Exactly - as I suggested earlier but it was effectively dismissed as irrelevant or off topic. And if they have a state pension then that's even more hedging against possible high/all equity ARF volatility. But if all real life buffers against such volatility are dismissed as irrelevant/off topic then it certainly does become easier to assert that a high/all equity ARF is a bad idea...
Should retirees be 100% invested in equities?
- Thread starter Marc
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jasdpace@gmail.
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I agree that the Marc was too hard on you yesterday but this posts seems like payback. You are both financial professionals with strong convictions so it's a pity that the debate / sharing of these opinions is as handbaggy as it is. I know these things happen online but still.
Nonetheless, I find the debate very interesting overall. Can I just clarify one thing please (and apologies if you already addressed this in an earlier post and I missed it). What I'm trying to understand is what is the purpose of your posts? Is it to inform people that this approach works for you? Is it to inform readers that this approach works for you and that readers may want to follow this approach? Or is there another reason? I'm genuinely curious and currently not clear. [For context, I'm not sure I agree with everything Marc says but I've a much better idea of the purpose of his posts.]
Well, I was trying to keep the thread on topic - “Should retirees be 100% invested in equities”.
If a retiree has a large lump sum on deposit then they are obviously not 100% invested in equities.
A State pension is not really an investment and it doesn’t diversify an equity portfolio.
Colm Fagan
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Hi @jasdpace@gmail.
“to demystify investing in ordinary shares in order to make the world of investing accessible to people without specialised financial knowledge”
I see AAM as another way to achieve that goal. It definitely gives me access to a wider audience, thanks to @Brendan Burgess’s great efforts.
You’re probably right that I was too hard on @Marc, but (in my opinion) he’s guilty of doing exactly what I’ve set my face against, I.e., making stock market investing seem very complicated. In fairness, he’s far from being alone in that.
Good question. The answer is on my website colmfagan.ie, where I explain that one of the website’s purposes is:
“to demystify investing in ordinary shares in order to make the world of investing accessible to people without specialised financial knowledge”
I see AAM as another way to achieve that goal. It definitely gives me access to a wider audience, thanks to @Brendan Burgess’s great efforts.
You’re probably right that I was too hard on @Marc, but (in my opinion) he’s guilty of doing exactly what I’ve set my face against, I.e., making stock market investing seem very complicated. In fairness, he’s far from being alone in that.
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Well it's a social insurance policy that provides a baseline level of income so is very relevant in the real world of many/most retirees if not in the rarefied world of hypothetical test cases.
Duke of Marmalade
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I first came into investible cash rather late in life (despite my blue blood). So I said to myself I'll buy my first share. The brokerage arm of the group I worked for recommended me such a share and sent me their flyer supporting their recommendation which I had no hesitation in seizing. Within two weeks it had tanked 7%. I complained to the broker and they gave me a rigmarole of how totally unanticipated events, dear boy, had caused the fall but to hang on in there. I dumped the share and put the money back on staff deposit. I think the share subsequently collapsed entirely.
It was then that I twigged that the flyer had reminded me a lot of my favourite literature - the Racing Post. Developing the analogy, studying company reports etc. would be similar to me directly reading the racing form. I would understand the information and figures but they wouldn't help me one jot in picking winners, I would also find both exercises extremely boring. As for analysts, a Google search for analysts' views on their target price for a particular share price would show an enormous range - this is not rocket science!
As I described in an earlier post, many years later in retirement, I dipped my toes back in, this time through a passive Global Equity Fund.
Which reminds me, I recently read a quite thought provoking post on LinkedIn which argues that with passive investing now overtaking active investing in the US, this poses some serious threats to the price discovery mechanism. Maybe one for another thread.
It was then that I twigged that the flyer had reminded me a lot of my favourite literature - the Racing Post. Developing the analogy, studying company reports etc. would be similar to me directly reading the racing form. I would understand the information and figures but they wouldn't help me one jot in picking winners, I would also find both exercises extremely boring. As for analysts, a Google search for analysts' views on their target price for a particular share price would show an enormous range - this is not rocket science!
As I described in an earlier post, many years later in retirement, I dipped my toes back in, this time through a passive Global Equity Fund.
Which reminds me, I recently read a quite thought provoking post on LinkedIn which argues that with passive investing now overtaking active investing in the US, this poses some serious threats to the price discovery mechanism. Maybe one for another thread.
Colm Fagan
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Hi @jasdpace@gmail.
I probably should also have mentioned that my intervention in this discussion was partly as a favour to @Brendan Burgess He wanted to generate a good discussion, knows that I have strong views on the issue, and hinted that I might want to make a contribution.
I probably should also have mentioned that my intervention in this discussion was partly as a favour to @Brendan Burgess He wanted to generate a good discussion, knows that I have strong views on the issue, and hinted that I might want to make a contribution.
Sure, I’m not trying to downplay the importance of the State pension to most retirees.
But it doesn’t go to the question “should retirees be invested 100% in equities?”.
Maybe a better way of asking the question is what asset allocation gives a retiree the best possible chance that their portfolio will survive a given level of drawdown over a given timeframe?
While I’m grateful for the backstop, I don’t want to prematurely exhaust my portfolio if it means I have to exist exclusively on the State pension.
And therefore I won’t be invested 100% in equities on retirement.
From what I’ve read, the answer to that question is an equity glidepath. Diversify for the early years of retirement and basically DCA back into equities over a 10 year period to ensure the portfolio has sufficient growth potential for the latter years.
Yeah, I’m a bit sceptical about the whole concept of a so-called “bond tent” TBH.
If you think about it, you end up with a more aggressive portfolio for a shorter period of time so you lose an element of “time diversification”, which is important with any volatile investment.
Also, there’s really no reason to expect a portfolio that glides from 30/70 to 90/10 to outperform a portfolio with a fixed 60/40 portfolio, on average.
It would certainly help reduce sequence of return risk but that’s not the full story.
jasdpace@gmail.
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Thanks for the replies, @Colm Fagan
Firstly, quelle surprise, it has never even crossed Brendan's mind to ask me to make a contribution!
Does Brendan put you on the payroll on slow news days or something?
Just to finish regarding the purpose piece. Given your mission statement and your posts, is it fair to say that you take the time to share your personal ARF journey to inform others in the hope that this information will be genuinely useful to them?
And fair play to you for acknowledging any excesses in your comments about Marc. This is a critical discussion (or should be!) for very many so it would be great if the debate stays on the rails. Fair play to Brendan also for encouraging the AAM community to examine this issue.
I'd love to get stuck into this debate myself and I will try to set out my stall at some stage but I just don't know when I'll get the chance. As you know, it takes time to compose measured posts - especially so, in my case, as I'd need to refresh my thinking quite a bit before I write!
Now there's a question! Is that link available? For sure you could see how it would warrant its own thread but at the same time - for example - when I do get around to setting out my stall, the sort of second-tier points I'd be making (for debate purposes) is my belief that your regular ARFer is simply not equipped to stock pick and that diversification is the only free lunch, etc. and that the way to access your chosen equity allocation is via an appropriate passive index. I'd also be arguing that even if the regular ARFer could stock pick sufficient stocks sufficiently well, it's hard and expensive to then implement. monitor, etc. and that such difficulties just increase with age, etc., etc.
But, but.......if the merits of purchasing an index is less clear-cut because of the threats you describe, then people should be made aware of this also. FWIW, I read an article myself somewhere a while back - the gist of which was that these indexing threats were much ado about nothing?!
Firstly, quelle surprise, it has never even crossed Brendan's mind to ask me to make a contribution!
Does Brendan put you on the payroll on slow news days or something?Just to finish regarding the purpose piece. Given your mission statement and your posts, is it fair to say that you take the time to share your personal ARF journey to inform others in the hope that this information will be genuinely useful to them?
And fair play to you for acknowledging any excesses in your comments about Marc. This is a critical discussion (or should be!) for very many so it would be great if the debate stays on the rails. Fair play to Brendan also for encouraging the AAM community to examine this issue.
I'd love to get stuck into this debate myself and I will try to set out my stall at some stage but I just don't know when I'll get the chance. As you know, it takes time to compose measured posts - especially so, in my case, as I'd need to refresh my thinking quite a bit before I write!
Now there's a question! Is that link available? For sure you could see how it would warrant its own thread but at the same time - for example - when I do get around to setting out my stall, the sort of second-tier points I'd be making (for debate purposes) is my belief that your regular ARFer is simply not equipped to stock pick and that diversification is the only free lunch, etc. and that the way to access your chosen equity allocation is via an appropriate passive index. I'd also be arguing that even if the regular ARFer could stock pick sufficient stocks sufficiently well, it's hard and expensive to then implement. monitor, etc. and that such difficulties just increase with age, etc., etc.
But, but.......if the merits of purchasing an index is less clear-cut because of the threats you describe, then people should be made aware of this also. FWIW, I read an article myself somewhere a while back - the gist of which was that these indexing threats were much ado about nothing?!
Duke of Marmalade
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@jasdpace@gmail.
Passive vs Active by Carles
Brian Woods commented with a thought piece.
The vast majority of US passive investment is in the market weighted S&P 500.
But there is also an equal weighted version.
By definition, passive investment makes no attempt to justify a price, it assumes someone has already done that.
Now if over half of investment was passively into the equal weighted version that would obviously be a massive distortion and active managers would have a field day picking up the the top 25% by market weight.
So there is the possibly complacent assumption that because, in fact, passive is market weighted it is a mere neutral hanger on..
Carles rejects that, though I don't think his arguments about the actual price distortions are convincing - he claims it is leading to overpricing of the market leaders.
There is the related issue that the S&P 500 is becoming massively concentrated .
The top 10 S&P stocks are worth more than the Japan, UK, China, France and Canada stockmarkets put together.
Passive vs Active by Carles
Brian Woods commented with a thought piece.
The vast majority of US passive investment is in the market weighted S&P 500.
But there is also an equal weighted version.
By definition, passive investment makes no attempt to justify a price, it assumes someone has already done that.
Now if over half of investment was passively into the equal weighted version that would obviously be a massive distortion and active managers would have a field day picking up the the top 25% by market weight.
So there is the possibly complacent assumption that because, in fact, passive is market weighted it is a mere neutral hanger on..
Carles rejects that, though I don't think his arguments about the actual price distortions are convincing - he claims it is leading to overpricing of the market leaders.
There is the related issue that the S&P 500 is becoming massively concentrated .
The top 10 S&P stocks are worth more than the Japan, UK, China, France and Canada stockmarkets put together.
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Gordon Gekko
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I think we’ve jumped the shark when we’re consoling retirees who’ve lost all their money that “at least there’s free food available in soup kitchens and the like for the destitute”.
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Gordon Gekko
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I think some of the comments directed at Sarenco are very harsh. Sarenco’s point is reasonable. There are conceivable scenarios in which (and people for whom) a 100% equity allocation in their ARF would be catastrophic. And there are people for whom the loss of their ARF and reliance on the State Pension just wouldn’t be manageable. It’s why I always look at my overall asset allocation. For example, having all of my ARF in equities is grand if I’ve a load in a money market fund or some May 2027 Irish bonds that’ll redeem tax-free. But if I was retiring on 31 December with just my ARF and the State Pension, and given the divergence of views of where we’re at in the cycle, I wouldn’t dream of having 100% of my ARF in equities. I could genuinely envisage scenarios where I’d be in big trouble. It’s also reasonable to assume that younger people, who are exercising more and boozing less, will challenge many of these current actuarial tables.
I think I’ve been fair to both sides, but you can’t argue a decumulation-only point when the original point was about staying 100% in equities for both accumulation+decumulation phases.
In Sarenco’s hypothetical unluckiest retiree in Ireland situation, if he wants to argue Colm’s point then he should compare a lifestyled €1m pot against an equities-only pot of, say, €1.2m-ish. To his point then, the retiree would be well advised to limit his annual spending to a conservative 40k/3.35% per annum (as he would’ve been on track for before the dotcom boom) rather than splurge to 4%/48k pa.
Gordon Gekko
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Some poor former ARF-holder queuing-up for soup at the Salvation Army wearing a t-shirt saying “Wow, The S&P Was Indeed Overvalued”.
SquirrelChaser
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The shark was jumped several pages back when people started talking like your pension fund running out at age 84 meant you would either starve to freeze to death before your 85th birthday.
We're extremely fortunate to live in a country where there's a relatively decent income floor for retirees, fuel allowance, medical card, home care, and yes- meals on wheels- etc etc. My neighbour (mid 90s) has benefited from all of those for many years as have many thousands of others.
But you wouldn't realise that from half the posts on the thread.
Dr Strangelove
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So I did the same exercise for the MSCI all worldon a euro basis starting on 1 January 2000 when €1m would have purchased $990k.
Hypothetical retiree would have run out of money a lot sooner, by 2015 in fact. A bad sequence of early returns combined with an appreciation of the euro by 2003 meant that the fund in dollar terms would have more than halved in just three years. After that recovery would have been very different.
Hypothetical retiree would have run out of money a lot sooner, by 2015 in fact. A bad sequence of early returns combined with an appreciation of the euro by 2003 meant that the fund in dollar terms would have more than halved in just three years. After that recovery would have been very different.
| Year-end | Annual return | Fee | Net return | €/$ | Euro HICP | Drawdown (€) adjusted for inflation | Drawdown ($) | Fund ($) |
1999 | | 74.2 | | 990,000 | ||||
2000 | -12.9 | 1.0 | -13.9 | 0.92 | 77.4 | 40,000 | 36,800 | 815,392 |
2001 | -16.5 | 1.0 | -17.5 | 0.9 | 79.2 | 40,941 | 36,847 | 635,688 |
2002 | -19.5 | 1.0 | -20.5 | 0.95 | 81.0 | 41,882 | 39,788 | 465,394 |
2003 | 29.8 | 1.0 | 28.8 | 1.13 | 82.3 | 42,569 | 48,104 | 551,091 |
2004 | 14.6 | 1.0 | 13.6 | 1.24 | 84.0 | 43,443 | 53,870 | 572,280 |
2005 | 9.2 | 1.0 | 8.2 | 1.24 | 86.2 | 44,550 | 55,241 | 564,195 |
2006 | 20.3 | 1.0 | 19.3 | 1.26 | 88.2 | 45,604 | 57,461 | 615,341 |
2007 | 10.8 | 1.0 | 9.8 | 1.37 | 90.3 | 46,690 | 63,965 | 611,679 |
2008 | -40.7 | 1.0 | -41.7 | 1.47 | 93.0 | 48,086 | 70,686 | 285,861 |
2009 | 30.8 | 1.0 | 29.8 | 1.39 | 92.3 | 47,703 | 66,308 | 304,712 |
2010 | 12.3 | 1.0 | 11.3 | 1.33 | 94.6 | 48,923 | 65,068 | 274,198 |
2011 | -5.0 | 1.0 | -6.0 | 1.39 | 100.0 | 51,700 | 71,862 | 185,829 |
2012 | 16.5 | 1.0 | 15.5 | 1.28 | 102.7 | 53,080 | 67,942 | 146,765 |
2013 | 27.4 | 1.0 | 26.4 | 1.33 | 103.7 | 53,623 | 71,318 | 114,148 |
2014 | 5.5 | 1.0 | 4.5 | 1.33 | 104.3 | 53,918 | 71,710 | 47,574 |
2015 | -0.3 | 1.0 | -1.3 | 1.11 | 105.0 | 54,285 | 60,256 | -13,310 |
2016 | 8.2 | 1.0 | 7.2 | 1.11 | 104.3 | 53,897 | 59,826 | -74,087 |
2017 | 23.1 | 1.0 | 22.1 | 1.13 | 105.8 | 54,678 | 61,786 | -152,223 |
2018 | -8.2 | 1.0 | -9.2 | 1.18 | 108.4 | 56,022 | 66,106 | -204,324 |
2019 | 28.4 | 1.0 | 27.4 | 1.12 | 109.8 | 56,756 | 63,567 | -323,876 |
2020 | 16.5 | 1.0 | 15.5 | 1.14 | 109.6 | 56,678 | 64,613 | -438,690 |
My joint life (ages 59 and 55) non escalating 10 year guarantee annuity at 4.86% bought this time last year with €420,000 looks good value against this model. I have accepted I’ll not inflation proof the income but it won’t run out either.. and it takes up none of my time.
Dr Strangelove
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I mean it's not an investment but it's a material share of almost everyone's retirement income. If you're rich enough for the state pension not to matter then you're rich enough to stay all in equities. But I digress.
This is where I think you most succinctly set out your objectives.
I don't want to put words in your mouth but via the above and other posts you seem to have the following objectives:
- An absolutely constant income level in retirement
- Provision of a survivor's benefit
- Apart from that, indifference toward a bequest
- Very low tolerance for ever running out of money
What am I missing?