Fraction of financial wealth held in equities

[tjh290633]

That does not make sense. If you are in receipt of pensions from the state of employers, or income from annuities, then your pension wealth is zero.

If I offered to make you wealthier by giving you £1,000 in exchange for that future income stream would you turn it down? If not why would that make sense if the offer made you wealthier?

My former employer tried to get out of an annual 3% increase in our pensions, by offering an immediate increase but level payments thereafter. It was universally rejected. Your offer is of a lump sum in exchange for a stream of income. It might not make me wealthier, as I would have to use your lump sum to replace that flow of income. It might make me poorer.

TJH

[scotview]

So pension and property isn't "wealth", what about the examples below :

Individual 1
DB pension worth £2.5 million, Home worth £900K mortgage free, ISA 100% equities value £25K.

Individual 2
SIPP £65K, Home £150K (£100K mortgage), ISA 100% equities value £27K.

Who is the wealthiest ?

[scrumpyjack]

That does not make sense. If you are in receipt of pensions from the state of employers, or income from annuities, then your pension wealth is zero.

If I offered to make you wealthier by giving you £1,000 in exchange for that future income stream would you turn it down? If not why would that make sense if the offer made you wealthier?

Clearly entitlement to future pension payments (state or private) is a form of wealth, but I excluded it because I cannot make decisions about it or what any capital involved is invested in. But the certainty of future receipts from them obviously affects my decisions about how I invest other assets.

As my Sipp is managed 100% by me and I can draw it down if I want, or leave it to my offspring, it clearly is personal financial wealth for the purposes of this poll.

[tjh290633]

So pension and property isn't "wealth", what about the examples below :

Individual 1
DB pension worth £2.5 million, Home worth £900K mortgage free, ISA 100% equities value £25K.

Individual 2
SIPP £65K, Home £150K (£100K mortgage), ISA 100% equities value £16K.

Who is the wealthiest ?

What about them? By any method the first is wealthier. The second is obviously early in his career, the second retired.

TJH

[scotview]

The second is obviously early in his career, the second retired.

TJH

Ah, no they are both 64 years old, that's the point.

[tjh290633]

The second is obviously early in his career, the second retired.

TJH

Ah, no they are both 64 years old, that's the point.

Why didn't you say so?. In terms of financial wealth individual 1 is slightly more wealthy..

In terms of pension potential income, he is also far more wealthy, but he cannot access the source of that wealth.

In terms of primary residence, he is also more wealthy, and one wonders how individual 2 got into such a dire situation with his mortgage.

TJH

[Bubblesofearth]

These sort of polls are fairly badly constructed if they don't make a distinction between

property as in investment vs your home
DC pension vs DB pension
Personal vs business wealth

There have been a few comments that make me inclined to agree with you. Part of a learning curve I guess. What I really wanted to do was get a feel for how people invest money that they have total control over hence excluding ones own home and private and state pensions. Thinking about it SIPP's and BTL properties should probably be included. Maybe investment in ones own business as well although that's not something I've ever done or know much about. Perhaps scope for another, slightly different, poll in the future?

What the poll results seem to be confirming is that the cult of the equity is alive and well on these boards. The fact that a large majority have >50% in equities, and a fair majority >70% indicates this. These numbers should be taken in the context that, outside these boards, these kind of levels of share ownership would be considered high risk. That so many have 90-100% in equities surprised even me.

Despite the poll's failings it does at least provide some understanding of the views expressed regarding alternative investments. When you invest primarily in equities the assumption is that you view them as the best place to put investment money. Therefore your views regarding other investments, e.g. cash, bonds, gold, crypto (the board that prompted this poll) etc, will likely be less favourable than for many away from TLF.

BoE

[Hariseldon58]

It's hard to frame a question that elicits what the poll is trying to capture without endless notes...

Perhaps if the question was along the lines of "what proportion of your financial wealth where you control the asset allocation and could change it within 7 days, is invested in......"

My answer would be 75% (because of the 7 day rule I exclude an industrial property that I own)

[scrumpyjack]

What the poll results seem to be confirming is that the cult of the equity is alive and well on these boards. The fact that a large majority have >50% in equities, and a fair majority >70% indicates this. These numbers should be taken in the context that, outside these boards, these kind of levels of share ownership would be considered high risk. That so many have 90-100% in equities surprised even me.

BoE

The orthodox view of risk, I think, focusses on short term volatility whereas I, and I suspect many Fools, regard it as risk of losing long term real purchasing power.

With that perspective many of the things financial advisers regard as low risk (eg cash) are actually high risk. In my lifetime the real value of GBP has been virtually totally wiped out by inflation and almost anything else would have been better. Equities have generally been a good long term store of value and now that we tend to invest a far greater proportion in overseas equities (which is much easier than it use to be), the risks are lower.

[dealtn]

If I offered to make you wealthier by giving you £1,000 in exchange for that future income stream would you turn it down? If not why would that make sense if the offer made you wealthier?

It might not make me wealthier, as I would have to use your lump sum to replace that flow of income. It might make me poorer.

TJH

So you now agree, unlike your earlier statement, that a stream of income over future years is a wealth constituent.

[elephanthunt11]

82% stock, 6% gold bullion (physical, stored in home safe), 7% fixed term savings bonds, 5% cash on hand, easily accessible.

Where do you live?

Essex, come find me

[SalvorHardin]

What the poll results seem to be confirming is that the cult of the equity is alive and well on these boards. The fact that a large majority have >50% in equities, and a fair majority >70% indicates this. These numbers should be taken in the context that, outside these boards, these kind of levels of share ownership would be considered high risk. That so many have 90-100% in equities surprised even me.

Most people in the UK consider any form of stockmarket investment to be high risk. Risk to these people is the possibility of losing nominal capital. Hence the vast amount that's "invested" in deposit accounts for the long-term. Weirdly many of these people have no problems putting money into cryptocurrency (as Jim Morrison said "People Are Strange").

TLF, being an investment website with a lot of discussion regarding stockmarket investment, is going to attract people who like to invest in the stockmarket. It shouldn't be too surprising to discover that a lot of us have portfolios where the majority of our non-property wealth is invested in shares. There's quite a bit of selection bias in that many of us arrived here after spending many years on TMF, so quite a few of us are experienced investors, often with a strong background in finance and investment, and a lot of us are retired (many with decent pensions, so can afford to take more risk in the stockmarket).

We've seen the damage that inflation does to fixed interest and cash, whereas property and shares offer some defence. Our definition of risk focuses much more on the risk that our real capital (and income) fails to keep pace with inflation; we're a lot more tolerant about short-term and medium-term price volatility.

Many of us with these sorts of portfolios are not people who appear to be outwardly wealthy and many of us are (or were) self-employed. We're not "flash gits" as a friend puts it. Anyone who has read "The Millionaire Next Door" knows the type. One scene in the book refers to a focus group session run by a bank where the Vice President in charge is exasperated by those who attended, saying "These people cannot be millionaires! They don't look like millionaires, they don't dress like millionaires, they don't eat like millionaires, they don't act like millionaires--they don't even have millionaire names. Where are the millionaires who look like millionaires?".

The first chapter of "The Millionaire Next Door" can be found at the link below. It isn't behind the Washington Post's firewall.
https://www.washingtonpost.com/wp-srv/style/longterm/books/chap1/millionairenextdoor.htm

[Brodes]

The orthodox view of risk, I think, focusses on short term volatility whereas I, and I suspect many Fools, regard it as risk of losing long term real purchasing power.

With that perspective many of the things financial advisers regard as low risk (eg cash) are actually high risk. In my lifetime the real value of GBP has been virtually totally wiped out by inflation and almost anything else would have been better. Equities have generally been a good long term store of value and now that we tend to invest a far greater proportion in overseas equities (which is much easier than it use to be), the risks are lower.

Succinctly put. I’m of the view that the least risky position is to be 100% in equities, leveraged with a mortgage on my residence, and a PAYE income. Frighteningly volatile. But manageable, while employed at least. Post PAYE I expect I’ll hold a meaningful cash buffer in case of market crashes. I guess that makes me 120% equities.

Brodes

[elephanthunt11]

What the poll results seem to be confirming is that the cult of the equity is alive and well on these boards. The fact that a large majority have >50% in equities, and a fair majority >70% indicates this. These numbers should be taken in the context that, outside these boards, these kind of levels of share ownership would be considered high risk. That so many have 90-100% in equities surprised even me.

BoE

The orthodox view of risk, I think, focusses on short term volatility whereas I, and I suspect many Fools, regard it as risk of losing long term real purchasing power.

With that perspective many of the things financial advisers regard as low risk (eg cash) are actually high risk. In my lifetime the real value of GBP has been virtually totally wiped out by inflation and almost anything else would have been better. Equities have generally been a good long term store of value and now that we tend to invest a far greater proportion in overseas equities (which is much easier than it use to be), the risks are lower.

The notion of defining risk by absence of gain instead of loss is risky in itself. I get where you're going with your point but I was very surprised by the polling. I'm 31 - just over £100k in stock (+/-£500) which represents around 82% of liquid assets. But even I consider my allocation to equities may be too high considering the conventional Stock to bond allocation wisdom of [100 - my age = equity allocation %]

My impression of Lemon Fools is that most here are older than me (partly why I am attracted to this forum for investment talk instead of Reddit) and was shocked that these old boys are white knuckling at 90+% allocation.

[scrumpyjack]

The orthodox view of risk, I think, focusses on short term volatility whereas I, and I suspect many Fools, regard it as risk of losing long term real purchasing power.

With that perspective many of the things financial advisers regard as low risk (eg cash) are actually high risk. In my lifetime the real value of GBP has been virtually totally wiped out by inflation and almost anything else would have been better. Equities have generally been a good long term store of value and now that we tend to invest a far greater proportion in overseas equities (which is much easier than it use to be), the risks are lower.

The notion of defining risk by absence of gain instead of loss is risky in itself. I get where you're going with your point but I was very surprised by the polling. I'm 31 - just over £100k in stock (+/-£500) which represents around 82% of liquid assets. But even I consider my allocation to equities may be too high considering the conventional Stock to bond allocation wisdom of [100 - my age = equity allocation %]

My impression of Lemon Fools is that most here are older than me (partly why I am attracted to this forum for investment talk instead of Reddit) and was shocked that these old boys are white knuckling at 90+% allocation.

I'm 75 but started equity investing aged 6 when my father gave me some shares, though I wasn't aware of that til I was 18. But I carried on sticking to equities even through market collapses. I recall the market lost 70% of its value in the early seventies, but inflation then at one point reached 27%.
Since I became 18 the pound has lost at least 97% of its purchasing power (Yes! what cost £3 then now costs at least £100). It has been bumpy ride at times but well worth it overall. Bonds were never worth it for me because in those days 'unearned income' was taxed at up to 98%. The only ones I bought were index linked gilts.

Age 31 you need to make your own decisions on risk, but I for one do not think the beast of inflation will sleep for long!

[Urbandreamer]

What the poll results seem to be confirming is that the cult of the equity is alive and well on these boards. The fact that a large majority have >50% in equities, and a fair majority >70% indicates this. These numbers should be taken in the context that, outside these boards, these kind of levels of share ownership would be considered high risk. That so many have 90-100% in equities surprised even me.

Most people in the UK consider any form of stockmarket investment to be high risk. Risk to these people is the possibility of losing nominal capital. Hence the vast amount that's "invested" in deposit accounts for the long-term. Weirdly many of these people have no problems putting money into cryptocurrency (as Jim Morrison said "People Are Strange").

I think that you are conflating opinions here. I happen to listen to a lot of podcasts about bitcoin and Austrian economics.

Many talk about the "monetization" of assets because "money" is unfit for purpose. Comments have been made on this thread about how "money" devalues over time.

The Austrians get very concerned about mall-investment. Investing in things without a strong opinion of their worth, throwing away value, simply because there is no alternative. Said companies provide little value to the investor or to society, but investing in them keeps some value, instead of saving money.

Now I'll admit that there will be those who buy cryptocurrency as a speculative asset. However I've not met many.

Would you claim that all these groups share the same opinions?

I did hear someone on one podcast claim that he had very conservative views upon saving, which was why he didn't invest on the stock market but did save bitcoin. I suspect that his views may be influenced by his belief that bitcoin is "money".

BTW the cause of this poll and my own was a debate on the crypto board about the TLF cohort and their views upon assets. I had thought, given the number of posts about cash (keeping dry powder etc) and bonds, that the result of this poll would be different than it is.

[vand]

my invested assets break down to something like this

equities 55%
gold/pms 24%
real estate equity 15%
bonds 6%
cash 1%

bonds are not directly held but I know are held by some funds I hold as well as in my Nest pension scheme

On the topic of risk vs loss, its important to distinguish and understand the risk to long term purchasing power vs investment risk. Both are important to consider.

[tjh290633]

It might not make me wealthier, as I would have to use your lump sum to replace that flow of income. It might make me poorer.

TJH

So you now agree, unlike your earlier statement, that a stream of income over future years is a wealth constituent.

Not at all. You cannot sell it or realise its capital value. If is an annuity the capital is gone, outside your control.

TJH

[dealtn]

So you now agree, unlike your earlier statement, that a stream of income over future years is a wealth constituent.

Not at all. You cannot sell it or realise its capital value. If is an annuity the capital is gone, outside your control.

TJH

Actually you can, though its extremely rare I imagine, through assignation of that income stream (and you can borrow against it too). Regardless just because you can't realise its capital value in the way you describe doesn't mean it doesn't have a wealth value. It's clear we have a different meaning of wealth in that case.

Do you literally think that wealth vanishes overnight at the point you exchange your pension pot for an annuity? That's a significant >£1m reduction in wealth for many people. I hope they are prepared!

[tjh290633]

Not at all. You cannot sell it or realise its capital value. If is an annuity the capital is gone, outside your control.

TJH

Actually you can, though its extremely rare I imagine, through assignation of that income stream (and you can borrow against it too). Regardless just because you can't realise its capital value in the way you describe doesn't mean it doesn't have a wealth value. It's clear we have a different meaning of wealth in that case.

Do you literally think that wealth vanishes overnight at the point you exchange your pension pot for an annuity? That's a significant >£1m reduction in wealth for many people. I hope they are prepared!

Your capital is gone and cannot be retrieved. Your income flow may be enough to make you feel wealthy, but in terms of disposable capital you are not wealthy. You are like Billy Bunter, waiting for your next postal order to arrive.

TJH