But Colm what in concrete terms am I supposed to do with this “advice”?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.
Colm, I never intended my comments to sound as smug as that, hope it wasn’t taken that way. I think one thing which I tried to acknowledge is that you guys are sophisticated retail investors - having read your blog, you’re actually a rare enough creature in these here parts given you’re a stock-picking retiree rather than passive index pensioner. But I do think your hypothetical example of a year-1 15% drop is a bit of a softball compared to an actual real life scenario of a 1968 retiree who saw three recessions on the trot only separated by anaemia growth in real terms. And since both your lived experience and our 1968 example are in the rear-view mirror, we need to acknowledge that the main danger with sequence of returns risk is actually in the action/inaction taken. Do you keep the same withdrawal rate and weather the storm? Great if it’s a 2022 blip, not so great if it’s a decade of 1970’s stagflation.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.?
I haven 't a clue what that means. I hope you don't give that explanation to a client if they ask you what assumptions you made about equity v bond returns and if there's a greater chance of a fall after a rise.For global equities I am using the historic characteristics of the MSCI ACWI since inception.
I've already answered that 100% equities would have delivered a better outcome than 80:20 or any other such distribution for someone saving for a long number of years and then drawing from their savings for a long number of years, even if they retired on 1 January 2000, because they would have enjoyed the benefit of the growth in the years leading up to 2000 (see #47 in this thread where I modified my original assertion).Sorry but your 100% equities forever approach is just plain wrong for pretty much all retirees.
I’ve already demonstrated why that is the case by way of a concrete, real world example and your inability to deal with this head on is very frustrating.
I'm not a financial adviser and have no aspirations to be one, but if I were advising someone in those circumstances, I would probably (as at 1 January 2000) have said something like "You've had an incredible few years. Market values have doubled in the last four years/ Some say that's unsustainable and that the market is frothy. I don't know, but to be on the safe side, it might be worth assuming that only say 3% of current market value can be taken as a sustainable income. If you must take 4% (to please the taxman), you should put some of it aside to cover the risk that values may fall back in the near future." I'm not sure I would go so far as to tell them to get out of the market. Of course, with the benefit of hindsight I would have advised that, but it's always easy to be wise after the event. What I've said above is probably as far as I would have gone at the time. Is that sufficient to answer your question of what "need to be cautious" means in terms of actionable moves?But Colm what in concrete terms am I supposed to do with this “advice”?
Reduce my exposure to equities? Not according to your 100% equities for life mantra.
Reduce my proposed expenditure? Apparently not.
So what does this “need to be cautious” look like in practical terms? What actionable moves are you suggesting?
I have already explained, with reducing patience, why that was NOT the case.I've already answered that 100% equities would have delivered a better outcome than 80:20 or any other such distribution for someone saving for a long number of years and then drawing from their savings for a long number of years, even if they retired on 1 January 2000, because they would have enjoyed the benefit of the growth in the years leading up to 2000 (see #47 in this thread where I modified my original assertion).
Ah, so you ARE suggesting I cut my expenditure.I don't know, but to be on the safe side, it might be worth assuming that only say 3% of current market value can be taken as a sustainable income.
So to sum upI 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?
And this advice would have been more valuable in 2000 when there was no imputed distribution, and the client could have used their lump sum to fund their lifestyle initially while leaving the ARF as untouched as possible@Sarenco I think you’re being deliberately obtuse. With reducing patience, I would have said to the client “That 1m fund you have was worth less than 0.5m just four years ago and you were planning your retirement on it being worth something like 700k now. There are people more knowledgeable than me who are saying that this dot-com boom is a bubble that’s about to burst so my advice to you is to plan your withdrawals from the fund on the assumption that it’s only worth the 700k on which you based your retirement plans. If my fears aren’t realised, that’s great and you can adjust your expenditure upwards”.
Given your disrespectful approach, I do not intend to engage further with you on this.
Hi @conor_mc. Thanks for your patience.But I do think your hypothetical example of a year-1 15% drop is a bit of a softball compared to an actual real life scenario of a 1968 retiree who saw three recessions on the trot only separated by anaemia growth in real terms. And since both your lived experience and our 1968 example are in the rear-view mirror, we need to acknowledge that the main danger with sequence of returns risk is actually in the action/inaction taken. Do you keep the same withdrawal rate and weather the storm? Great if it’s a 2022 blip, not so great if it’s a decade of 1970’s stagflation.
And I think that’s where others here feel you are being a little myopic about your personal experience. You only had blips over the past 14 years and your portfolio doesn’t seem to have ever really tanked, to the extent that you would have worried about running out of funds in retirement. You’ve not lived through that worst case scenario that actually happened, where a split portfolio or a glidepath in early retirement would have been the difference between succeeding or failing at the retirement game.
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.
..........it really seems to be a blind spot.
You can see how the discussion developed from that by following the thread. I hope that satisfies your curiosity!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".
Suppose someone starts with €2,000 in their ARF and withdraws €100 in year 1, increasing by 2% a year.
They have two investment options.
One is to invest in "bonds", earning a steady 4% a year (all figures are net of charges, etc.).
The other is to invest in "equities". The value falls by 15% in year 1 but thereafter increases by 8% a year. (For what it's worth, the worst annual fall for my ARF was slightly less than this; it happened in year 8). Suffering the fall in year 1 is the worst possible sequence of return risk.
The implied ERP of 4% a year is less than the average future ERP of 5.5% which a group of 1,756 economists expects (see footnote 1 of this paper). It's also about 8% a year less than my ARF delivered over the last 14 years, but as noted above I was lucky, and I would definitely not extrapolate that into the future; however, I would happily extrapolate an average expected equity outperformance of 4% a year into the future.
Under investment option 1, the money runs out at the start of year 27. There's just €50 left at the end of year 26. In contrast, under investment option 2, the fund value after 26 years is €2,100.
After 15 years (just beyond where I am now with my ARF, and I hope I still have a few years left in me), there is €1,327 of the initial €2,000 left in the ARF under investment option 1 versus €1,949 under option 2.
Perhaps.I think the point @Colm Fagan is making is that if in your hypothetical example the retiree ended up with €1m from a 100% equities portfolio, then they would have retired with a smaller pot if they’d lifestyled into a more conservative investment mix, therefore guaranteeing a cut to their planned expenditure anyway.
does that exception prove a rule?Perhaps.
But let’s assume that my hypothetical retiree (perhaps unwisely) remained 100% invested in a global equity index fund right up to the point of retirement at the start of 2000.
Let’s also assume, for simplicity, that the pension lump sum was used to pay off his mortgage and other debts and he has no other assets or sources of income.
So, what he wants to know is what asset allocation to adopt within his €1m ARF that will give him the best chance of maintaining a €40k a year lifestyle, adjusted for inflation, over a projected 30-year retirement.
He’s worked long and hard to get to this position and is not interested in cutting his expenditure over vague fears that the market might be “overvalued”.
We now know, with the benefit of hindsight, that maintaining a 100% allocation to a global equity index fund would have been disastrous.
We also now know, with the benefit of hindsight, that maintaining a traditional balanced 60/40 portfolio would have worked out just fine.
That’s the reality for a 2000 retiree.
That is the most ridiculous misstatement I ever heard in all my life, but it's fairly typical of the sort of BS that some people write about me, so I'm not surprised.That said - I can't help not following my own counsel! It's funny how the successful ARF bet gets rolled out incessantly but it's all gone quiet regarding the Tesla bet for some reason. I'm sure this will give rise to appeals to park "ad hominem" attacks and a "disrespectful approach". Calls to deny factual statements are merely attempts to gag.
And this is actually another aspect of your approach which compels me to address the wholly imprudent nature of what you are doing.I don't think I need to post any more on this thread. People know where I stand. Maybe the one aspect of my approach that hasn't come through sufficiently is that I only invest in shares/ companies that I know something about (or knew something about at the time I invested in them). That gives me a level of comfort that I probably wouldn't enjoy if I were "investing" completely in the dark, without knowing anything about the shares in my portfolio.
Your approach whilst it might have worked for you is imprudent and you are reckless to post on a public forum as it might encourage others to take the same approach and they might not be as lucky.
They will have no recourse, insurance or compensation.
+1. Also...And if that happened that is entirely up to them, with zero recourse to Colm.
You are wrong to suggest that Colm is "reckless" for posting, he is discussing his approach. What others may or may not do based on what they read or interpret, is no concern of his. I seriously value the quality of posting on this forum, including yours, but this post is appalling.
And if that happened that is entirely up to them, with zero recourse to Colm.
You are wrong to suggest that Colm is "reckless" for posting, he is discussing his approach. What others may or may not do based on what they read or interpret, is no concern of his. I seriously value the quality of posting on this forum, including yours, but this post is appalling.
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