moneymakeover
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Say individual with 12 years to retirement, in today's environment (low bond yields)
What is most/least risky of the main asset classes
What is most/least risky of the main asset classes
Pension risk bonds Vs equity Vs cash Vs property fund
- Thread starter moneymakeover
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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.
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.
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).
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).
moneymakeover
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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?
And while property /rent might be undervalued in this country can we say same for USA and UK?
Gordon Gekko
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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.
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.
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.
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.
Are you saying that global equities have never lost value over a 12 year period?
That’s obviously not the case.
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.
Steven Barrett
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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
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Gordon Gekko
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Median
Gordon Gekko
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Nice selective quote there Sarenco!
What I actually said was “with valuations at their current levels” or words to that effect.
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.
Gordon Gekko
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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.
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
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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.
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.
Gordon Gekko
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You’re doing your usual. Come on Sarenco...you’re better than that.
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
Gordon Gekko
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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
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.