Should retirees be 100% invested in equities?

I have made it clear many times that I am recounting my own long-term (14-year) experience, which has included good times and bad times, and that I am not advising others to do the same. I'm not an adviser and have never pretended to be one.
What we need is more honest recounting of individuals' long-term investment experiences, not fancy graphs.
The main point I've been making on this thread is that advisers tend to be over-cautious, for the reasons stated. Long-term investors should be warned off investing significant amounts in bonds (which includes annuities) because they are certain destroyers of value if inflation increases in future. It would be good if people focused more on that rather than ad hominem attacks.
 

I disagree with this point. The fancy graphs are essentially a visual recounting of the long term investment experiences of millions of individuals in the relevant investment type over various time periods at various times. As such they're infinitely more relevant that a textual recounting of a single individual's investment experience over a single time period.
 
Colm Fagan said:
Let's look at some sample (deterministic) numbers to check the reasonableness of this assertion and also to explore the infamous bogeyman of "sequence of return risk".
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Meanwhile back in the real world…

If somebody retired in 2000 and drew €40k per annum (adjusted for inflation) from an ARF with an opening balance of €1m invested 100% in a global equity index fund, the portfolio would have been exhausted years ago, even though the annualised return of global equities over the last 24 years has been broadly in line with their long-term average.

Why?

A lousy sequence of returns.

You may well have strong views on the subject but that doesn’t mean you’re right.
 
If they'd kept it in cash, they'd be running out around now.
 
Fortune said:
If they'd kept it in cash, they'd be running out around now.
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And in my experience lots of people did that too.

It’s madness that otherwise sensible people are drawn to the two wildest extremes 100% cash or 100% equities when all that is ordinarily required is simple prudent diversification with an equity bias.
 
30 seconds of googling tells me that the person who retired with €1 million in a fund based on the MSCI World Index would have had only around €320k in 1995. Another 90 seconds with excel tells me that represents a 25% annualised return over a 5 year period. Another 90 seconds with Excel tells me the long term (1980 to 2024) annualised return on that index is about 10%.

So the reason they exhausted their fund is not because of sequence of returns, but because they took their fund value at face value and spent accordingly while wilfully ignoring the world changing around them. If they'd spent their money as if the last 5 years of growth had been 10% they would have considered €500k of their fund to be real money, and spent €20k or so a year, and they would have been totally fine.

Nobody should think "I have X at retirement and I will therefore spend 5% of X (and not under any circumstances a penny less) for 24 years", because acting as if the world now is the same as it was 5 or 10 years ago is simply moronic. 10 years ago there was still talk of bulldozing housing estates because there'd never be anyone to occupy them.

Holding up a dum-dum straw man who's wilfully ignorant of and/or utterly unable or unwilling to adapt their behaviour to a changing environment for two decades hardly represents an accurate representation of reality.

The fund you have at retirement is the product of decades of contributions and returns and should be viewed in that context. It's a 1 day snapshot of an evolution which frequently lasts over half a century. Looking only at the value of a fund at the moment of your retirement is like constantly buying the same sized clothing regardless of a contracting or expanding waistline: it's obviously stupid, everyone around you can see you're being stupid, and deep down you also know you're being stupid.
 
Sarenco said:
Meanwhile back in the real world…
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I should have made the obvious point that my ARF was accumulated in the real world. The money didn't appear by magic in December 2010. It was built up gradually over the previous 15 years, as I'm sure is the case for the vast majority of people buying ARF's.
Of course it's possible to find dates through history when markets hit absolute peaks and to claim that, if an equity investment started then, it would have spelt curtains. Therefore, I should have qualified my comments to reflect the real world situation, so I'll revise my claim to the following:
If someone is saving regularly over a long period and is also drawing down those savings gradually over a long period, the best strategy is to invest 100% in real assets all the way through.
Is that sufficient for "back in the real world"?
Unfortunately, they're not. The long-term experience of millions of individuals is that they are charged entry and exit fees which aren't reflected in fund performance statistics. They may also be advised to change providers from time to time or to change the mix of their investments.
To the best of my knowledge, there isn't a data base anywhere of the historic real world experience of groups of investors, what returns (net of charges and fees) they earned over various time periods, the averages and upper and lower quartiles. There should be.
 
There you go, it is not rocket science. I am not arguing that financial advisors have no role to play.
You yourself provide a cornucopia of information on this site. I don't agree with it all and I think it tends to be a tad overengineered but I do read most of it so please keep up the good work.
 
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Sarenco said:
Sure.

But if they had gone with a conventional 60/40 portfolio they would have been fine.
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80/20 to 60/40 seem to provide reasonable returns and allows for enough variety to suit a person's attitude to risk.

To anyone arguing that this is extremely vague and unscientific, I will look into it further as I get closer to retirement.
 
Dr Strangelove said:
I’m sincerely trying to replicate this as it’s an important example.
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I don't think it is, for the reasons set out by @SquirrelChaser. As I recall, world markets hit an absolute peak on 1 January 2000 so it's not surprising that if someone appeared with a sack-full of money at that date and invested it in the stock market, they'd have suffered a sorry fate.
If I understand @SquirrelChaser correctly, they would have built that fund up gradually over the previous years. Markets went mad in the few years up to 2000, so anyone who started drawdown on 1 January 2000 would have realised that the amount emerging was far more than they were expecting only a short time previously, and they would probably have taken a cautious approach.
I realise that I'm now in danger of replaying my smoothing approach which was a major feature of my AE proposal. I also use a similar approach for my own fund (which is how I came up with it for AE). In reality, I think we all have an inbuilt smoothing formula in our heads for our investments!
 
@SquirrelChaser, @Colm Fagan

If you are so confident in your ability to anticipate market drawdowns, wouldn’t you have gone to cash at the start of 2000?

Why persevere with an equity portfolio when you are absolutely positive that a crash was imminent?

I gave a real world example to demonstrate why sequence of returns risk is very real and hugely important in drawdown.

This new argument that, ah well, market values aren’t the real values is just silly
 
SquirrelChaser said:
So the reason they exhausted their fund is not because of sequence of returns, but because they took their fund value at face value and spent accordingly while wilfully ignoring the world changing around them.
Click to expand...

Another real world consideration that hadn’t been thrown into this debate yet is that the other constant grind that an ARF must battle against is the annuity forgone at outset.

You had the opportunity to lock in a guaranteed income for life the day you bought your ARF and it is against that income payment that the success or otherwise of an ARF must be judged. EVERY SINGLE YEAR

It’s all well and good saying you would just reduce your income during a market downturn but if you’d bought an annuity you wouldn’t need to.

So now we also have to fight against mortality cross subsidies and mortality drag.

Are You Preparing Your Consumers for Mortality Drag?

In this blog we explore the concept of mortality drag and how you can better prepare your clients.
blog.ev.uk


Told you it was more like rocket science
 
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Reactions: jim
A correction doesn't require a drawdown.

If your expected return is 10% and you've been getting 20% for the last 10 years, then after a few years of getting a return of 5% you'll be back at an annualised 10% over the long term.

That's just maths.
 
Marc said:
Told you it was more like rocket science
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I'm pretty sure that accurately landing a rover on Mars is in fact far easier than accurately predicting what the stock market will do.

One has been done a number of times while all attempts to do the other have failed despite vastly larger human and capital resources being committed to the endeavour by multiple actors.
 
Marc said:
Told you it was more like rocket science
Click to expand...

I think the mortality drag slide points towards deferral of annuitization until say 75. It looks like you are missing out on about 10% of mortality drag. And the good thing about annuities is there is no risk of becoming uninsurable by deferring, in fact the opposite might happen. (impaired annuities)
 
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SquirrelChaser said:
A correction doesn't require a drawdown.
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Of course it does!

A market correction is a drawdown from a previous market high of at least 10% but less than 20%.

But the important point is that nobody can accurately forecast future market returns and therefore it’s impossible to accurately discount market values to arrive at the “true” values.
 
Lots to reply to!
First of all, @Sarenco and @conor_mc have said that if @SquirrelChaser and I are so confident about knowing when markets are about to tank, then why not go into cash, etc.?
Of course, no-one knows in what direction the market is going to move at any time. We're always worried that it might fall, but sometimes we're more worried than at other times. It doesn't mean you exit the market. You're just that bit more cautious.
As to the comment about Irish investors' lack of caution in relation to property investment, so why should we expect anything better for shares, I suppose that's where the adviser adds value, by reminding retail investors that markets can fall, and may fall precipitously. At times, the risk is higher, at times it's lower.
There's been lots of talk about 60:40 and 80:20 portfolios. I have never seen a good explanation for why either is reasonable.
@Marc says that a 100% equity portfolio is as mad as a 100% cash portfolio. As everyone know, my portfolio has been 100% equities practically from when I started saving for my own retirement in 1996 (with a few small exceptions years ago). I don't think I'm mad. Yes, I suffered badly in 2007/08 but I also experienced the recovery. I also suffered in early 2020 with the Covid scare but I came through it. I hope the long-term results (which I know should include the period pre-2010 but I don't have them to hand) support this belief. @Marc says it's all luck. How long would the experience have to be to convince him that it's not luck?
I repeat my conviction that a 100% growth ("equity") strategy is best for a committed long-term investor, who'll be investing for a long number of years and drawing down for a long number of years. No-one has shown why I'm wrong.
I'm afraid that @Marc's graphs leave me cold. I think part of the reason is that I don't have a clue of the underlying assumptions. For example, is there an assumption of an ERP? If so, how much? Does he allow for auto-correlation? Auto-correlation is insignificant at short durations but it's very important at long durations. Pension investing is about as long as it gets so some autocorrelation should be assumed, even implicitly, especially when modelling the more extreme possibilities, which is where he focuses a lot of his attention. What expenses are assumed in his various graphs (i.e., the expenses the retail investor will have to bear, not just investment management fees)? My regular analyses of my portfolio allow for all expenses. GIGO - garbage in, garbage out.
Finally, I think there's a slight misunderstanding between @Sarenco and @SquirrelChaser in relation to the word "drawdown". They are using two very different meanings for the word.
 
@Colm Fagan

I’ve given you a concrete example of a 2000 retiree and why your 100% in equities forever approach would have been catastrophic.

I could have picked other real world examples.

Your response? Mutter something about extreme valuations and the need to be cautious.

What does that mean exactly? Cut expenses?

Sorry but my retiree has a lifestyle to maintain - he’s not in a position to cut his expenses in any meaningful way.

We’ve had this debate before and your ongoing denial of the existence of sequence of returns risk is just bizarre to me at this stage.

For such an obviously intelligent man, it really seems to be a blind spot.
 
So that readers can understand the extent of the bubble at 1 Jan 2000, the sample start date chosen by @Sarenco, the index value at that date (I'm looking at the UK FTSE) was 400.84, or more than double its 196.73 level exactly four years previously. All I'm saying is that someone retiring on 1/1/2000 would have been well advised to consider part of the gain at that point to be windfall in nature. If that's a "mutter", so be it.
And as for the need to be cautious, I'm not saying anything about having to cut expenses or alter their lifestyle, I'm just saying that they would have been well advised to treat some of the doubling of their money in four years as unsustainable. That would have been sensible advice. The index was back down to 252.87 by 1/1/2003. I don't think that's hard to grasp.
I'm still waiting for an explanation as to why a 60:40 or an 80:20 split is better than a 100:0 split from cradle to grave, during both the accumulation and decumulation stage
As to @Marc's comment about the risk of a negative return near the start and @Sarenco's comment that I haven't dealt with sequence of return risk, I started my contribution to this thread (#21) by showing that someone in drawdown would still be better off being 100% in equities if they experienced a 15% loss in year 1 and just got a "normal" ERP thereafter - which effectively means that they would have got less than the "normal" ERP over the entire period since retirement since they would never have recovered the15% lost in year 1. So much for my supposed refusal to address the bogeyman of sequence of return risk.
As to my question to @Marc on what ERP and autocorrelations are assumed in his projections, the answer is to ask EV!
 
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