# Pension portfolio



## moneymakeover (11 Sep 2018)

In current environment, markets performing well,
With say 10 to 20 years to retirement
What's a good spread of investments in a pension?
There is a range of funds in my scheme fund: risk 1 cash to risk 7 emerging equities.

Some funds available on my scheme:

Cash (risk 1)
Equity/cash/property/bonds (risk 3)
Global equities (risk 6)
What is a good distribution I suppose in light of the bull market over the past 9 years?

I guess some people will be equity all the way. While others will be more cautious.

Some will say do not time the market

With quantitative easing maybe there's more room for markets to go higher?


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## Gordon Gekko (11 Sep 2018)

Hi moneymakeover,

It’s very hard to answer that in isolation without getting under the bonnet of the rest of your life and understanding how you are likely to react in the event of material market weakness.


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## moneymakeover (11 Sep 2018)

What I find is that at the pot total becomes significant, my appetite for risk is decreasing.

Previously I was 100% global equity

What I'm thinking now is to gradually move it to
Option 2 (risk 3 above) 60%
Option 3 (risk 6 above) 40%

New deposits into option 3

This way it will tend back towards 50/50


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## Steven Barrett (13 Sep 2018)

What level of income do you need in retirement? 
What other assets do you have? 
What outgoings do you have? 
Are you on target to meet your goals? 
If not, what do you need to do to reach your goals? 

When it comes to retirement planning, people let the tail wag the dog ie their happiness in retirement is based on whatever random number they have when they stop working. With 10 years to go, you have plenty of time to put a plan in place so you know how much you need when you retire. If you know that number, you can calculate how much you need to put in and what return you need. 

If you are 20 years out from retirement, you should be invested in equities unless having 100% equity exposure makes you uncomfortable. 


Steven
www.bluewaterfp.ie


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## moneymakeover (13 Sep 2018)

Cheers Steven

So in the case of 10 years out what would be a rule of thumb mix of investments?


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## Steven Barrett (13 Sep 2018)

moneymakeover said:


> Cheers Steven
> 
> So in the case of 10 years out what would be a rule of thumb mix of investments?



Really? 

There have been two replies to your post, both saying other factors have to be taken into consideration first but it's as if you've disregarded what was said. 


Steven
www.bluewaterfp.ie


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## moneymakeover (13 Sep 2018)

So imagine I have some other income say rental income 500 per month
Say I have 300k in pension pot
And contributing 2k gross per month
10 years to retire
Aiming for total 600 pension pension pot on 10 years


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## LDFerguson (13 Sep 2018)

moneymakeover said:


> So imagine I have some other income say rental income 500 per month
> Say I have 300k in pension pot
> And contributing 2k gross per month
> 10 years to retire
> Aiming for total 600 pension pension pot on 10 years



From a purely mathematical perspective, if the €600,000 target is not adjusted for inflation, then your requirement needs about 1.5% annual growth, net of charges per year.  That would steer you in the direction of one of the lower-risk options, but the choice should also be looked at in the context of your overall financial circumstances and your own appetite for taking risk.


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## moneymakeover (13 Sep 2018)

Thanks Liam

It seems at 20 years ahead it's simple: 100% global equities

And it gets complicated at 10 years out

What are the factors?


Alternative income
Risk appetite
Bull market (over priced)
Number of years until the funds are needed
Size of current pension pot

I was thinking the answer should be able to generalise a portfolio taking the factors into account


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## moneymakeover (13 Sep 2018)

Perhaps a risk factor on the Dow/s&p

As this goes up the holding decreases


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## David1234 (13 Sep 2018)

How much money will you need p/a in retirement


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## Sarenco (13 Sep 2018)

moneymakeover said:


> I was thinking the answer should be able to generalise a portfolio taking the factors into account


How can you generalize while taking individual circumstances into account?


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## moneymakeover (16 Sep 2018)

Sunday times article mentions a Goldman Sachs bear market probability model


Also mentioned this article
https://www.bloomberg.com/news/arti...et-risk-indicator-at-highest-since-1969-chart

This is kind of thing I'm suggesting can be used to adjust the holdings away from 100% equity.


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## Sarenco (16 Sep 2018)

Well, my rule of thumb for market timing (which is really what you’re suggesting) is pretty simple - don’t do it!


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## moneymakeover (16 Sep 2018)

It occurs to me there is a silver lining if the prices collapse

Buying at the lower prices ie dollar cost averaging 

So as long as the future contributions exceed the value invested in equities then I think the risk is reduced/limited.


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## Sarenco (16 Sep 2018)

Dollar cost averaging is just another form of market timing.

Yes, your risk of loss is reduced.  But then so is your potential reward.

Why?  Because your savings at “at risk” for a shorter time period.

There is an umbilical link between risk and reward - there’s no way around it.


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## moneymakeover (16 Sep 2018)

My proposed rule of thumb:

Only expose that amount equal or less than future contributions

So if contributing X per year then 
Where R is year of retirement
Year, amount exposed to 100% equities
R-5, 5x
R-4, 4x
R-3, 3x
R-2, 2x
R-1, x
R, 0

So by 1 year out (R-1) from retirement only one year of contributions is fully exposed to equities

Then, new approach post retirement: create arf etc


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## Sarenco (16 Sep 2018)

Sorry but I really can't follow your proposed rule of thumb.

Say I'm 6 years from retirement with a €500k pension pot, 100% allocated to global equities and I'm currently contributing €15k per annum.

What would my allocation look like next year according to your proposed rule of thumb?  And the year after?


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## moneymakeover (16 Sep 2018)

Firstly let me say this is just thinking out loud and I would agree it's conservative.
And doesn't account for the fact that 75% of the fund after retirement will go to some equity fund after anyway.

So 6 years out the potential contributions will be 90k

So this theory says the most one should be putting at risk is 90k. The reason being if stocks drop you can still benefit to the extent you will be contributing (90k). The 90k will have much better purchasing power after stocks drop. The more they drop the better for the 90k.

So at this stage one would already have moved 410k to some cautious equities fund including cash and bonds.


After that 30k per year would have to move to cautious to reduce the exposure by 15k and to account for the added 15k

So
*year, cautious, equities*
R-6, 410, 90
R-5, 440, 75
R-4, 470, 60
R-3, 500, 45
R-2, 530, 30
R-1, 560, 15
R, 590, 0


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## Sarenco (16 Sep 2018)

So you go from 0% allocation to equities on "R" to 75% in equities the following day?

That doesn't seem to make much sense.

If you really want a rule of thumb (with all the caveats previously mentioned re personal circumstances) how about your age less 20 in bonds/cash with the balance in equities?  So at 50 you would have 30% of your pot in bonds/cash, at 60 you would have 40% in bonds/cash, etc.


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## moneymakeover (17 Sep 2018)

Well it makes sense in maximising the 25% tax free cash lump sum

And I'm still working on what to do with the arf as I said 

I imagine that would be treated cautiously at the age so probably not rush into entirely equities

With your rule... you may miss out on cash lump sum aged 65 (I'm assuming retirement age) when you would be 55% invested in equities. What if equities went to the floor any time in the 5 year run up to age 65?


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## Sarenco (17 Sep 2018)

moneymakeover said:


> With your rule... you may miss out on cash lump sum aged 65 (I'm assuming retirement age) when you would be 55% invested in equities. What if equities went to the floor any time in the 5 year run up to age 65?


What if equities collapsed 10 years out from retirement?  There have been 10, 20 even 30-year periods in the past where long-term domestic bonds have outperformed domestic equities in all major economies.  Or what if equities collapse within a few years after retirement?

Why is maximising your tax-free lump sum such a priority?  Ultimately your pension pot is about funding your retirement - which could last 30+ years.


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## moneymakeover (17 Sep 2018)

Logically what you're saying makes sense

I wonder what the "pension advisors" say?

Can people live with the risk involved?

And brings me back to the "bear market probability index"


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## Steven Barrett (17 Sep 2018)

Mr A is 5 years out from retirement and still 100% in equities. His fund of €500,000 grows by 10% per annum for 4 years. He'll be up to €732,050 with 1 year to go.  
Meanwhile, Mr B has reduced risk and is getting 2% per annum for 5 years up to retirement in 5 years. His fund will grow to €552,040 when he is 65. 

Mr A's pot will have to fall in value by -25% in the final year for him to be worse off than Mr B. While we don't know what form any stock market crash will take, Mr A would have plenty of opportunity to move his pension from 100% to cash before it falls by 25%, so even if it fell by 10%, he'd still have over 100% more in his pot at retirement than Mr B.

This pension advisor has already had his say, your own total financial situation has to be taken into account. 

Steven
www.bluewaterfp.ie


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## moneymakeover (17 Sep 2018)

So Mr A will be closely monitoring the market and selling up 100% when it falls 10%?


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## moneymakeover (17 Sep 2018)

I thought @SBarrett subscribed to Tim Hale approach



> Rule 1: Own 4% in equities for each year until you need the money as defined by your investment period above and own bonds for the rest. Rule 2: If this money represents general funds to support your future lifestyle, own your age in bonds and the rest in equities. Own more in equities if you are more aggressive and able to weather market falls, or more in bonds if you want more certainty of your outcome.


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## cremeegg (17 Sep 2018)

SBarrett said:


> Mr A is 5 years out from retirement and still 100% in equities. His fund of €500,000 grows by 10% per annum for 4 years. He'll be up to €732,050 with 1 year to go.
> Meanwhile, Mr B has reduced risk and is getting 2% per annum for 5 years up to retirement in 5 years. His fund will grow to €552,040 when he is 65.
> 
> Mr A's pot will have to fall in value by -25% in the final year for him to be worse off than Mr B. While we don't know what form any stock market crash will take, Mr A would have plenty of opportunity to move his pension from 100% to cash before it falls by 25%, so even if it fell by 10%, he'd still have over 100% more in his pot at retirement than Mr B.



Oh dear, oh dear. This is not your finest Steve.



SBarrett said:


> Mr B has reduced risk and is getting 2% per annum for 5 years up to retirement in 5 years. His fund will grow to €552,040 when he is 65.



So aged 60 he has a reasonably certain idea of the value of his pension pot at retirement. If it is adequate to meet his needs, he can look forward to his retirement without financial worry.



SBarrett said:


> Mr A is 5 years out from retirement and still 100% in equities. His fund of €500,000 grows by 10% per annum for 4 years. He'll be up to €732,050 with 1 year to go.



10% a year ? Lucky Mr A. Is that what you project for your clients?  

A more realistic long run return is 6% p.a.

But what if equities fall 25% five years out. If they then rise 6% each year thereafter poor Mr. A has €473k, less than he started with, not to mention less than Mr. B.


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## Steven Barrett (18 Sep 2018)

It's a hypothetical. Merely to illustrate that even staying in equities and suffering a loss in the final year can leave you in a better position than playing it safe for the final 5 years.

The 10% return is perfectly reasonable given the returns on equities over the last number of years. 


Steven
www.bluewaterfp.ie


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## Steven Barrett (18 Sep 2018)

moneymakeover said:


> I thought @SBarrett subscribed to Tim Hale approach



I made my approach perfectly clear at the outset. Take your total personal and financial situation into account first. 


Steven
www.bluewaterfp.ie


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## ashambles (19 Sep 2018)

Investment fund performance appears good right now because the 10 year window is now sliding beyond the massive losses in funds between 2007 and 2009.

Anyone investing in funds (not just equity ones either) would need to be aware that 75% losses in value are possible and factor than into their calculations.

https://www.ilim.com/fund-fact-sheets/retail/+++-Active_Managed_Fund.pdf

If you look at the chart for Irish Life active managed despite the upward trend there are two 10%+ drops one starting in July 2015, a recovery and the same pattern again in December 2015. So if you do have a stop loss it's likely you're going to be using it earlier than you'd like and it won't allow you to capture an overall upward trend. Don't imagine it conveniently only coming into play at the end of a 5 year investment window


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