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Default Investment Strategies and

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'I can calculate the movement of the stars, but not the madness of men' ... 'What we learn from history is that people don't learn from history' Warren Buffett ... – PowerPoint PPT presentation

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Title: Default Investment Strategies and


1
Default Investment Strategies and Life-styling

2
The financial dilemma
  • Humans often make bad financial decisions
  • Overconfident
  • Not clear on objectives
  • Heavily influenced by current developments
  • Herd instinct-asset bubbles
  • Not good at probability
  • Cash is king

3
(No Transcript)
4
  • I can calculate the movement of the stars, but
    not the madness of men Isaac Newton

5
Lets think about cash
6
Inflation
7
Diversified Assets
Sector B
Sector A
Sector C
Sector D
8
Strategy 1
  • Strategy 1 invest in only one sector
  • 90 100,000
  • 10 0

9
Strategy 2
  • Strategy 2 invest 25 in each of 4 sectors
  • 65 100,000
  • 29 75,000
  • 5 50,000
  • 0.4 25,000
  • 1/10,000 0
  • Works but only if the 4 sectors are independent.

10
The financial dilemma
  • Should Product providers
  • Design products that customers want?
  • Design products that customers need?

11
20 years of drawdown
  • Next year cash
  • Next four years bonds for extra return
  • Next fifteen years equities for inflation
    protection
  • Answer- invest in a managed fund

12
Want an annuity ?
  • Make sure you are in bonds towards retirement

13
Want Cash ?
  • Are you sure?

14
Happiness and Income
X
Happiness
0
30,000
50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
15
What should be the aims of a DIS
  • A DIS should reduce the possibility of
    unacceptable outcomes.
  • Allow appropriate exposure to higher return
    assets.

16
How to compare DIS
  • Stochastic Processing on equity and risk free
    asset portfolio
  • Infinite possible variety of shapes of
    distributions
  • Log normal distribution
  • Real return over risk free assets 4 SD 15

17
The Contributor
  • 30 years to retirement
  • Funds for 10 times salary on a 2 gap with an
    initial 24.17 contribution
  • Two scenarios
  • A. fixed contribution
  • B. variable contribution
  • First 10 years up to
    15
  • Second 10 years up to 25
  • Third 10 years up to 40

18
The Contributor Cost Basis
  • Fixed contribution Cost is 7.25 times salary
  • 100 equity investment gives expectation of 10
    times salary
  • Reduced equity leads to same cost and lower
    expectation

19
Fixed Contribution modal score 6.5
20
10 year switch to cash modal 6.5 expected 8.5
21
Variable contribution cost 6.9 expected 9 modal
7.5
22
10 year switching and variable contributionscost
7.2 expectation 8 and modal 8.5
23
Clearly no uniquely right answer
24
Fixed contribution 10 year switch and 70
equities
25
Variable contributions
26
Insights
  • Variability of outcomes is surprising
  • Late switching and fixed proportion can give
    remarkably similar distributions.
  • This is changed if client actively changes
    contributions.

27
Additional Point
  • What is not measured is the clients emotional
    position throughout the period and this may
    implicitly be a driver for design.

28
Asset position for 30 year old
Equity 10
Property 90
29
Asset position for 50 year old
Income generating 30
Property 50
Equity 20
30
Asset position for 70 year old
Income generating 33
Property 33
Equity 33
31
Three alternatives
  • Smoothed investment fund
  • Guided switching
  • Blind switching

32
PensionSTAR - Lifestyle Strategy
33
PensionSTAR - Lifestyle Strategy
Source Eagle Star
34
How did it work out in 2008
  • Percentage of maturities that had higher value
    compared to 1 year earlier. 87

35
  • What we learn from history is that people don't
    learn from history
  • Warren Buffett
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