Author Topic: Couple of questions about managing investment risk  (Read 4319 times)

mubington

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Couple of questions about managing investment risk
« on: December 28, 2017, 07:42:53 PM »
1. At present I’m managing my risk by varying cash to equity ratio. If I want to be risky I hold 80% equity and 20% cash. Or if I want to be safer I have 50/50. But I see vanguard life strategy or nutmeg have a fantastical blend of bonds and reits and all sorts.  Is restricting holdings to simply equity index and cash a valid way to achieve specific risk level? I have no idea what a bond is or how it hedges the market but is it gospel that I should just move to blended allocation anyway?

2. I have a big chunk of my net worth in an unsheltered world equity tracker fund. I’ve already used up my cgt allowance, trading and rebalancing. Is there any way to lower my risk/equity exposure on this chunk somehow without paying cgt?

Bonus: I’m late 30s targeting FI in 4 years. As my only assets other than cash is equities, I feel pressure to diversity.... but is a world tracker not already diversified. Presumably some of these companies in the tracker are invest,net companies that hold bonds or property?
« Last Edit: December 28, 2017, 07:58:42 PM by mubington »

skip207

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Re: Couple of questions about managing investment risk
« Reply #1 on: December 29, 2017, 01:56:22 AM »
Your attitude to risk is critical IMHO that close to FIRE. 
It needs some careful planning esp with many analyists suggesting the market is somewhat over valued.
I dont think a 20/80 split is that risky but many people close to fire go with VLS60 for the "safer" option.

It all depends how long you are willing to ride out a dip.  If you can ride out a 2-3 year dip and wait out the recovery I dont think it really is a big deal.  If you need those equities to bring you income every month in FIRE then you might need to re-think.

From what you post its sounds like the fomer but we would need to see hte numbers tbh.

dreams_and_discoveries

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Re: Couple of questions about managing investment risk
« Reply #2 on: December 29, 2017, 12:44:24 PM »
I'd say you need to add bonds into the mix, and reduce the reliance on cash, which is a depreciating asset nowadays.

If you've already earned 10k capital gains in stock this year, sounds like you are doing well. I'd have a look at what you are holding to get such large gains (are you crystallising gains from the brexit pound slide here?), and try and keep shares that are liable to large gains inside an ISA....speaking of ISA's -is your ISA full this year? Are you contributing a large amount each month to investments? I'd be tempted to just buy bonds on a monthly basis to reduce risk, if that's what you want.

And it sounds like you are doing a lot of trading, and varying your risk tolerance on a regular basis - around here we tend to be fond of the set a plan and execute type of investing - how often are you changing your asset allocation?

Playing with Fire UK

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Re: Couple of questions about managing investment risk
« Reply #3 on: January 03, 2018, 03:15:26 PM »
...how often are you changing your asset allocation?

Seconded. Or do you have different asset allocations for SIPP / ISA / taxable?

Nutmeg is pricey for what it is. Vanguard LS doesn't allow you to sell only the bonds after a crash in a single transaction (you'd need to sell some LS80 or lower and buy some LS100 to achieve the same thing).

You don't need REITs or gold or other all sorts (they aren't prohibited, but are low-urgency). If you are worried about investment risk, bonds are a good choice - you can buy them in a fund or ETF like your world tracker so they don't need to be complicated.

If you are contemplating 50/50 equity / cash and you have enough equity that you are maxing out your CGT allowance, you have WAAAAAAAAAAY too much cash.

cerat0n1a

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Re: Couple of questions about managing investment risk
« Reply #4 on: January 04, 2018, 02:29:05 AM »
I'd say you need to add bonds into the mix, and reduce the reliance on cash, which is a depreciating asset nowadays.

Don't disagree with any of the advice given on the thread, but not convinced there's much of a difference between cash and bonds in terms of getting returns below inflation at the moment - certainly not on UK government bonds anyway.

Playing with Fire UK

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Re: Couple of questions about managing investment risk
« Reply #5 on: January 04, 2018, 06:27:53 AM »
I like some bonds because historically they've done well when equities have tanked. It isn't a guarantee.

cerat0n1a

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Re: Couple of questions about managing investment risk
« Reply #6 on: January 04, 2018, 08:20:08 AM »
I like some bonds because historically they've done well when equities have tanked. It isn't a guarantee.

Yes, and I see that Monevator has upped the bond holding in the passive portfolio (well rebalancing has done it really.) Struggling to see that there's really much of a difference between lending to the UK government through a bonds ETF and getting less than 2% fixed interest or lending it to a bank with government backing at a bit under 2% fixed interest though. I suppose at least with the gilts I don't have to open new accounts every few months or keep track of whose offering good deals at the moment.

dreams_and_discoveries

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Re: Couple of questions about managing investment risk
« Reply #7 on: January 05, 2018, 02:53:53 PM »
I like some bonds because historically they've done well when equities have tanked. It isn't a guarantee.

Yes, and I see that Monevator has upped the bond holding in the passive portfolio (well rebalancing has done it really.) Struggling to see that there's really much of a difference between lending to the UK government through a bonds ETF and getting less than 2% fixed interest or lending it to a bank with government backing at a bit under 2% fixed interest though. I suppose at least with the gilts I don't have to open new accounts every few months or keep track of whose offering good deals at the moment.


My GILT ETF have done really well lately, not sure why,  but much better than a cash account.

PhilB

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Re: Couple of questions about managing investment risk
« Reply #8 on: January 07, 2018, 06:29:04 AM »
My GILT ETF have done really well lately, not sure why,  but much better than a cash account.
On the other hand a cash account doesn't carry the risk of a huge capital loss if interest rates rise...

mubington

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Re: Couple of questions about managing investment risk
« Reply #9 on: January 07, 2018, 07:48:06 AM »
Unless there is a real negative correlation with stock market returns. I still don’t see the point of inevesting in low return index. Why not just keep slightly less cash and save fees and achieve same return as you would with equity bond mix?

Burnthehousedown

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Re: Couple of questions about managing investment risk
« Reply #10 on: January 07, 2018, 12:43:47 PM »
My GILT ETF have done really well lately, not sure why,  but much better than a cash account.
On the other hand a cash account doesn't carry the risk of a huge capital loss if interest rates rise...

But most cash accounts do carry a guaranteed loss in the form of reduced purchasing power due to inflation. In actual fact holding high levels of cash can be seen as quite an aggressive investment decision.

If you're worried about interest rate rises I'd stick to short dated bonds - they're largely insulated due to their duration.

cerat0n1a

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Re: Couple of questions about managing investment risk
« Reply #11 on: January 22, 2018, 05:17:41 AM »
On the bonds thing, one of Monevator's weekend reading links was to this (google link to FT article):

https://www.google.co.uk/search?q=site:Ft.com+Risk+the+retail+investor+and+disastrous+new

which is a good article on risk, but which, in passing, devotes a couple of paragraphs to the idea that retail investors (us) shouldn't bother with bonds.

As someone who is planning to RE in the next few months and thinking about what the correct allocation should be (reverse glide path etc.) interested in other opinions.



PhilB

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Re: Couple of questions about managing investment risk
« Reply #12 on: January 23, 2018, 02:56:10 AM »
Thanks, that article echoes my gut feeling on bonds.  I think I’d rather hold out form1.5% in an instant access, under inflation thought that may be. At least I can have a portion of ,my portfolio which is very predictable / low risk. Bonds seem different to equities only by degrees which is not really what I need to balance, I’m guessing.
+1  The returns on UK gilts are significantly lower than you can get for cash by shopping around, plus the likelihood of capital loss unless holding shortdated gilts to maturity and/or missing out on future interest rises.  I see it as a no-brainer to avoid them at the moment.  There may still be a case for holding corporate bonds if you think the risk is priced appropriately, but not gilts.

Linea_Norway

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Re: Couple of questions about managing investment risk
« Reply #13 on: January 23, 2018, 04:43:04 AM »
Your attitude to risk is critical IMHO that close to FIRE. 
<...>

Does it really matter how close one is to FIRE when it comes to risk? In my case, when FIREd, we need to survive for 20 years on our stash. The only way to generate a growth that compensates for inflation and the 4% that we want to withdraw, is to invest it into the stock market. The alternative funds with lower risk are barely generating 2% per year, which is below inflation.

I don't dare to take our stash out of the stock market and into low-risk funds. One alternative strategy is to invest money in property, in our case currently our too expensive house, from which we will downsize in few years. I know, houses are generally not a good investment at all, but at least it is some form for diversification.

If only the interest on the bank was higher, then I would put more money on the bank. I remember the days when we received 6,5% interest on a bank account. That would be a no-brainer to put a lot of money there. But currently we would be loosing money, either on a bank account and in a low risk fund.