State Savings Bonds” nonsense is as reckless as it is dangerous.



And my last comment on this is that you can't tell another poster that they are making stuff up and that it is dangerous for people to listen to them and use words like reckless and dangerous and then simply copy something from the internet as 'best practice'. If you think that by pointing this out that I have an alternative motive then grand.


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## Gordon Gekko (5 Sep 2019)

That’s interesting, given that Ned Davis use “median earnings yield” as standard. It’s pretty standard in many areas to eschew the mean in favour of the median, but then neither of you are really interested in meaningful discussion, are you? Much easier to construct rabbit-holes and derail the discussion.

e.g. Poster No 1: “Is my 12 year time horizon too short?”

Poster No 2: “No, it’s okay for X/Y/Z reason”

In rides Sarenco: “You chosen an arbitrary 12 year time horizon!” This despite it being at the root of the person’s initial enquiry.

And then his pal Sunny: “You copied X/Y/Z from the internet!”

Presumably people are familiar with the term “sock puppet”?


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## Sarenco (5 Sep 2019)

I must confess that I have never heard of Ned Davis either.  Who is he?

I really don’t understand why anybody would use the P/E of a “median stock” as a reference point when projecting returns for a market cap weighted index.  The largest cap stocks will always dominate the index so why would the P/E of the median stock in that index particularly matter?

I never suggested that the 12-year timeline specified by the OP was arbitrary. I’ve no idea where you are getting that idea from.

I can assure you that I have never used a “sock puppet” to post on this forum.  I find it odd that you would think otherwise.


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## Sunny (5 Sep 2019)

Gordon Gekko said:


> That’s interesting, given that Ned Davis use “median earnings yield” as standard. It’s pretty standard in many areas to eschew the mean in favour of the median, but then neither of you are really interested in meaningful discussion, are you? Much easier to construct rabbit-holes and derail the discussion.
> 
> e.g. Poster No 1: “Is my 12 year time horizon too short?”
> 
> ...



Now you are just sounding ridiculous going on about sock puppets. If you want to claim something you got on the internet as best practice while telling other posters that they are making something up and are dangerous, then you better be prepared to back it up with something better than 'Ned Davis use it'. Ned Davis (Not sure why they are being held up as the final voice) might use it but I am also willing to be bet it is not the only measurement they use and like every other statistical measure comes with health warnings. Or you can answer why the vast majority of other research houses don't. Are they wrong? So maybe instead of insulting other posters and their contributions, you can answer the question. Why is the median P/E the best measure to use and how exactly does it deal with write offs and other accounting trickery as you put it? I am genuinely interested.


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## Duke of Marmalade (5 Sep 2019)

Girls please! 
Actually the link by _Sunny _is very interesting, and whether _Gordon_ quoted from it without referring to his source is really not terribly relevant.  Just to get the technicals out of the way, the median does not refer to median size of company but to median size of P/E.  It is a fair statistic to consider, though it is not absolutely consistent to track this statistic against the 10 year returns as these latter are overall cap weighted.
The negative correlation between past P/E ratios and the subsequent 10 year growth is stark, and it is intuitively appealing.
The graph itself was constructed in February 2016 and the P/E was 21.5 which the author states is only 2.7% below the level that would be considered overpriced.  Interestingly, today it stands at 21.9.  The historic average (median) level is 16.9.  So a very crude calculation is to say that in 12 years time the P/E level will have fallen from 21.9 to 16.9 - a fall of 23% in price, all else equal.  Meanwhile earnings of 4.6% p.a. will be enjoyed.  However, after allowing for taxes and charges this does not suggest to me that equities look good over this time period.  Of course, this was all done in S&P land.
But bonds are a far worse proposition.  No capital upside.  Yields of 0%.  Potentially big downside.  Institutions are holding bonds at negative yields for technical reasons all tied up with the policies of the central banks.  Retail investors should shun bonds for the foreseeable future.  Once the central bank manipulation has been wound down and bond yields rise to around 4% p.a. then they will again serve a purpose in stabilising and diversifying fund performances.
Meanwhile cash or State Savings is your only man.


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## cremeegg (5 Sep 2019)

Hoping to avoid the personal tone that is creeping in. I would like to address this point.



Gordon Gekko said:


> Focussing on an index’s median rather than its mean is best practice, as one can be assured that the valuation metric is not skewed by individual outliers,



I don't think that a median P/E or (earnings yield) ratio is common practice. I may be wrong about that I am not an expert, thats just my understanding. However the idea that a ratio like this may be skewed by an outlier is simply incorrect. There are certain metrics which can be skewed by outliers but a P/E ratio is not one of them. The usual example is given of average wages being skewed by a small number of high earners, is not relevant to a ratio.

If one company with a high P/E makes up 90% of an index and 10 companies with low P/Es make up the rest it is the mean and not the median P/E that drives results. For a market cap index that's arithmetic not opinion.

or to put it another way.



Sarenco said:


> I really don’t understand why anybody would use the P/E of a “median stock” as a reference point when projecting returns for a market cap weighted index.  The largest cap stocks will always dominate the index so why would the P/E of the median stock in that index particularly matter?



or as the Duke might say



Duke of Marmalade said:


> the median ... is a fair statistic to consider, though it is not absolutely consistent to track this statistic against the 10 year returns as these latter are overall cap weighted.



Although the use of the word "absolutely" here is just Belfast good manners.


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## NoRegretsCoyote (5 Sep 2019)

Gordon Gekko said:


> Nice selective quote there Sarenco!
> 
> What I actually said was “with valuations at their current levels” or words to that effect.


Like @Sarenco I also read it to mean something like "No one has ever lost money on an equites basket over any 12-year period."


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## Duke of Marmalade (5 Sep 2019)

cremeegg said:


> Hoping to avoid the personal tone that is creeping in. I would like to address this point.
> 
> 
> 
> ...


_cremeegg _if earnings are nil P/E is infinite.  One company with nil earnings would mean the average for the whole lot is infinite.  If earnings are near nil we would not quite have infinity but we would have very large outliers.  This problem always exists when the underlying distribution is very skewed e.g. bounded below by zero but unlimited bounds on the upside.  That is the case with wages and with P/Es.
I am not a practitioner but I can see that median would be the preferred statistic.  Of course, another statistic which would make sense as a mean would be to divide the market cap by the aggregate market earnings.  This would be averaging P/E with E as the weights.


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## cremeegg (5 Sep 2019)

Duke of Marmalade said:


> But bonds are a far worse proposition.  No capital upside.  Yield of 0%.  Potentially big downside.  Institutions are holding bonds at negative yields for technical reasons all tied up with the policies of the central banks.  Retail investors should shun bonds for the foreseeable future.  Once the central bank manipulation has been wound down an bond yields rise to around 4% p.a. then they will again serve a purpose in stabilising and diversifying fund performances.
> Meanwhile cash is your only man - max out is State Savings.



This for me is the heart of the matter.

My pension is 30% (or some such) in bonds. Just how risky is this. And is this a new risk that investment managers are unfamiliar with. To misquote Warren Buffet, am I swimming without clothes.


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## cremeegg (5 Sep 2019)

Duke of Marmalade said:


> _cremeegg _if earnings are nil P/E is infinite.  One company with nil earnings would mean the average for the whole lot is infinite.



Ah Duke, whatever about the median P/E not being useful, the average for the lot becoming infinite only arises if you average the averages. Learning not to do that is literally Junior Cert stuff.

This is the correct approach.



Duke of Marmalade said:


> Of course, another statistic which would make sense as a mean would be to divide the market cap by the aggregate market earnings.


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## Duke of Marmalade (5 Sep 2019)

cremeegg said:


> Ah Duke, whatever about the median P/E not being useful, the average for the lot becoming infinite only arises if you average the averages. Learning not to do that is literally Junior Cert stuff.


Example:  A: Market Cap=100 Earnings = 5; B: 100,3; C 100,0
P/E = 20, 33, Kinda big
Median P/E: 33
Mean P/E: Kinda big

I don't see any average of the averages there.


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## cremeegg (5 Sep 2019)

Total market Cap 300

Total Earnings 8

Market P/E 37.8


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## Duke of Marmalade (5 Sep 2019)

cremeegg said:


> Total market Cap 300
> 
> Total Earnings 8
> 
> Market P/E 37.8


Yes, that is probably the best statistic for aligning with the growth in the index.  But I was correcting your reference to "average of averages".


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## Conan (5 Sep 2019)

I'm beginning to bet the original poster is regretting asking the question.


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