Stocks for the long run?

Duke of Marmalade said:
Absolutely! Why have I been so stupid :mad:
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No need to be like that, but your case that there is a bottom that yields can go is not strong enough for me and I feel you are trying to predict future behavior, I think when it comes to wealth preservation people would happily lower there risk and you'd be surprised how much they would he willing to lock in at a loss .

I feel sarenco makes a stronger argument for bonds in a portfolio .
 
Duke of Marmalade said:
I have accepted the diversification aspect. You obviously rate that very highly.
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I do indeed. After all, diversification is the only free lunch in investing.

But leaving that aside, the Euro Government Bond fund that I hold currently has a positive yield-to-maturity of 0.25%. On the other hand, cash deposits with the life company where I have my pension currently carry a negative interest rate of -0.6% (which is very much in line with the short end of the current yield curve).

So, if I was basing the decision on yield alone, I would still favour the bond fund over cash.
 
Sarenco said:
I do indeed. After all, diversification is the only free lunch in investing.

But leaving that aside, the Euro Government Bond fund that I hold currently has a positive yield-to-maturity of 0.25%. On the other hand, cash deposits with the life company where I have my pension currently carry a negative interest rate of -0.6% (which is very much in line with the short end of the current yield curve).

So, if I was basing the decision on yield alone, I would still favour the bond fund over cash.
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sarenco as an aside I see that I have really got up the trolls' noses, that gives me a buzz, but I won't be engaging with them.

You obviously firmly believe in your argument and I think we are reaching "agree to disagree" territory.

For avoidance of doubt I agree that cash in an institutional wrapper is an awful investment. If someone is trapped in such a wrapper they face a real quandary as to how to get the portfolio risk rating aligned with their needs (unless of course they are risk rating 7). You cite a 0.85% differential between long bonds and cash, maybe if I was in that position I would after all risk the long bonds.
For those not forced into a wrapper (because of Revenue rules) the Gordon Gecko approach makes perfect sense to me - collective diversified 100% equity portfolio for your risk appetite and state savings/retail deposits for your risk dampener.
 
Exactly. You’re arguing the merits of a dog-do sandwich versus a kitty-litter stew; why not just have neither?

Take your equity risk through the pension and hold cash personally; the whole thing is an advert for looking at one’s overall asset allocation rather than each bucket individually.

I agree that government bonds have no place in a private investor’s portfolio; he or she is almost guaranteed to lose money in real terms.
 
Duke of Marmalade said:
sarenco as an aside I see that I have really got up the trolls' noses, that gives me a buzz, but I won't be engaging with them.

You obviously firmly believe in your argument and I think we are reaching "agree to disagree" territory.

For avoidance of doubt I agree that cash in an institutional wrapper is an awful investment. If someone is trapped in such a wrapper they face a real quandary as to how to get the portfolio risk rating aligned with their needs (unless of course they are risk rating 7). You cite a 0.85% differential between long bonds and cash, maybe if I was in that position I would after all risk the long bonds.
For those not forced into a wrapper (because of Revenue rules) the Gordon Gecko approach makes perfect sense to me - collective diversified 100% equity portfolio for your risk appetite and state savings/retail deposits for your risk dampener.
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I don't know who is trolling , there's no need for it.
Using myself as an example I keep cash on deposit earning nothing and state savings maxed out. I have as much as I want to risk in equities .
Sarenco has made a decent argument for me to move some of this cash to negative yield long term bonds, the reason I think of it as an option is if stocks crash it's likely there will be a move to bonds and I am likely to see a gain if yields move further negative. This seems a decent hedge to me and I can also look at the option of currency hedging if I wanted to diversify from a largely euro holding. Holding cash doesn't offer these benefits as far as I can see.
 
Gordon Gekko said:
Take your equity risk through the pension and hold cash personally; the whole thing is an advert for looking at one’s overall asset allocation rather than each bucket individually.
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GG I think the problem is that there can be compelling tax reasons for having all your pension funding in an institutional wrapper. Having all of that fund in equities might not be within the risk appetite of the person - to mitigate the risks they seem trapped into awful cash deposits and/or negative yielding bonds.
 
Duke of Marmalade said:
You cite a 0.85% differential between long bonds and cash, maybe if I was in that position I would after all risk the long bonds.
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No, 0.25% is the yield-to-maturity of the FTSE EMU Government Bond Index (EGBI), which captures Euro government bonds of all durations at market weight, as at 31 March 2020.
Duke of Marmalade said:
collective diversified 100% equity portfolio for your risk appetite and state savings/retail deposits for your risk dampener.
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I've been arguing that very split for a long time around these parts.

But here's the problem - not everybody will have sufficient after-tax savings to fully achieve their desired allocation across all accounts (pension and after-tax). I know I don't.
 
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Sarenco said:
But here's the problem - not everybody will have sufficient after-tax savings to fully achieve their desired allocation across all accounts (pension and after-tax). I know I don't.
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That's such an important point, Sarenco - for solutions to genuinely apply in the real world, they need to be actionable.
 
Sarenco said:
I've been arguing that very split for a long time around these parts.

But here's the problem - not everybody will have sufficient after-tax savings to fully achieve their desired allocation across all accounts (pension and after-tax). I know I don't.
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I think I read somewhere that 40% of ARF moneys are in cash. I am not going to question the wisdom of that as an investment strategy. But you have highlighted the institutional drag in keeping cash in the ARF wrapper.
I see best retail deposit buys of 0.8% and of course State Savings of up to 1% tax free. Combine this with wholesale rates of -0.6% and AMC and we might have a whopping drag of -3% p.a.
ARF withdrawals will incur tax at the marginal rate but if this is only foregoing tax deferral then we have the opposite to gross roll up, we have gross roll down - so if it is mere tax deferral you should immediately withdraw your cash holdings in the ARF.
It will usually be a lot more complicated than that as leaving it in the ARF may involve deferral to a point when there is less or no marginal taxation on withdrawal.
I know this is a tad off topic but I would ask moderators not to open a new thread on the point - that usually kills off discussion.
 
I agree with the Duke's request to the moderators and have a certain sympathy for what the Duke is trying to say in the above post.

Problem is that it seems a little extreme and thus not really actionable – and, as I specifically mentioned earlier, solutions really do need to be actionable to be truly useful. There’s that sense of a hammer being used to crack a nut or the medicine being more brutal than the illness.

Applying a permanent drastic solution (selling-up) does seems like an over-action to what many believe are market conditions that will not endure forever.

Continuing the medical analogy from earlier – there really is little merit in having a very successful operation in which the patient dies.
 
If I were relying on a €1M ARF invested 40% in cash I would be getting a gross income of €40K p.a. It would certainly stick in the craw to think that €12k p.a. (3% of €400k) was going down the plughole of institutional drag. But of course encashing €400k would trigger a tax charge approaching €200k. So indeed one would seem to be stuck in the headlights.

What a turnaround. I recall that one of the minor selling points of unit linked policies was that the life company could use its clout to earn wholesale rates on its cash which would be superior to the rip off retail rates. What has caused this turnaround is that the populace are armed with their mattresses whilst that is not a practically available instrument to the big boys.

And zero seems to be very much a cusp point in the retail space. Deposit Best Buys of this forum show rates ranging from .05% to .8%. It seems that rates of .1% can survive alongside rates twice as high but no-one dare go negative - they would lose their retail deposit base overnight, and retail deposits are still desirable in their own right.
 
Duke of Marmalade said:
The essence of Solvency II is to be market based. But with the low interest rates its initial intended introduction in 2012 was postponed until the UFR compromise was agreed. The cynics say that without the compromise the German annuity market and possibly even the UK annuity market would be technically insolvent.
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What does this mean,what was the UFR compromise in english please Im interested? My take away is that the annuity markets were insolvent because they never expected the extremely low interest rates following the financial crash so they could not generate the income needed to pay out the annuities. But my question is how did the "UFR compromise" change things that stopped them going insolvent?
 
joe sod said:
But my question is how did the "UFR compromise" change things that stopped them going insolvent?
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Ahhh! We are in serious danger of going down the deepest rabbit hole known to woman:eek:
"Insolvency" is a very ambiguous term in insurance circles. In legal terms it means you haven't got the money to meet your day to day obligations. For a well capitalised annuity company, even if current v. low interest rates persisted, that day might be 50 years off.
By "insolvent" in this context I mean not having sufficient assets to cover the present discounted value of future liabilities as stipulated by regulation. If the regulators had stuck to the original spirit of Solvency II and insisted on long term market interest rates for the discount rate it would have put companies with very long term liabilities in a very precarious situation from a regulatory viewpoint.
So they decided (compromised) that long term market rates were not reliable and came up with their own estimate of the appropriate ultimate interest rates at a higher level. At a stroke the companies' regulatory liabilities were "written down" whilst their assets remained unchanged. Ergo they looked much healthier, and that eventually got Solvency II over the line 4 years behind schedule.
Hope that helped but possibly I missed the point of your query.
 
Yes that makes it much clearer, Im just interested to see how these regulatory bodies themselves are dealing with negative interest rates, and as you have explained they are not extending them far out into the future. Of course their primary concern was to get these insurance companies over the line but by saying that the market is wrong about long term interest rates and increasing substantially their own figure. Even though they did this for a technical fix it shows that negative interest rates are not normal. But the guys that set the rate in the bond markets dont care what the interest rate will be in 20 years time on these bonds anyway as they are only in it themselves for the very short term
 
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MW-IG726_holdin_20200518135524_ZQ.jpg
 
Interesting new research suggests that 20th century outperformance of equities does not generalise.

Taking a broader historical perspective, sometimes equities outperformed over 30-year periods, sometimes bonds outperformed and sometimes they performed about the same.

Regimes of asset class outperformance come and go; sometimes there is an equity risk premium, sometimes there isn’t.

 
With all the changes in the financial markets in the last 20-50 years, I am not sure that extending the data back 80 or 90 years from 1900 to the beginning of the 19th century has much to offer to this argument
 
The timing of this thread couldn't have been better in pinpointing the turn in assets and the ending of the 30 year bond market run. Inflation returned rapidly after covid , interest rates went up and all those ultra low interest bond funds got trounced.
Then the posts about " why has my pension fund fallen 15% ,it was invested in low risk assets?"
Well because it was full of those ultra low interest rate bonds that were deemed by regulators to be "low risk"
I suppose it demonstrates the principle of "return to mean" , the Japanese stock market is also demonstrating that now aswell as it is top performing market for first time since late 80s
 
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