Critique of Potential ARF Asset allocation

[Sarenco]

@Deauville

Where to start?

Firstly, Zurich does not hold any meaningful amount of fixed-income securities that are denominated in anything other than euro in any of their funds. Prisma 2 is no exception.

There is a very good reason for that - you don’t want to take currency risk in what is supposed to be the “safe” element of your portfolio.

It is true that dividend growth stocks can sometimes outperform the broader equity market in a cyclical downturn (at the cost of lower long term return) but they are no substitute for bonds. It is far more efficient to construct a portfolio using a broad equity index tracker and adding a fixed-income fund to achieve your desired risk/return profile.

There is no “free lunch” in investing - if dividend growth stocks represented a better risk/return profile than the broader equity market, then investors would simply bid up the price of those stocks until that ceased to be the case.

There is zero evidence that active managers, on average, outperform their benchmarks during drawdowns. Zero.

 

[Deauville]

Surely having a Cash position plus an Equity position gives one options to mitigate sequence of returns risk? That's a basic 2 bucket approach and seems more than simple mental accounting. Draw down from equities in a bullish period and draw down from cash in a bear period. The % allocation varies depending on one's risk appetite and you can also include a Bond element if desired.

That’s correct. Avoiding realising a loss in growth assets.

A disadvantage would be the loss of potential return on the value of the bucket of cash if it had been otherwise invested in growth assets.
I see it as a premium to be paid on an option to reduce that sequence of return risk.

 

[Flybytheseat]

Interesting discussion and lots of great points made and advice given. Food for thought. Thanks to all the contributors.

 

[Sarenco]

That’s correct.

Sorry but it’s not correct - it’s nonsense.

 

[Deauville]

@Deauville

Where to start?

Firstly, Zurich does not hold any meaningful amount of fixed-income securities that are denominated in anything other than euro in any of their funds. Prisma 2 is no exception.

There is a very good reason for that - you don’t want to take currency risk in what is supposed to be the “safe” element of your portfolio.

It is true that dividend growth stocks can sometimes outperform the broader equity market in a cyclical downturn (at the cost of lower long term return) but they are no substitute for bonds. It is far more efficient to construct a portfolio using a broad equity index tracker and adding a fixed-income fund to achieve your desired risk/return profile.

There is no “free lunch” in investing - if dividend growth stocks represented a better risk/return profile than the broader equity market, then investors would simply bid up the price of those stocks until that ceased to be the case.

There is zero evidence that active managers, on average, outperform their benchmarks during drawdowns. Zero.

That’s very informative.
Thanks a million.

Just one thing puzzles me.
Why are Zurich holding North American bonds ?
Just had a look at the fact sheet and no indication of euro hedging ( or not).

I’m not winding you up.
I’m genuinely hungry for information.

This feedback is very much appreciated.

 

[Redzer]

No, “bucketing” is mental accounting pure and simple.

If you draw money from a portfolio that has fallen in value, it doesn’t matter a jot whether you are drawing from the cash element of the portfolio or the equity element of the portfolio - you are still drawing money from a portfolio that has fallen in value!

You can never eliminate sequence of return risk - the best you can do is hold sufficient levels of diversifying, low risk assets to hopefully cushion the inevitable market falls.

Agreed about still drawing money from a portfolio that has fallen in value but doesn't a bucket strategy implicitly involve holding "sufficient levels of diversifying, low risk assets"?

And a bucket strategy also allows for the inevitable market gains?

 

[Sarenco]

Why are Zurich holding North American bonds ?

They’re not - the geographical breakdown only relates to the equity holdings (I appreciate that’s not very clear from the factsheet).

 

[Sarenco]

Agreed about still drawing money from a portfolio that has fallen in value but doesn't a bucket strategy implicitly involve holding "sufficient levels of diversifying, low risk assets"?

Well, it might but the earlier discussion referred to “3x Years Distribution Bucket”.

That’s not going to move the dial very far in a drawdown if the “27x Years Distribution Bucket” is comprised of equities!

 

[Redzer]

I suppose we're all talking about the OP's Asset Allocation and I personally just call Asset Allocation a bucket strategy when explaining it to non-AAM people as they can visualise it easier . However the generic term 'bucket strategy' can mean more here when one gets into drawdown rules and rebalancing as well as Sequence of Returns risks.

 

[Deauville]

They’re not - the geographical breakdown only relates to the equity holdings (I appreciate that’s not very clear from the factsheet).

If that’s the case, it’s potentially very misleading. Especially as the equity holding is only less than about 10%. of the fund.

Thanks for that heads up. Appreciated.

I’ll leave you in peace now.

 

[Flybytheseat]

So I'm sensing we're getting a consensus output from this thread namely hold 75%-80% of the ARF fund in a low charge passively manged global equity index tracking fund and most of the balance in Euro government bonds with maybe a small alocation in cash to cover 1 years deemed disposal as a cheap hedge against sequence of withdrawl risks. Most useful.

 

[Sarenco]

Well, I would frame it slightly differently.

In my opinion, it is prudent to hold the equivalent of approximately 10 years of anticipated expenses in low-risk assets on retirement.

That might represent anywhere between 0-100% of an ARF, depending on the size of the portfolio and what other assets are held outside the ARF.

 

[Flybytheseat]

Sounds very conservative to me when bear stock markets will generally recover within 3 years.

 

[Sarenco]

Well, look what happened during the first decade of this century when we had two major stock market crashes.

If you started drawing a fixed €40k, adjusted for inflation, from a €1m stock portfolio starting in 2000 you would have gone bust years ago.

But you’re right, it is fairly conservative.

We only have one investment lifetime and we really can’t afford to have an unlucky run in retirement.

 

[Flybytheseat]

Thanks - well I'll think I'll go with a bit more risk and hopefully convert the bucket strategy into ticking all the boxes on my bucket list.

 

[theObserver]

Well, look what happened during the first decade of this century when we had two major stock market crashes.

If you started drawing a fixed €40k, adjusted for inflation, from a €1m stock portfolio starting in 2000 you would have gone bust years ago.

But you’re right, it is fairly conservative.

We only have one investment lifetime and we really can’t afford to have an unlucky run in retirement.

But if you were 65 in 2000, you likely would have died years ago too given the average life expectancy is 82 (which is the highest in the EU as of 2022). The first ten years of retirement is generally the most expensive and afterwards people tend to settle down and watch the world change around them. My parents are pushing 80 and the state pension meets their needs with enough left for savings each week.

I think the OP will be just fine whatever they do.

 

[Gordon Gekko]

If you started drawing a fixed €40k, adjusted for inflation, from a €1m stock portfolio starting in 2000 you would have gone bust years ago

But nobody would do that in the real world. And you have to stop obsessing about the 20 year one observation period that looks bad for equities!

 

[cremeegg]

If you started drawing a fixed €40k, adjusted for inflation, from a €1m stock portfolio starting in 2000 you would have gone bust years ago.

Actually you wouldn't.

If you invested €1m on 1/1/2000 and drew €40k on 31/12/2000 and so on adjusting for USD inflation and MSCI returns you would have €179k left today.

Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis

Historical data from the era of the modern U.S. consumer price index (CPI)

www.minneapolisfed.org

Backtesting for the European index investor

Backtest by Curvo is the best backtesting simulator for European index investors. Discover the historical performance of your portfolio and compare it to others.

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Despite the name this is the MSCI world index

Admittedly a small tweak to the initial conditions would cause huge changes.

 

[Fortune]

So I'm sensing we're getting a consensus output from this thread namely hold 75%-80% of the ARF fund in a low charge passively manged global equity index tracking fund and most of the balance in Euro government bonds with maybe a small alocation in cash to cover 1 years deemed disposal as a cheap hedge against sequence of withdrawl risks. Most useful.

I'd argue for converting the annual amount of DB pensions and state pension to a capital value and considering them to be fixed interest in the portfolio