Critique of Potential ARF Asset allocation

[Flybytheseat]

I'll hopefully be in a position in 5 or less years to retire, take a lump sum and put a balance of circa €1M in an ARF. I'm hoping to go execution only on the ARF and would like to keep the overall AMC/TER on the fund in the region of 0.6% to 0.7%. I have a relatively high risk tolerance (ESMA 5.5). From various state and DB pensions I should have a guaranteed pension on top of the ARF of circa €23K pa.

From what I've read Zurich or Standard Life seem to offer the lowest Fund Manager charges of the Irish approved ARF providers. My current incling is to go with Zurich with the following asset allocation:

Portfolio Risk Rating 5
Portfolio Volatility 11.34%

Asset Split:
Cash
8.17%
Bonds
10.83%
Equity
75.00%
Commodity
6.00%

This is made up of the following Zurich funds:



I'm open to any feedback on my strategy or suggestions as to how to improve it.

Thanks in advance.

 

[Kev1964]

I'll hopefully be in a position in 5 or less years to retire, take a lump sum and put a balance of circa €1M in an ARF. I'm hoping to go execution only on the ARF and would like to keep the overall AMC/TER on the fund in the region of 0.6% to 0.7%. I have a relatively high risk tolerance (ESMA 5.5). From various state and DB pensions I should have a guaranteed pension on top of the ARF of circa €23K pa.

From what I've read Zurich or Standard Life seem to offer the lowest Fund Manager charges of the Irish approved ARF providers. My current incling is to go with Zurich with the following asset allocation:

Portfolio Risk Rating 5
Portfolio Volatility 11.84%

Asset Split:
Cash
8.17%
Bonds
10.83%
Equity
75.00%
Commodity
6.00%

This is made up of the following Zurich funds:

View attachment 8981
I'm open to any feedback on my strategy of suggestions as to how to improve it.

Thanks in advance.

Watching replies with interest as this is not a lot different from my wife’s upcoming situation albeit in a shorter time frame ie 12 months.

 

[Gordon Gekko]

Seems overengineered to me. Why not pick one multiasset fund? e.g. Prisma 4/5?

 

[Flybytheseat]

Seems overengineered to me. Why not pick one multiasset fund? e.g. Prisma 4/5?

I'm trying to avoid actively managed funds and definitely want some gold in the portfolio as have invested for many years in gold and it's been good to me. I like the fact that it is in many ways inversely correlated to equities. It's also a hedge against central banks printing money like they have for most of the past decade. I'm also not a fan of any property allocation in the portfolio. I also dont really understand bonds if I'm honest so dont want to invest too much in things I dont understand.

 

[Flybytheseat]

....

 

[Sarenco]

What do you plan to do with the lump sum?

If you are going to keep it in a series of fixed-term deposits, then I would keep the ARF invested 100% in a global equity index fund.

Your DB/State pensions are already “bond-like” in nature.

I personally wouldn’t bother with the gold allocation.

The important thing is to look at your overall financial position in determining your asset allocation, rather than looking at a single account (ie the ARF) in isolation.

 

[Flybytheseat]

What do you plan to do with the lump sum?

If you are going to keep it in a series of fixed-term deposits, then I would keep the ARF invested 100% in a global equity index fund.

Your DB/State pensions are already “bond-like” in nature.

I personally wouldn’t bother with the gold allocation.

The important thing is to look at your overall financial position in determining your asset allocation, rather than looking at a single account (ie the ARF) in isolation.

Good point. 50% of the lump sump I'll waste on paying off my mortage (I'm divorced in my 50's so had to buy recently) and the rest I'll invest in holidays, women, making memories and fast cars.

 

[Sarenco]

Good point. 50% of the lump sump I'll waste on paying off my mortage (I'm divorced in my 50's so had to buy recently) and the rest I'll invest in holidays, women, making memories and fast cars.

Well, in that case you should probably have some bonds in your ARF but I wouldn’t overdo it given your DB/State pension entitlements.

Let’s say you anticipate annual expenses of €43k; €20k over and above your State/DB pension entitlements. So, personally, I would go with €200k (10 times your residual expenses) in a Eurozone Government Bond index fund, with the balance in a Global Equity index fund.

Or, to put it another way, roughly 80% in equities and 20% in bonds.

I wouldn’t bother with a corporate bond fund - take your risk on the equity side.

Keep it simple.

 

[Steven Barrett]

Seems overengineered to me. Why not pick one multiasset fund? e.g. Prisma 4/5?

It looks like an asset mix by a financial advisor who thinks he can outdesign a portfolio designed by MSCI

To be honest, Gordon is correct, you have far too many funds. Use the Global Index managed by Blackrock and the Active fixed income. If you want a bit of gold, add that in too.

We don't use assets that don't produce an income but if you want to do it yourself, that's up to you.

Keep it simple, 2% in a fund is going to do nothing and a bond fund will have corporates in it anyway, so you're adding nothing to the mix with such a small allocation.


Steven
www.bluewaterfp.ie

 

[Flybytheseat]

Thanks Steven. Makes sense. The Active fixed income fund though is 95% Eurozone Government fixed interest with no corporate bond exposure which probably reduces the risk on the fund at the expense of returns.

 

[Deauville]

Thanks for starting this thread. Very helpful and well done on managing your finances so well to date. Impressive.

I plan to initiate an execution only ARF in December of this year and my homework on a probable portfolio is not unlike yours.
Expected ARF after TFLS at current value about 770k. Less than yours.

I note Steven and Gordon's comments and respect their opinions. The more challenges to my views, the better for me (and others).
So thank you.


Zurich ARF Draft. ESMA Volatility Risk 5. 10.79% Volatility 5 Years

Reasons for Portfolio Composition:

Sequence of return risk mitigation: .Cash Fund (3x Years Distribution Bucket).

Potential Volatility reduction: ……..Prisma 2 Fund. Active Fixed Income Fund.

Growth:………………………………Indexed Global Equity, International Equity, Div. Growth.


6 funds picked for asset diversification and lower cost due to nil or low ‘Additional AMC’ and ‘Other Ongoing Charges’.

65.65% Equity. 20.45% Bonds. 13.00% Cash.

Prisma 2 15% Allocation


Risk Rating 3. Geo 74 % North America. Mainly Government, Corporate bonds and Cash.

0.01% additional AMC. 0.00% OOC.


Active Fixed Income 10% Allocation

Risk Rating 4. Currently Geographical 95% Euro. Government bonds.

0.00% additional AMC. 0.00% OOC


Dividend Growth Fund 10% Allocation

Risk Rating 6. Geographical 65% North America. 11% Eurozone equities.

0.00% Additional AMC. 0.01% OOC.


Indexed Global Equity (Blackrock) 40% Allocation

Risk Rating 6. Geographical 71% USA. The rest global equities.

0.00% Additional AMC. 0.01% OOC.


International Equity Fund 15% Allocation

Risk Rating 6. Geo. 74% North America. 9% UK, rest Global.

0.00% Additional AMC. 0.04% OOC.


Cash Fund 10% may need to be adjusted as it will initially be based on projected numerical 3x years distribution. This will have an impact on the other allocations.

Risk Rating 1. Geo 100% Euro. 0.00% Additional AMC. 0.00% OOC.

I intend to use the cash fund for distribution only in negative return years and as Homestore and More used to say, 'when they're gone they're gone'.

I'll then apportion it's allocation percentage to Prisma 2 (ESMA 3).

After that, it will be on auto re-balance without a cash fund and I hope to then keep my hands in my pockets and do as little as possible damage to it.

The reason I'm not currently planning to use Prisma 4 (ESMA 5) is because it has an OOC of 0.07%. Open to challenging views especially here.

My cognitive ability is okay (although my wife may disagree ) but I'd be open to auto re-balancing or change to a multi asset earlier if I, my wife or my doctor thought I was starting to decline for any reason.

Thanks again for the information shared.

 

[Sarenco]

Your proposed portfolio is way over-complicated, with significant overlapping holdings.

Again, what’s the plan for your lump sum? If you are keeping that on deposit, there’s no need to replicate a cash holding in your ARF.

You really just need to use two funds to achieve your desired asset allocation - one global equity index fund and one fixed-income fund.

And you need to take account of ALL your assets, rather than focusing on one account in isolation.

 

[Gordon Gekko]

I agree. It’s overcomplicated nonsense. I have equities, cash, and property. That’s all I’ll never need, just the mix may change over time.

 

[Steven Barrett]

Far too much overthinking going on. 3 different global equity funds plus the small amount in prisma 2.

Equities and bonds. If you want you can reduce the bond fund and add cash. You can direct the life company to deduct withdrawals from the cash fund.

Thanks Steven. Makes sense. The Active fixed income fund though is 95% Eurozone Government fixed interest with no corporate bond exposure which probably reduces the risk on the fund at the expense of returns.

Euro bonds will reduce the cost to the fund. Bonds held in other currencies will require hedging, which have to be paid for.

 

[Deauville]

Your proposed portfolio is way over-complicated, with significant overlapping holdings.

Again, what’s the plan for your lump sum? If you are keeping that on deposit, there’s no need to replicate a cash holding in your ARF.

You really just need to use two funds to achieve your desired asset allocation - one global equity index fund and one fixed-income fund.

And you need to take account of ALL your assets, rather than focusing on one account in isolation.

Thanks for that.

I’d be interested in your opinion on sequence of return risk with regard to ARF. Some publications describe it as a serious potential risk. What do you think ?
I don’t fancy distributing 4 / 5% of growth units when down in price.
That’s why I’m looking at a limited bucket strategy.
I’ve been thinking of the loss of potential earnings on that portion of ARF portfolio as a premium cost for a mitigating insurance policy. In the same way we pay a premium to hedge.
Thoughts ?

Plans being formed for TFLS. Including investing in individual stocks.
I have been long term stock investing for some years. I have a CG loss from a rental property some years ago (good riddance) which I can use against current and future capital gains in the equity markets.
I don’t hold ETF’s or other investments subject to exit tax.
I’m happy with allocating TFLS across instruments.

Again, thanks for taking the time to respond. Appreciated.

 

[Sarenco]

Sequence of returns risk is very real but it applies across all your accounts - not just your ARF.

You can’t completely remove sequence risk - you can only mitigate against its worst impacts by holding an allocation to lower risk, diversifying assets.

But that needs to be balanced with your need for real (after-inflation) portfolio growth.

Bucketing strategies are just a form of mental accounting. If it provides you with a psychological crutch that’s fine but you’re not meaningfully mitigating against sequence risk.

Bear in mind that the effective requirement to draw 4/5% from the ARF is not a requirement to actually spend the money - you are really just transferring money from a tax-advantaged account to a taxable account.

Finally, be careful not to allow the tax tail wag the investment dog. Capital losses brought forward are certainly a valuable but it shouldn’t be the sole factor driving the composition of your portfolio.

 

[Kev1964]

Again, what’s the plan for your lump sum? If you are keeping that on deposit, there’s no need to replicate a cash holding in your ARF.

This comment has prompted me to articulate a thought I’ve had a few times. If your ARF funds are significantly down and you don’t want to crystallise the losses, do people (aged 61+) ever just stop withdrawing a pension income while waiting for fund values to recover and just accept the tax cost of deemed distribution (4 or 5%)?

 

[Deauville]

Sequence of returns risk is very real but it applies across all your accounts - not just your ARF.

You can’t completely remove sequence risk - you can only mitigate against its worst impacts by holding an allocation to lower risk, diversifying assets.

But that needs to be balanced with your need for real (after-inflation) portfolio growth.

Bucketing strategies are just a form of mental accounting. If it provides you with a psychological crutch that’s fine but you’re not meaningfully mitigating against sequence risk.

Bear in mind that the effective requirement to draw 4/5% from the ARF is not a requirement to actually spend the money - you are really just transferring money from a tax-advantaged account to a taxable account.

Finally, be careful not to allow the tax tail wag the investment dog. Capital losses brought forward are certainly a valuable but it shouldn’t be the sole factor driving the composition of your portfolio.

That makes sense and I’m pretty happy I’ve been incorporating those observations so far.

‘Sequence of returns risk is very real but it applies across all your accounts - not just your ARF.’

I don’t have accounts outside of the proposed ARF that would be subject to deemed distribution and
I don’t expect to have to realise a loss in my other investments for the foreseeable future.

Nursing home costs in the hopefully far distant future is the only case that I can envisage. That in itself would involve many variables and is for another day.

Your opinion on a bucket approach ties in with the attached paper.

Many thanks for sharing your knowledge and experience.

 

[Gordon Gekko]

This comment has prompted me to articulate a thought I’ve had a few times. If your ARF funds are significantly down and you don’t want to crystallise the losses, do people (aged 61+) ever just stop withdrawing a pension income while waiting for fund values to recover and just accept the tax cost of deemed distribution (4 or 5%)?

Hard to see why someone would do that.

Let’s say my ARF is worth 100.

I’d rather end up with 2 in my back pocket and 96 in the ARF by taking the distribution rather than ending up with 98 in the ARF by suffering the deemed distribution.

 

[Deauville]

This comment has prompted me to articulate a thought I’ve had a few times. If your ARF funds are significantly down and you don’t want to crystallise the losses, do people (aged 61+) ever just stop withdrawing a pension income while waiting for fund values to recover and just accept the tax cost of deemed distribution (4 or 5%)?

I often wondered about that too.

I suppose that’s related to the holding of some low risk assets including money market funds.
You may not be making the same realised loss when taking the distribution from a fund not as significantly hit if at all.
Perhaps then investing that distribution outside the ARF into the assets that are significantly down ?

It’s one of the reasons I’d prefer to have flexibility with different asset funds rather than a multi asset fund.