I have a pension with Irish Life and am 7 years to retirement.
I noted today that I am now in 2 funds
Empower Growth Fund (Risk Rating 4)
Empower Stability Fund ( Risk Rating 2)
I am being "sheperded" into low risk funds the closer I get to retirement.
I will take an ARF self administered option when i retire so the above makes no sense.
Have been looking at putting 100% into their Indexed World Equity Fund (Risk Rating 6).
And problems with this approach that I may be missing?
So to sum up
Target date funds or life-styling is an invention of the pension trustees to reduce THEIR fiduciary risk by automatically reducing volatility in your defined contribution pension account in the years before your nominal retirement date.
Conceptually if your intention is to purchase an annuity in retirement this makes sense as you have hedged the interest rate risk (bond prices move inversely to interest rates) so falling pension value but rising annuity rates is fine.
But it’s a blunt instrument in the real world where investors also have the option of remaining invested via an ARF.
Many people don’t retire at a nominal age of say 65 anymore. Some earlier, some retire in phases. What if you have multiple accounts from previous employments etc?
Volatility isn’t risk and when saving regularly into a pension over long periods of time you really want to be maintaining a high equity allocation for as long as possible for the highest expected returns. Which for many if not most people requires a coach to manage the perfectly natural emotional desire to bail out if and when markets get choppy.
In numerous studies, the process of planning for retirement has been shown to benefit from ongoing advice but we know most people don’t seek or receive competent financial planning advice. Less than 30% nearing retirement have used an adviser, according to new research from behavioural finance experts, Oxford Risk -
https://lnkd.in/eQV9bwnX
So there is frequently a gap between the optimum asset allocation for a given investor and their actual asset allocation. Either too much or too little in equities.
In this post
https://www.linkedin.com/posts/marc...8-5odP?utm_source=share&utm_medium=member_ios
I have estimated how large that gap might be from an analysis of the realised returns of various investment options provided by a large Irish employee benefits consultant compared to a range of bond/equity portfolios. The return given up can be significant and for many, if not most people easily covers the additional cost of the advice.
This thread then morphed into a discussion about the strategy to pursue at and post retirement.
The focus of much of the subsequent debate has been on the mathematical phenomenon which has only been published relatively recently by the London school of Economics known as sequence of return risks.
This isn’t something you choose to believe in. It’s a mathematical fact. You might be lucky and due to an accident of your birth, your retirement might coincide with a spectacular bull market, and you may never be aware of it. But that doesn’t mean that it doesn’t exist.
And remember a 50% decline requires a 100% return just to get back to par.
So those at the point of drawing down from their pensions should consider Pascal’s Wager to inform their decision making.
You don’t know how the future is going to play out so you would be well advised to play it safe in the early years.
Yes, markets have an upwards bias, they go up 70% of the time and over long periods of time you should expect to be rewarded with a positive premium over inflation of c4% to 6% annually.
BUT there is no free lunch and those juicy returns come with a price which is that equities are also extremely volatile, more volatile than you would predict since returns are not normally distributed. Markets have fat tails meaning that bad periods are much worse and more frequent than you might want them to be to support a regular monthly income in retirement.
Looking at data on the daily index movements of the Dow Jones Industrial Average from 1916 to 2003, orthodox theory predicts there should be 58 days when the Dow moved more than 3.4% over that period; in fact there were 1,001. Theory suggests just six days of index moves beyond 4.5%; in fact there were 366. Index swings of more than 7% should occur once every 300,000 years; in fact, the 20th century saw 48 such days.
Consider the stock market collapse during the Russian bond default of August 1998. On 4 August the Dow fell 3.5% and, three weeks later, as the news worsened, stock fell again, by 4.4%, and then again, on the 31 August, by 6.8%. Theory would estimate the odds of
that final 31 August collapse at one in 20 million – an event which, were you to trade daily for almost 100,000 years, you would not expect to see even once. The odds of getting three such declines in the same month were about one in 500 billion.
A year earlier, the Dow had fallen 7.7% in one day (probability: one in 50 billion). In July, 2002, the index recorded three steep falls within seven trading days (probability: one in four trillion). And on 19 October 1987, the worst day of trading in at least a century, the index fell 29.2%. The probability of that happening, according to orthodox financial theory, was less than one in 10 to the 50, odds so small they have no meaning, and are beyond the scale of nature.
You could search for powers of ten from the smallest sub-atomic particle to the breadth of the observable universe and still never meet such a number.
https://www.linkedin.com/posts/marc...6-S3Wc?utm_source=share&utm_medium=member_ios