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Maximum Equity Allocation

Including Financial Independence and Retiring Early (FIRE)
GeoffF100
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Maximum Equity Allocation

#396885

Postby GeoffF100 » March 18th, 2021, 7:19 pm

I have index linked pensions that more than cover my expenses. I would, however, need to double my index linked income if I needed full time nursing care for the rest of my life. I would need a Safe Withdrawal Rate (SWR) of about 1% to achieve that. In recent years, my allocation has been about 60% equities and 40% cash/bonds. That seems to be the usual recommendation. Recently, my equity allocation has risen to about 62.5%. I feel relaxed about that. At a 67% allocation, my portfolio would halve if the equities crashed do a quarter of their value, as they did in the UK in the 1970s. Again, not too scary. More important is the possibility that I would not be able to pay my bills. How high does my equity allocation have to rise, before I should rebalance? Here is a relevant paper:

https://www.coronation.com/assets/Coroc ... avings.pdf

The maximum SWR did indeed occur at around 60% for the more benign markets. In the less favourable markets nearly 100% equities did best. An SWR of >1% was always achieved in all but the Japanese market. (See the graph at the end of the paper.)

If my equity allocation has increased because the equities have increased in price, I do not think that I need to do anything. My chance of running out of money should not have been increased by that. If I was drawing money from my portfolio, and the percentage equity allocation had increased because the bonds had been depleted, that would be a different matter.

Another tack on the problem is to consider the cost of an immediate needs annuity. It looks as though my cash/bonds would pay for that, albeit at a horrific looking price. If my bonds alone will do the job, the equity allocation does not matter. The problem here (and indeed more generally) is that annuities might not be paid if the economy collapses. There is no completely safe option!

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Re: Maximum Equity Allocation

#396913

Postby Alaric » March 18th, 2021, 9:10 pm

GeoffF100 wrote:The problem here (and indeed more generally) is that annuities might not be paid if the economy collapses. There is no completely safe option!


Annuities, or those with guaranteed life time payments at least, are well protected in the hierarchy of failure. The shareholders of Legal & General, M&G, Aviva etc. would suffer before annuitants did.

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Re: Maximum Equity Allocation

#396951

Postby 1nvest » March 18th, 2021, 11:59 pm

GeoffF100 wrote:I have index linked pensions that more than cover my expenses. I would, however, need to double my index linked income if I needed full time nursing care for the rest of my life.

Are you reasonably costing 'care'? Full time nursing care can be in excess of £12,000/month. Mum with mild dementia apparently having been elevated after a fall and a hip op back in January, is now considered as being at risk of falls and as such in need for 1:1 nursing rather than just care.

A very bad year so far. Lockdown for a year, compounded by the shock of her fall/injury in January, and not being able to see her due to Covid, that she caught whilst in hospital and was moved to a Covid isolation home for 14 days mandatory isolation period - pretty much locked up in a white room, such that original post op good progress has deteriorated and I suspect the mental stress has been a contributor to elevated dementia as did the abrupt ending of physio pretty much kill prospects of physical mobility. To now being informed that medically she's down for hospital discharge but mentally and physically is nowhere near the active/relative fit person she was prior to the fall. Can barely even sit to get out of bed. And the first question community care asked was whether she had assets above £23K that in effect meant a very brief call to the effect ... "you're on your own with regard to finding and funding care following hospital discharge".

One of mums neighbours went into dementia care around six months ago, £85K/year and that's just for group care. If nursing or 1:1 care is required the costs are significantly more. Mums 89, so pencilling in a 95 life expectancy = 6 x £140K = £850K and hope that the above average inflation rate of care to better line shareholders pockets doesn't accelerate too quickly.

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Re: Maximum Equity Allocation

#396977

Postby GeoffF100 » March 19th, 2021, 7:54 am

1nvest wrote:
GeoffF100 wrote:I have index linked pensions that more than cover my expenses. I would, however, need to double my index linked income if I needed full time nursing care for the rest of my life.

Are you reasonably costing 'care'? Full time nursing care can be in excess of £12,000/month. Mum with mild dementia apparently having been elevated after a fall and a hip op back in January, is now considered as being at risk of falls and as such in need for 1:1 nursing rather than just care.

A very bad year so far. Lockdown for a year, compounded by the shock of her fall/injury in January, and not being able to see her due to Covid, that she caught whilst in hospital and was moved to a Covid isolation home for 14 days mandatory isolation period - pretty much locked up in a white room, such that original post op good progress has deteriorated and I suspect the mental stress has been a contributor to elevated dementia as did the abrupt ending of physio pretty much kill prospects of physical mobility. To now being informed that medically she's down for hospital discharge but mentally and physically is nowhere near the active/relative fit person she was prior to the fall. Can barely even sit to get out of bed. And the first question community care asked was whether she had assets above £23K that in effect meant a very brief call to the effect ... "you're on your own with regard to finding and funding care following hospital discharge".

One of mums neighbours went into dementia care around six months ago, £85K/year and that's just for group care. If nursing or 1:1 care is required the costs are significantly more. Mums 89, so pencilling in a 95 life expectancy = 6 x £140K = £850K and hope that the above average inflation rate of care to better line shareholders pockets doesn't accelerate too quickly.

Here are the numbers that I was using:

https://www.payingforcare.org/how-much-does-care-cost/

I live in Yorkshire & Humber, so that is £869 x 52 = £45,188 for "dementia care". I had assumed that was the worst case, but your experience suggests that the actual cost could be twice that. Here is a link for the cost of an immediate needs annuity:

https://www.sharingpensions.co.uk/annui ... _needs.htm

The average cost of £12 p.a. escalating at 5% p.a. is £127K for a 75 years old (that is not far away for me). With my estimate, £250K in bonds would be about right, but your experience suggests that I might need £500K.

The Pfau paper considers an investment to be in stocks, bonds and treasury bills. It is not clear whether we should count property as stocks or as bonds. It does not really matter for the purpose of this thread. We can assume that I rent my house.

If we assume that I have no other income and £500K in bonds, even with your numbers, the bonds should roughly cover the cost of care. My equity allocation then does not matter. A 90% allocation would give me another £4.5 million in equities, and that certainly should not reduce may chance of paying for care.

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Re: Maximum Equity Allocation

#396988

Postby Wuffle » March 19th, 2021, 8:52 am

I am currently investigating the world of residential care (dementia, parkinsons - the usual laundry list).
Quoting costs without reference to geography is unhelpful.
I would consider it before getting into a tussle about what sort of withdrawal rates are relevant.
Also, commiserations to anybody in the same boat, I am not enjoying the experience.
The 'caring professions' definitely care more if you are rich, which I think says a lot.
And I would add, the ONS has data on longevity, for a non emotional perspective.

W.

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Re: Maximum Equity Allocation

#396997

Postby GeoffF100 » March 19th, 2021, 9:17 am

An ex-social worker friend told me that money did not necessarily buy good care. She said that the quality of the care depended on the dedication of the care workers, and not on the price tag. She had the job of assessing whether care home residents were having their freedom curtailed excessively. A thankless task. The care home management did not appreciate her efforts, and the people she was helping were not capable of appreciating them.

As far as my personal circumstances are concerned, finding the money for care from cash, bonds and my house should not be a problem. I should not need to touch my equity holdings, which will mostly fund a charitable donation. I can essentially just let my portfolio run, reinvesting dividends. I do not need to rebalance if my equity holdings increase in value. I can also afford to buy some more equities if the market takes a big dive.

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Re: Maximum Equity Allocation

#397001

Postby TUK020 » March 19th, 2021, 9:26 am

1nvest wrote:
GeoffF100 wrote:I have index linked pensions that more than cover my expenses. I would, however, need to double my index linked income if I needed full time nursing care for the rest of my life.

Are you reasonably costing 'care'? Full time nursing care can be in excess of £12,000/month. Mum with mild dementia apparently having been elevated after a fall and a hip op back in January, is now considered as being at risk of falls and as such in need for 1:1 nursing rather than just care.

A very bad year so far. Lockdown for a year, compounded by the shock of her fall/injury in January, and not being able to see her due to Covid, that she caught whilst in hospital and was moved to a Covid isolation home for 14 days mandatory isolation period - pretty much locked up in a white room, such that original post op good progress has deteriorated and I suspect the mental stress has been a contributor to elevated dementia as did the abrupt ending of physio pretty much kill prospects of physical mobility. To now being informed that medically she's down for hospital discharge but mentally and physically is nowhere near the active/relative fit person she was prior to the fall. Can barely even sit to get out of bed. And the first question community care asked was whether she had assets above £23K that in effect meant a very brief call to the effect ... "you're on your own with regard to finding and funding care following hospital discharge".

One of mums neighbours went into dementia care around six months ago, £85K/year and that's just for group care. If nursing or 1:1 care is required the costs are significantly more. Mums 89, so pencilling in a 95 life expectancy = 6 x £140K = £850K and hope that the above average inflation rate of care to better line shareholders pockets doesn't accelerate too quickly.


I apologize in advance if what I say causes offence.
The combination of dementia + covid + broken hip is likely to have significant impact on life expectancy.
Worry less about the finances, and focus more on the time remaining you have with her.

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Re: Maximum Equity Allocation

#397078

Postby 1nvest » March 19th, 2021, 12:36 pm

TUK020 wrote:I apologize in advance if what I say causes offence.
The combination of dementia + covid + broken hip is likely to have significant impact on life expectancy.
Worry less about the finances, and focus more on the time remaining you have with her.

Wish I could TUK020. Not allowed into the hospital where she's been since January. She struggles with a mobile phone as she's old-gen and never had one, and there are no portable phones within the ward. Some of the kind souls have helped her to call home and for me to then return call back typically to their mobile where they help her with the call, but that's irregular and more often she's so tearful at simply just hearing my voice that there's no real meaningful conversation and seems to me to be more a risk of elevating dementia through anxieties/stress of crying.

I have repeatedly pushed to get her home but the response is always that I wouldn't be able to cope i.e. the hospital is required to discharge to a safe environment and it would seem that the combined SS, nurses, doctors decision is that home discharge isn't a viable safe option. Hoping to have her moved to a care home soon so that I can actually get to see her and talk things through and see for myself whether we might cope or not at home. My intent is to get her home asap and be 24/7 with her to maximise the remainder of what time we do have. We're fortunate enough to have the capital that enables choices. By the sound of things however even when in a care home visits will be limited to no more than half an hour and through separation (presumably plastic wall shields/whatever) and no physical contact, so not sure how well I'll be able to make a informed decision/opinion.

As the rest of family are geographically distant and I'm her only child my intent was to privately employ a couple of carers to cover weekdays to provide me with the time/opportunity to get out and do shopping/whatever or simply to give me a break. 9am to 1pm, 1pm to 5pm, type Mon-Fri shifts, perhaps at £20/hour £40K/year type cost. Basically living walking-sticks/support so I don't have to be at her side every second of the day/night.

Did consider and discuss pulling her out of hospital but the doctor said that would more likely end up with her being back into hospital and as such strongly discouraged and that the pathway of discharge into a care home and take it from there was the right way to go, and that if her dementia/delirium eased then a return home could be possible - but not to hold out too much faith in that. She's always been quite highly strung and anxious, rarely delirious, so I'm hoping that the delirium is a consequence of anaesthetic/morphine and stress induced that may very well calm.

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Re: Maximum Equity Allocation

#397089

Postby 1nvest » March 19th, 2021, 12:57 pm

@GeoffF - looks like you have more than enough wealth that it doesn't matter what asset allocation you opt for. Extremes of all stuffed as cash under a bed or 100% in a global stock index fund - and a midway choice seems reasonable, 50/50 stocks/gilts.
I visualised my grief if the stock market went way up and I wasn’t in it–or if it went way down and I was completely in it. My intention was to minimise my future regret. So I split my contributions 50/50 between bonds and equities.
[Harry Markowitz]

At around half your wealth, I like the equal split of FT250/US stock/gold/10 year gilt ladder variation. A form of 50/50 domestic and foreign currencies. So reduces grief if the £ went down and otherwise was all-in that. Whatever might be thrown at that and within reason likely it would be OK.

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Re: Maximum Equity Allocation

#397105

Postby GeoffF100 » March 19th, 2021, 1:25 pm

Yes, 1nvest it does not matter in my case. I do not go for cash stuffed under the bed, but I could have 100% index linked gilts or 100% global tracker. Both would be reasonable. Do I want to leave a certain sum, or maximise the likely sum that I leave? I am inclined towards the latter. The charity would want the money now, of course, but if I did that, I could run out of money.

I feel a duty for good stewardship of my money. This thread has helped me focus on the issues. I now have a plan for the next financial year. After that, my crystal ball is fuzzy.

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Re: Maximum Equity Allocation

#397170

Postby taken2often » March 19th, 2021, 4:23 pm

Self Deliverance no nursing homes

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Re: Maximum Equity Allocation

#397212

Postby Darka » March 19th, 2021, 7:37 pm

taken2often wrote:Self Deliverance no nursing homes


Likewise

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Re: Maximum Equity Allocation

#397263

Postby Steveam » March 19th, 2021, 11:26 pm

You are clearly in a position that you’re not likely to rub out of funds. The detail of your allocation will determine how much goes to your beneficiaries. (I’m in a similar position and, having no dependants, the capital depletion is not a concern.) Have you got a LPA in place? I’ve been thinking about a financial LPA and will need to sort out both the investment strategy and the order in which pots are used. Do they take money from the SIPP or use unprotected funds or take money from the ISA?

@1nvest: sympathy regarding the awful situation that your Mother is in and that you’re trying to manage. My parents (US resident) spent most of their wealth on medical costs and care costs in their declining years. We children contributed but parents don’t like being supported. Anyway, it all ended years ago.

A couple of people have mentioned deliverance rather than care. It may not be easy. I had a friend who collapsed in his bathroom and by the time he was found had suffered very severe brain damage. He lasted about 3 years and needed 24/7 care. He was in no condition to deliver himself of this mortal coil.

Best wishes,

Steve

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Re: Maximum Equity Allocation

#397427

Postby 1nvest » March 20th, 2021, 2:35 pm

GeoffF100 wrote:Yes, 1nvest it does not matter in my case. I do not go for cash stuffed under the bed, but I could have 100% index linked gilts or 100% global tracker. Both would be reasonable. Do I want to leave a certain sum, or maximise the likely sum that I leave? I am inclined towards the latter. The charity would want the money now, of course, but if I did that, I could run out of money.

Much of asset evaluation is based on risk-free rate comparisons, however there is no real world risk-free asset. T-Bill rates are often used as the measure - but even T-Bills have lost substantial amounts after inflation over periods of time or been defaulted upon via other means such as high inflation, low interest rates (state prints to buy it own bonds and suppress yields), high taxation. As have entire stock markets failed - only takes one idiot to be in command (which is often the case) and some bad luck. Even of those stock markets that have survived have over 10 or more year periods have seen 50% or greater inflation adjusted losses. Perhaps the best choice of risk-free is a global stock index - near-as wont ever fail. There are no guarantees that stocks will be the most rewarding asset, could even be ousted by cash. A all-world stock tracker however likely has the best potential, pretty much wont fail, more often rewards the most compared to bonds etc.

Blend a all-world stockmarket 75/25 with a global currency ... gold, and since 1970 that yielded 4.8% annualised versus 4.1% for just world stock alone. Shift the start date to 1985 and the figures were 4.8% versus 5.5%. i.e. the 75/25 yielded more consistent rewards of 4.8% for those two start dates where one had more favourable gold valuations and the other more favoured stock valuations. A blend of 50/50 stock/gold might be considered as a form of a global bond bullet formed from a barbell of two polar opposites/extremes (stocks and gold). Which makes the 75/25 stock/gold a form of 50/50 stock/bond type blend. Historically 50/50 stock/bonds have provided the more consistent reward across periods of both economic expansion and contraction.

For a steward of a bequest just lumping it all into a 75/25 world stock accumulation fund/gold and not even bothering to review/rebalance is one option that is more likely to be resilient and see the real worth of that rise over time. Maybe the growth might not as much as if all-stock had been used, or maybe it could be more. US data and 2000 loading into 75/25 stock/gold left to accumulate at the end of 2011 had gold weighted 60%, stocks 40% and having grown at +4% annualised real, all stock in contrast had lost -1.3% annualised.

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Re: Maximum Equity Allocation

#397458

Postby GeoffF100 » March 20th, 2021, 4:38 pm

I am sceptical about gold. It has not been a global currency for a long time, and has little intrinsic value. Warren Buffet is credited with saying that gold is pulled out of one hole in the ground at great cost so that you can pay someone to guard it in another hole in the ground.

My detached house is a small proportion of my assets. Aside from that, nearly a third of my assets are a holding in Vanguard Developed World ex UK (outside a tax shelter with about 100% capital gain). I am coming towards the end of bed and ISAing my directly held UK shares and VFEM holding. I am moving towards FTSE 100, VFEM and some Vanguard Developed World ex UK in my ISA. I have VEVE in my SIPP. I have about a quarter of my cash/bonds in an index linked gilt, and index linked National Savings Certificates. Most of the remainder is on a ladder of term accounts guaranteed by the FSCS.

As I have said, I have 62.5% equities and 37.5% cash/bonds at the moment. My conclusion from this thread is that my cash/bonds allocation is than enough in absolute terms, and I also have my house. I am happy to let my equity allocation increase. I work on the DALAP principle: Do As Little As Possible, but that still seems to involve a lot of work.

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Re: Maximum Equity Allocation

#397495

Postby tjh290633 » March 20th, 2021, 6:36 pm

With the current ridiculously low rates of interest on cash in various forms, I would maximise the income potential as far as is prudent. A cash reserve is still desirable, and I would consider that a year's expected income might be suitable. Hopefully this is more than a year's expenses, which allows for rebuilding if the reserve has to be drawn down.

As long as investments are easily liquidated, the reserve does not all have to be a cash deposit, so Premium Bonds are acceptable. Not sure about corporate bonds.

TJH

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Re: Maximum Equity Allocation

#397514

Postby GeoffF100 » March 20th, 2021, 7:54 pm

tjh290633 wrote:With the current ridiculously low rates of interest on cash in various forms, I would maximise the income potential as far as is prudent. A cash reserve is still desirable, and I would consider that a year's expected income might be suitable.

I have been doing the opposite. I have been working hard to reduce my taxable income. I have very high levels of cash and near cash reserves. Equities are valued with respect to bonds using discounted cash flow. The low interest rates have inflated the price of equities. When the bonds fall, so will the equities. Cash should be safe unless and until it is eroded by inflation.

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Re: Maximum Equity Allocation

#397547

Postby tjh290633 » March 20th, 2021, 11:11 pm

GeoffF100 wrote:
tjh290633 wrote:With the current ridiculously low rates of interest on cash in various forms, I would maximise the income potential as far as is prudent. A cash reserve is still desirable, and I would consider that a year's expected income might be suitable.

I have been doing the opposite. I have been working hard to reduce my taxable income. I have very high levels of cash and near cash reserves. Equities are valued with respect to bonds using discounted cash flow. The low interest rates have inflated the price of equities. When the bonds fall, so will the equities. Cash should be safe unless and until it is eroded by inflation.

I think that the opposite applies. If Inflation rises, then equities are likely to be the only medium to protect you from the effects of inflation on your income. Are you suggesting that, for example, Imperial Group's price would fall, therefore increasing its yield above the current 9.45%? That seems highly unlikely. Or maybe that of BP. rise above its current 6.54%?

TJH

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Re: Maximum Equity Allocation

#397578

Postby GeoffF100 » March 21st, 2021, 7:54 am

tjh290633 wrote:I think that the opposite applies. If Inflation rises, then equities are likely to be the only medium to protect you from the effects of inflation on your income. Are you suggesting that, for example, Imperial Group's price would fall, therefore increasing its yield above the current 9.45%? That seems highly unlikely. Or maybe that of BP. rise above its current 6.54%?

Real (i.e. after inflation) interest rates on gilts are currently negative. Some index linked gilts have a real redemption yields of less than -3%. They have been as much a +4% in the past. That is not because inflation is expected to be low. It is because the Bank of England has pushed the price up by buying them with printed money. Interest rates could fall without a rise in inflation.

Equities do not entirely protect against inflation. Index linked gilts and other inflation linked bonds do protect against inflation. An index linked annuity is the surest way of protecting your income against inflation. Here is a discussion of why inflation makes stock prices fall:

https://theconversation.com/why-does-in ... fall-91874

The market clearly believes that the dividends of Imperial Group and BP will fall. I do not know whether the market's assessment of the value of these shares is correct. I do know that professional investors cannot beat the market, except by chance. I do not believe that I have any special skill that they lack. My FTSE 100 tracker holds both of those stocks in their market weights.

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Re: Maximum Equity Allocation

#397598

Postby GeoffF100 » March 21st, 2021, 10:21 am

I meant interest rates could rise without a rise in inflation, but the converse is also true. The article that I linked is a good one, but US based. In the UK, the stock market fell by about 75% in the high inflation of the 1970s. After inflation dividends were trashed too. Taxes also rose.


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