# Pension Watch



## gnf_ireland (10 Aug 2016)

I have a pension going for the last 10 years or so, and review it every 5 years. Its now time for the next review. The last 5 years have been pretty good, with a 14.4% growth (roughly), but there has been a general bull market during this time.

I believe, in general, that equities are overvalued at the moment and feel some level of a correction is due in the next few months/beyond the end of the year. Do others feel the same? *understanding no one can tell the future*

So the question is
(a) should I review the current pension allocation and re-invest all the funds immediately OR
(b) encash a portion of the funds, hold in cash until a correction happens (or not), and then reinvest


Also, anyone have any thoughts on where various industries/regions are going in the next 5 years? Anyone believe there is strong reasons to buy particular industries or regions? Just curious of others thought process here !


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## Gordon Gekko (10 Aug 2016)

14.4% is terrible!

How is it invested?


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## gnf_ireland (10 Aug 2016)

Gordon Gekko said:


> 14.4% is terrible!


Sorry, I should have said 14.4% per year


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## Conan (10 Aug 2016)

How old are you. Trying to time markets is foolish. If you have a long time to retirement - more than say 20 years- I would be inclined to stick with your current strategy.


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## gnf_ireland (10 Aug 2016)

41 - so assume somewhere between 20 and 25 years to retirement



Conan said:


> Trying to time markets is foolish.


Agree and disagree here ! trying to pick the top and bottom is foolish, but is it foolish to continue to hold no matter what? 

Lets say in 2007 certain people believed the world economy was overheating - if they wanted a 'time out' and go to 'cash' for a bit was that foolish? Hindsight is great obviously and would be fantastic if we all had that crystal ball

Saying I have sufficient time to recover any losses incurred (which I agree with), but surely I also have time to recover any potential lost growth by the same argument !


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## Gordon Gekko (11 Aug 2016)

Markets didn't crash in 2007 though, and when did this person get back into the market?

He or she would have missed upside on the way into the crash and upside on the way out while procrastinating.

Trying to time the markets is futile.

And in any event, a diversified investor has recovered spectacularly since the financial crisis.


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## Marc (11 Aug 2016)

*Estimating Future Returns*

Author Larry Swedroe periodically updates the following calculations.

The best tool we have for estimating future stock returns is the Shiller CAPE 10 ratio. In the US the Shiller CAPE 10 currently at 27, the earnings yield is 3.7%. If we adjust for the Shiller CAPE10’s 5-year average lag in earnings, and the fact that real earnings tend to grow about 2% per year, we get a real return forecast for the S&P 500 of 4.1% (3.7 x [1 + (5 × .02)]).

While 4.1% is well below the S&P 500’s historical real return of about 7%, with the current T-bill rate at just 0.25%, it still produces a significant equity risk premium (though lower than the historical level).

International valuations are much lower. For example, the current Shiller CAPE 10 for developed, non-U.S. markets is about 15, which produces a real return forecast of about 7.3%. For emerging markets, the Shiller CAPE 10 is about 12, producing a real return forecast of about 9.4%. Those return forecasts are roughly their historical averages, and they look even more attractive relative to the riskless alternative.

According to a research paper from Vanguard, the r squared for the Schiller PE is  40 which makes it the least worst predictor of future stock returns we have but there is still lots of uncertainty about the future. That's one of it's defining characteristics, it hasn't happened yet


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## gnf_ireland (11 Aug 2016)

So I am taking the above comments to suggest that option a would be the better option, even for people who believe a correction may be on the cards.

@Gordon Gekko  Out of curiosity, what would you see as an average diversified pension fund performance and good pension fund performance over the last 5 years? Curious to benchmark mine against !


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## gnf_ireland (11 Aug 2016)

@Marc thanks for that

So basically what you are saying to the lay man is that equity returns are expected to be lower (than historical averages) over the next say 5 years in the US, and if you want higher returns you have to go higher risk to non-US and/or EM options.

This is perfectly sensible given S&P500 is at a historic high, and therefore one would 'assume' (at ones peril), the growth may need to slow down a bit over the next while


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## Gerry Canning (11 Aug 2016)

Would I be better to leave my Pension Pot in ARF in the reasonable hope that it will continue to grow @ inflation + something , rather than lock it into an actual pension ?

I am inclined to take the view that an ARF will grow more than the miserly pension way?

Advice would be appreciated, please.


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## gnf_ireland (11 Aug 2016)

Gerry Canning said:


> Would I be better to leave my Pension Pot in ARF in the reasonable hope that it will continue to grow @ inflation + something , rather than lock it into an actual pension ?



Sorry, do you mean is now a good time to effectively buy an annuity [actual pension] or are you better to continue to grow your pension using the ARF option? 

I am sure there are calculators out there advising on what the current annuity would be. Based on the detail above from Marc, the 'forecast' growth of US Equities is 4.1% - subject to standard risk qualifications etc


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## Gerry Canning (11 Aug 2016)

gnf, Thanks , Your 4.1% possible growth on ARF ,looks better than me buying an annuity.At least for now.


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## gnf_ireland (11 Aug 2016)

@Gerry Canning  The 4.1% comment is based on Marc post above on  Shiller CAPE 10 ratio - of which I can honestly say I know nothing about.

Personally, I believe there is a correction due in the equity market, especially in the USA where S&P500 is at an all time high. I believe in the short term 1-2 years, equities will fall a bit. What I have been advised here on the posts above is that trying to time the market is a futile exercise, and better to just accept the roller coaster that it is

I have ~25 years to retirement, so a long way off thinking with a short term outlook. Your outlook may be much shorter than mine and you have to take this into account.

I think you need to have a serious think about what funds you need access to, what way annuities are going etc. I would suggest having a chat with someone who deals in this on a daily basis, as opposed to take a single line 4.1% projected growth assumption (over 5 years) at face value. This could well be -5% Y1, -3% Y2, +4% YR, +17% Y4 and +7.5% Y5. How would that work out for you if it was to come to pass !


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## gnf_ireland (11 Aug 2016)

Gordon Gekko said:


> Markets didn't crash in 2007 though, and when did this person get back into the market?
> He or she would have missed upside on the way into the crash and upside on the way out while procrastinating.



I fully accept this would be a risk. All depends on the person I guess and how 'actively' they want to manage their pension fund.
And of course it all depends on the age profile as well


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## gnf_ireland (11 Aug 2016)

I am guessing the large majority of people simply opt into a set of funds on date x when setting up the pension and rarely, if ever, change the funds - never mind changing pension providers etc. I would have assumed it would make financial sense to review the funds semi-regularly (every 5 years say) and provider every 10 years - to compare charges, performance etc. Products and providers 'surely' innovate over time, and some are better than others at it ?

Maybe I am just over thinking it and should go with the flow, but something tells me I should at least do a comparison with what alternatives exist out there at the moment.


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## Marc (11 Aug 2016)

gnf_ireland said:


> @Gerry Canning The 4.1% comment is based on Marc post above on Shiller CAPE 10 ratio - of which *I can honestly say I know nothing about*.
> 
> *Personally, I believe there is a correction due in the equity market, especially in the USA where S&P500 is at an all time high*. I believe in the short term 1-2 years, equities will fall a bit. What I have been advised here on the posts above is that trying to time the market is a futile exercise, and better to just accept the roller coaster that it is



This is probably the clearest example I have ever seen of why investors fail to make money from investing

Just look at the two comments above 
1) I don't know anything about the best tool for assessing stock market valuations
2) I feel that the market is overpriced


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## gnf_ireland (11 Aug 2016)

Marc said:


> This is probably the clearest example I have ever seen of why investors fail to make money from investing


I think that is a bit unfair to be honest ! 



Marc said:


> I don't know anything about the best tool for assessing stock market valuations


Sorry if I sound a bit cynical about the "best tool" statement. I am sure it has value, but there are hundreds of stock market theories out there each with their own opinion on what is the best tool/theory etc etc.
My reading of the 'Shiller CAPE 10 ratio' is that it is best suited to 10-20 year timelines, rather than the immediate term (1-2 year time frame). I believe the US market in particular is overvalued in the immediate term.

The same could be said about the VIX index, which is in effect at an all time low despite Brexit, US Election etc etc. There is an argument there is a fundamental difference between short term and longer time views on both volatility and returns

If you google "is the s&p overvalued?" there is a general consensus that it is..... 

But then again what do I know ! I don't work in the finance industry.. but I do believe the S&P 500 will drop 10% at some point in the next 6 months - to 1950 !


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## elacsaplau (11 Aug 2016)

Marc said:


> *Estimating Future Returns*
> The best tool we have for estimating future stock returns is the Shiller CAPE 10 ratio. In the US the Shiller CAPE 10 currently at 27, the earnings yield is 3.7%. If we adjust for the Shiller CAPE10’s 5-year average lag in earnings, and the fact that real earnings tend to grow about 2% per year, we get a real return forecast for the S&P 500 of 4.1% (3.7 x [1 + (5 × .02)])......



Marc,

In my opinion, it is inappropriate to quote the original work of others without ascribing the source.......my students would spend the summer preparing for their repeats if they tried that!

For those interested, the link to full article is below........it's a reasonable article, but like CAPE, not without its flaws! Swedroe has a tendency to present opinions as facts (and treat those who challenge him as heretics.)

http://mutualfunds.com/news/2016/07/27/is-the-market-overvalued/

Gnf,

Of course your scepticism of magic financial math is well founded and you may well be right that current markets are pricey and that a correction is due but then again, you may not!!!! My understanding of the academic research is that it's extremely hard to successfully time the market on a sustained basis (.....a random walk and all that).......via intuition or math. Incidentally, what fund are you invested currently?


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## Marc (11 Aug 2016)

Agreed. I thought i had referenced Larry's piece


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## Conan (11 Aug 2016)

The problem with trying to time the market is that there are invariably individuals and theories that will suggest that markets are overvalued from time to time just as others will suggest the opposite. This is rarely clear cut.
If one looks back to 2007/2008 some will claims that they existed the market prior to the collapse (I wonder?) but the real question is when did they get back into the market. How many existed the market in say early 2007 and then got back in April 2009 ( the bottom of the market)? 
If one remained invested throughout then by circa 2012 the market had recovered all the losses.
It is easy to say the market is overvalued now (and is due a correction) but the real issue will be when to get back into the market.
That's why I said earlier that trying to time markets when one has some 20 plus year to go to retirement is likely a zero sum game. It can be easy to say that markets are overvalued from time to time but the real ability is timing the re-entry.


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## gnf_ireland (11 Aug 2016)

Conan said:


> It is easy to say the market is overvalued now (and is due a correction) but the real issue will be when to get back into the market.
> That's why I said earlier that trying to time markets when one has some 20 plus year to go to retirement is likely a zero sum game. It can be easy to say that markets are overvalued from time to time but the real ability is timing the re-entry.



@Conan - yes I 100% accept this argument and this is why I have held to date. Reading the various comments on here today, one thing I have learned is the financially savvy people (or at least those who come across as such) don't try and time the market. Those who do time it one way, might be down to luck, but as you say how do you time the upside again !


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## gnf_ireland (11 Aug 2016)

elacsaplau said:


> Incidentally, what fund are you invested currently?



A bit of a mix and match if I am being honest, as it has been a bit of a consolidation of a few pension funds that I have had, and only now sitting down to properly sort out a strategy for the next say 5 years or so, with a 20-25 year outlook.

Its currently with New Ireland, and the split is roughly
 - S&P500 Fund 35%
 - Eurostoxx Fund 20%
 - Trilogy Fund 15%
 - Property Fund 5%  *not actively paying into it currently - was a transfer in 
 - Innovator Fund - 12.5%
 - Geared High Yield Fund - 12.5% *not actively paying into it currently - was a transfer in 

One area I will be definitely dropping post review is the Innovator one... been the weakest link so time to leave


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## Sunny (12 Aug 2016)

It's not about timing the market. Nobody can ever time the market perfectly and if they do, they are just lucky. However, there is nothing wrong with taking a more defensive or offensive outlook even if you have 20+ years to retirement. For example, many people believe and rightly so in my opinion that stock markets and bond yields are currently distorted by the huge amount of monetary easing by the various central banks so comparisons to historical valuations need to be treated with caution. Current valuations are not based on fundamentals. They are based on low interest rates and excess capital all chasing yield. That doesn't mean that stock markets won't continue to increase for the forseeable future but it does increase the risk of a major correction. 

I am still investing in equities as I want the exposure but I have locked in most of the gains I have got over the past 5 years or so by moving a sizable percentage into a more defensive fund. Have I lost some upside gain? Yes, a small bit. But I am happy for the moment to have a good chunk of capital sitting on the sidelines (relatively speaking as still invested) . However, to be clear, I am not trying to time the market. I have lost some upside since I moved and I will lose some upside when I decide to buy back in because there is no chance of me being able to buy in at the exact bottom in but I am willing to do that.


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