Equity to bond/cash ratio
Discussion
Hi All
I’m interested in the approach people take to their split of equity to bonds/cash (also a question). I understand the traditional model is a 60:40 portfolio but this just feels quite conservative to me. I’m about 2 years away from stopping paid work and my approach is to have 5 years of spending in cash and everything else in equities, and I can’t see any need to change that once I’m not working. My logic is if (or when) my equities fall then live off the cash versus when they rise, sell down accordingly and replenish/increase the cash. The cash balance is a bit less than 20% by value.
The related question is then bonds v cash. My view is that cash won't lose your capital and (currently) will pay interest that will roughly keep up with inflation. Whereas bonds seem a bit less certain and can lose capital value, so I'm not sure I see the benefit of holding them.
Interested in views on all of the above and what am I missing? Or is it just my personal view on risk?
Thanks in advance.
I’m interested in the approach people take to their split of equity to bonds/cash (also a question). I understand the traditional model is a 60:40 portfolio but this just feels quite conservative to me. I’m about 2 years away from stopping paid work and my approach is to have 5 years of spending in cash and everything else in equities, and I can’t see any need to change that once I’m not working. My logic is if (or when) my equities fall then live off the cash versus when they rise, sell down accordingly and replenish/increase the cash. The cash balance is a bit less than 20% by value.
The related question is then bonds v cash. My view is that cash won't lose your capital and (currently) will pay interest that will roughly keep up with inflation. Whereas bonds seem a bit less certain and can lose capital value, so I'm not sure I see the benefit of holding them.
Interested in views on all of the above and what am I missing? Or is it just my personal view on risk?
Thanks in advance.
A few thoughts...
If equities fall and you have good cash reserves, rather than spend the cash, buy more equities...
If you're working you can take more risk because you can replace losses.
On bonds, I had some because that's what you were supposed to do - theory being that when equities went down bonds went up. Except then they both went down together; they were the only red figures in my list and I find them very dull and don't understand how they work so I swapped them for equities.
Yes, you can match inflation with cash but you won't get any better off.
But note there are equities and equities. You can buy shares in a wizzy tech company and make a million (or lose it!) or you can buy into a defensive fund, and all points in-between. As you say, it's all down to how you feel about risk.
If equities fall and you have good cash reserves, rather than spend the cash, buy more equities...
If you're working you can take more risk because you can replace losses.
On bonds, I had some because that's what you were supposed to do - theory being that when equities went down bonds went up. Except then they both went down together; they were the only red figures in my list and I find them very dull and don't understand how they work so I swapped them for equities.
Yes, you can match inflation with cash but you won't get any better off.
But note there are equities and equities. You can buy shares in a wizzy tech company and make a million (or lose it!) or you can buy into a defensive fund, and all points in-between. As you say, it's all down to how you feel about risk.
Keep in mind some of the reasoning behind asset allocation isn't simply the maths and history it's about what people can actually stomach.
If you've spent you life building a £1M retirement pot seeing it drop to £600K is something a lot of people simple can't handle regardless of "it'll bounce back".
Seeing it drop to £800K is unpleasant but might be acceptable.
If you've spent you life building a £1M retirement pot seeing it drop to £600K is something a lot of people simple can't handle regardless of "it'll bounce back".
Seeing it drop to £800K is unpleasant but might be acceptable.
Up until I transferred my DB pension to private using CETV agreement it was obviously 100% equities.
I did this at 60 but didn’t take the first dd until 2 years later.
Equity / Bond split is currently 76% / 24% and will roughly remain the same for the foreseeable.
I / we have other pots including cash , IIB’s , ISA’s and UT’s but intend to use the pot above for our yearly needs .
Rachel’s grab of 40% on anything unused when we both die has I believe changed the psychological thoughts of many FA’s in that using other pots first in dd needs may now not necessarily be their default thoughts.
I had always intended to use the pot first preferring other pots as either emergency , cash usage ( cars , holidays etc ) or just “ nice to haves “.
I did this at 60 but didn’t take the first dd until 2 years later.
Equity / Bond split is currently 76% / 24% and will roughly remain the same for the foreseeable.
I / we have other pots including cash , IIB’s , ISA’s and UT’s but intend to use the pot above for our yearly needs .
Rachel’s grab of 40% on anything unused when we both die has I believe changed the psychological thoughts of many FA’s in that using other pots first in dd needs may now not necessarily be their default thoughts.
I had always intended to use the pot first preferring other pots as either emergency , cash usage ( cars , holidays etc ) or just “ nice to haves “.
I used to be near 100% equity and when the stock market peaked at the end of 2021 decided to shift to 70:30. Regrettably my "30" caught the bond slump of 2022, dropping around 20%. Not a happy bunny.
I dumped some bonds, switching them back to equities, and moved forward at about 80:20
My recent review shows that despite the slump, total return on the bonds is positive to inflation with a running yield of 5.3%. Not too disastrous after all and the part switched back to equities has done a whole lot better than that. As, of course, has all of the "80".
I hold much less cash than bonds and it's included within the "20" of that 80:20 split.
FWIW my overall situation is currently at an all time high with some of the allocations benefitting from recent uncertainties about USA. Very roughly 50% North America, 25% Europe, 20% UK, 3% Emerging Markets and with a slant towards larger companies. It's all though funds, mostly active, with a couple of low cost passives such as L&G Global 100. Total annual running costs a little under 1%.
I dumped some bonds, switching them back to equities, and moved forward at about 80:20
My recent review shows that despite the slump, total return on the bonds is positive to inflation with a running yield of 5.3%. Not too disastrous after all and the part switched back to equities has done a whole lot better than that. As, of course, has all of the "80".
I hold much less cash than bonds and it's included within the "20" of that 80:20 split.
FWIW my overall situation is currently at an all time high with some of the allocations benefitting from recent uncertainties about USA. Very roughly 50% North America, 25% Europe, 20% UK, 3% Emerging Markets and with a slant towards larger companies. It's all though funds, mostly active, with a couple of low cost passives such as L&G Global 100. Total annual running costs a little under 1%.
trickywoo said:
Simpo Two said:
A few thoughts...
If equities fall and you have good cash reserves, rather than spend the cash, buy more equities....
Next time we have a fall could you pm me when it s at the bottom and only going up?If equities fall and you have good cash reserves, rather than spend the cash, buy more equities....
All equities here (beyond my emergency cash which is about 5% of current overall portfolio).
Expect I’ll keep a couple of years cash nearer to the time of retiring.
https://youtu.be/3ASQi1IUHws?si=OYDFRXtsI3vFpgac
Quite useful.
Expect I’ll keep a couple of years cash nearer to the time of retiring.
https://youtu.be/3ASQi1IUHws?si=OYDFRXtsI3vFpgac
Quite useful.
Simpo Two said:
A few thoughts...
If equities fall and you have good cash reserves, rather than spend the cash, buy more equities...
If you're working you can take more risk because you can replace losses.
On bonds, I had some because that's what you were supposed to do - theory being that when equities went down bonds went up. Except then they both went down together; they were the only red figures in my list and I find them very dull and don't understand how they work so I swapped them for equities.
Yes, you can match inflation with cash but you won't get any better off.
But note there are equities and equities. You can buy shares in a wizzy tech company and make a million (or lose it!) or you can buy into a defensive fund, and all points in-between. As you say, it's all down to how you feel about risk.
Thanks. This is my retirement strategy so will keep investing in equities for the next year or so while working but will keep the cash as the buffer - I’ll need something to spend so don’t want to dip into equities investments when they are down.If equities fall and you have good cash reserves, rather than spend the cash, buy more equities...
If you're working you can take more risk because you can replace losses.
On bonds, I had some because that's what you were supposed to do - theory being that when equities went down bonds went up. Except then they both went down together; they were the only red figures in my list and I find them very dull and don't understand how they work so I swapped them for equities.
Yes, you can match inflation with cash but you won't get any better off.
But note there are equities and equities. You can buy shares in a wizzy tech company and make a million (or lose it!) or you can buy into a defensive fund, and all points in-between. As you say, it's all down to how you feel about risk.
And to be clear, when I say equities I do mean tracker funds etc spread across SIPP, ISA and GIA.
butchstewie said:
Keep in mind some of the reasoning behind asset allocation isn't simply the maths and history it's about what people can actually stomach.
If you've spent you life building a £1M retirement pot seeing it drop to £600K is something a lot of people simple can't handle regardless of "it'll bounce back".
Seeing it drop to £800K is unpleasant but might be acceptable.
Fair point and I think probably points to my question on 60:40 - feels too conservative to me which correlates to me being comfortable with the equity piece of my pot going down as well as up.If you've spent you life building a £1M retirement pot seeing it drop to £600K is something a lot of people simple can't handle regardless of "it'll bounce back".
Seeing it drop to £800K is unpleasant but might be acceptable.
Panamax said:
I used to be near 100% equity and when the stock market peaked at the end of 2021 decided to shift to 70:30. Regrettably my "30" caught the bond slump of 2022, dropping around 20%. Not a happy bunny.
I dumped some bonds, switching them back to equities, and moved forward at about 80:20
My recent review shows that despite the slump, total return on the bonds is positive to inflation with a running yield of 5.3%. Not too disastrous after all and the part switched back to equities has done a whole lot better than that. As, of course, has all of the "80".
I hold much less cash than bonds and it's included within the "20" of that 80:20 split.
FWIW my overall situation is currently at an all time high with some of the allocations benefitting from recent uncertainties about USA. Very roughly 50% North America, 25% Europe, 20% UK, 3% Emerging Markets and with a slant towards larger companies. It's all though funds, mostly active, with a couple of low cost passives such as L&G Global 100. Total annual running costs a little under 1%.
This is what puts me off bonds, same point as Simpo Two makes - I like cash as a way to de-risk rather than bonds.I dumped some bonds, switching them back to equities, and moved forward at about 80:20
My recent review shows that despite the slump, total return on the bonds is positive to inflation with a running yield of 5.3%. Not too disastrous after all and the part switched back to equities has done a whole lot better than that. As, of course, has all of the "80".
I hold much less cash than bonds and it's included within the "20" of that 80:20 split.
FWIW my overall situation is currently at an all time high with some of the allocations benefitting from recent uncertainties about USA. Very roughly 50% North America, 25% Europe, 20% UK, 3% Emerging Markets and with a slant towards larger companies. It's all though funds, mostly active, with a couple of low cost passives such as L&G Global 100. Total annual running costs a little under 1%.
okgo said:
All equities here (beyond my emergency cash which is about 5% of current overall portfolio).
Expect I ll keep a couple of years cash nearer to the time of retiring.
https://youtu.be/3ASQi1IUHws?si=OYDFRXtsI3vFpgac
Quite useful.
Not massively different except I think 2 years isn’t enough (being near retirement ) but will still be c80% equities I expect, similar to alscar.Expect I ll keep a couple of years cash nearer to the time of retiring.
https://youtu.be/3ASQi1IUHws?si=OYDFRXtsI3vFpgac
Quite useful.
I like James Shack, his videos are good although I do struggle to get to the end of them!
Panamax said:
I used to be near 100% equity and when the stock market peaked at the end of 2021 decided to shift to 70:30. Regrettably my "30" caught the bond slump of 2022, dropping around 20%. Not a happy bunny.
I opened a stocks & shares ISA with £5k a few years ago, and have tracked its overall growth over the years which has been positive. However the bond part of the ISA has never done well. I assumed it was my particular set of bonds that were underperforming and I wasn't aware there had been an overall and slump of 2022 but clearly I was part of it..Edited by The Gauge on Friday 13th February 19:09
What happened is easy to explain. Inflation appeared to have been "dead" for 15 years and it was an era of near zero interest rates, with some countries even having NEGATIVE interest rates, if you can believe it. Yes, people had to pay banks to hold their money.
Then inflation suddenly reappeared, interest rates rose significantly and bonds dropped 20% because to get the "yield" to fit reality the capital/unit value had to drop considerably. Central banks were tripping over themselves saying "it's just a short-term blip and will all be over in a few months". That was four years ago and tells you everything you need to know about how little central banks actually know about anything.
Then inflation suddenly reappeared, interest rates rose significantly and bonds dropped 20% because to get the "yield" to fit reality the capital/unit value had to drop considerably. Central banks were tripping over themselves saying "it's just a short-term blip and will all be over in a few months". That was four years ago and tells you everything you need to know about how little central banks actually know about anything.
on 60:40 being too conservative, I think its also worth remembering that stocks have been on a one way bet since 2010. Sure there's been some pull backs but overall it's been an incredibly profitable ride for the passive investor.
A longer timespan shows entire decades have been lost to stocks (2000-2009 for the US stock market being the most recent? or the 1970's?)
Thats why 40% bond allocation is a thing.
I am not saying every pensioner should be 60:40 (far from it), but as a species humans are very prone to recency bias (stocks going up, returns from Bonds being poor).
On bonds vs cash: over the long term Bonds have outperformed cash, hence why they are recommended over cash in a portfolio. Bonds can (not always) increase in value during equity downturns - unlike cash.
A longer timespan shows entire decades have been lost to stocks (2000-2009 for the US stock market being the most recent? or the 1970's?)
Thats why 40% bond allocation is a thing.
I am not saying every pensioner should be 60:40 (far from it), but as a species humans are very prone to recency bias (stocks going up, returns from Bonds being poor).
On bonds vs cash: over the long term Bonds have outperformed cash, hence why they are recommended over cash in a portfolio. Bonds can (not always) increase in value during equity downturns - unlike cash.
^^ this
Keep a spreadsheet with your net worth on it over time.
Run some models on how it would look if it was down 10% then 20% then 30% then 40% then 50%
Ask yourself how you'd feel if that happened and there was no more money coming in to "buy the dip" and all you could do was cross your fingers and hope it would come back in 5 years like the US did after the .com crash right? (there's a hint on what sort of event to be thinking about).
Be really honest with yourself about if you have the stones to sit back and wait that kind of thing out or if you're basically just crossing your fingers it doesn't happen to you.
Keep a spreadsheet with your net worth on it over time.
Run some models on how it would look if it was down 10% then 20% then 30% then 40% then 50%
Ask yourself how you'd feel if that happened and there was no more money coming in to "buy the dip" and all you could do was cross your fingers and hope it would come back in 5 years like the US did after the .com crash right? (there's a hint on what sort of event to be thinking about).
Be really honest with yourself about if you have the stones to sit back and wait that kind of thing out or if you're basically just crossing your fingers it doesn't happen to you.
The main risk to bonds is inflation. As long as inflation doesn't rise again (it seems to be on the right path for now = down) then locking in a bit of (real) yield might benefit some investors. The other thing to think about is the current landscape of both bonds and equities. Equities are historically expensive which means the chance of a long and sustained double-digit collapse in share prices is more likely than when equities are cheap or fairly valued.. whereas bonds are already fairly valued so if equities do fall, bonds could once again be the 'flight to safety'. There's lots of chatter about long-bond yields potentially rising.. which I think is valid - particularly in gilts if for example there is a leadership challenge in Number 10 - so a mix of short to intermediate gov bonds looks the safest hedge if unsure.
Cash and bonds can operate together. It's not a binary choice.
Bonds have historically outperformed cash and are often (but certainly not always) negatively correlated to stocks.
The main difficulty with just holding cash and stocks is when do you sell stocks to replenish your 5 year cash buffer? What do you do if stocks have crashed? Wait a year or two and hope they recover?
There's a reason why the 60/40 (or whatever split you need) portfolio has endured - it's takes the difficult decision making away by using a systematic approach. You simply replenish your cash buffer (1-2 years?) by selling whatever you need to bring your portfolio back to 60/40. This can lead to selling stocks that have grown and buying bonds that have fallen or vice versa.
Bonds have historically outperformed cash and are often (but certainly not always) negatively correlated to stocks.
The main difficulty with just holding cash and stocks is when do you sell stocks to replenish your 5 year cash buffer? What do you do if stocks have crashed? Wait a year or two and hope they recover?
There's a reason why the 60/40 (or whatever split you need) portfolio has endured - it's takes the difficult decision making away by using a systematic approach. You simply replenish your cash buffer (1-2 years?) by selling whatever you need to bring your portfolio back to 60/40. This can lead to selling stocks that have grown and buying bonds that have fallen or vice versa.
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