Pension fund performance - do you monitor yours, how is it doing, do you actively change it?

[Mercenary Keyboard Warrior]

Youve explained nothing. Youve said 'its this' without explaining why.

Because its GAAP. (generally accepted accounting principles)
You may as well ask me to explain quantum mechanics.

Im really not sure why I bother, this feels just like the regular saver conversation where you need a random chunk of time for that lightbulb moment to trigger.
Maybe post less and think more.

If you want to see the wikipedia entry that also backs up the valuation you can go here and look at the present value approach. Which is in effect what the market is doing constantly.

Bond valuation - Wikipedia

en.wikipedia.org

 

[danlightbulb]

Because its GAAP. (generally accepted accounting principles)
You may as well ask me to explain quantum mechanics.

Im really not sure why I bother, this feels just like the regular saver conversation where you need a random chunk of time for that lighbulb moment to trigger.
Maybe post less and think more.

You're a nice guy MKW but you are also very condescending at times. I don't know if you do it deliberately or not. Im here asking genuine questions Im not trying to troll. And you basically insult me as being thick when Im far far from that.

Now your answer is simply 'its GAAP'. So you haven't explained why its done this way then, as I said. You haven't looked at the logic of the situation, the similarity between the two examples. You just do what you're told. Which is fine, but don't come at me implying Im stupid for questioning how things are done when its illogical.

 

[200sols]

Cant believe this is still going tbh.

The original point was about someone panic selling when they see a loss. In your saving account scenario it is impossible to see a loss of capital.

How you choose to account for your bonds on your own spreadsheets is up to you. Your broker will show you a +/- figure though.

 

[danlightbulb]

Cant believe this is still going tbh.

The original point was about someone panic selling when they see a loss. In your saving account scenario it is impossible to see a loss of capital.

How you choose to account for your bonds on your own spreadsheets is up to you. Your broker will show you a +/- figure though.

All I said originally was there is no loss if you hold to maturity, and questioned why you would think of it that way when bonds are meant to be fixed income.

IMO the broker account should be showing you the fixed return value by default, and only showing you today's value if you specifically want it (i.e if you're thinking of liquidating). Or at the very least showing both side by side with the remaining time until maturity?

 

[Mercenary Keyboard Warrior]

You're a nice guy MKW but you are also very condescending at times. I don't know if you do it deliberately or not. Im here asking genuine questions Im not trying to troll. And you basically insult me as being thick when Im far far from that.

Now your answer is simply 'its GAAP'. So you haven't explained why its done this way then, as I said. You haven't looked at the logic of the situation, the similarity between the two examples. You just do what you're told. Which is fine, but don't come at me implying Im stupid for questioning how things are done when its illogical.

Sorry but if you want a full understanding of accounting I suggest you go and take a course.
If you want to understand asset valuation and why its done that way your going to need to.
Its a choice in life you either listen when people explain how something works or not, but arguing with them will typically see you branded an idiot.
"I told you not to touch those two wires" is very different to "Now I am going to say do not touch those two wires whilst I explain electricity from scratch"

Your examples are dog **** examples frankly, a semi absurd position on a cash account that makes no sense to accepted principles of how bonds work and are valued.

One point of GAAP is to stop dreamers making up asset values

The simple most basic valuation of any asset, no need to pull bonds out specifically, is they are worth what someone is willing to pay. Which generally for most asset classes is simple market value as it is widely available to all.
There is absolutely no reason why you would use a different valuation model for bonds when market value is available.
If you had some that were not widely traded then you would use a valuation model as I linked.

The point of a valuation is that it gives you something meaningful. A future value, unless performed on a whole portfolio is meaningless.

If I said you had a pension pot worth £1M and you went great I am liquidating it, and I sent you £200k you would go hang on you said its worth £1M.
If I said yeah it would be, it was all bonds dated 30+ years out that we valued at face value, you would be a little ****** wouldn't you?

Its why the term paper value, or paper profit/loss are what they are.
On paper your assets are worth £x if you paid more for them you have a paper loss.
On liquidation you have an actual or crystalised loss.
Until you actually liquidate something your profit/losses can go up or down.
You will say but my bind guarantees £x so I cannot lose money. In £ terms yes, but you are ignoring inflation and lost opportunity value of that being invested elsewhere.

Is your house worth £10k less because you may have to pay an estate agent to sell it?

 

[200sols]

IMO the broker account should be showing you the fixed return value by default, and only showing you today's value if you specifically want it (i.e if you're thinking of liquidating). Or at the very least showing both side by side with the remaining time until maturity?

No. That would be showing a false impression of the true value of your account at any given time.

 

[danlightbulb]

No. That would be showing a false impression of the true value of your account at any given time.

I disagree. It would show you the value if you kept to the terms of your agreement (keeping bonds until maturity), in the same way as keeping your savings account without incurring the penalty maintains its value.

I just don't see a difference in practice.

You liquidate the penalty savings account early, you take a loss. But you value it as if you don't liquidate.
You liquidate the bonds early, you take a loss, and this is the value you assign.

The true value of your account is what you are going to have when all fixed/lock in agreements are completed, in my view. If you value it less than this it could result in poor decisions, like your example of bond holders panic selling when there was no need to.

If I said you had a pension pot worth £1M and you went great I am liquidating it, and I sent you £200k you would go hang on you said its worth £1M.
If I said yeah it would be, it was all bonds dated 30+ years out that we valued at face value, you would be a little ****** wouldn't you?

The specific condition here is that the person liquidated it or intended to liquidate it. His pension pot was worth £1M at maturity. It would surely be your job to explain to him the maturity value and the present day value and give him 2 figures wouldn't it? You wouldn't just give him one figure? He cant make a decision with just one of those figures alone.


I understand the point that the accepted method of present day valuation is X. But its not representative of all scenarios. IMO theres nothing inherently wrong with valuing a bond as its maturity value in your portfolio because that's fully your intention - to hold until maturity. If someone else comes along and says they disagree with the valuation because its at maturity not present day, then that's fine but its a different assumption.


I still don't have an answer to why you would value a cash account with a withdraw penalty ignoring the penalty. The present day value of that account in cash terms is incurring the penalty, so why don't you include it?

A future value, unless performed on a whole portfolio is meaningless.

It would be meaningless if it was speculative, eg stocks, crypto or house prices. A bond has a guaranteed future value though, so its not meaningless at all. Its a simple condition: hold it till maturity and you will get X back .

 

[200sols]

I disagree. It would show you the value if you kept to the terms of your agreement (keeping bonds until maturity), in the same way as keeping your savings account without incurring the penalty maintains its value.

Still wrong. There is no agreement to hold until maturity. Bonds are tradeable debt. They are not fixed term savings.

The argument also works the other way if yields fall, the value of your bond can rise above the redemption value.

 

[danlightbulb]

Still wrong. There is no agreement to hold until maturity. Bonds are tradeable debt. They are not fixed term savings.

Yes they are tradeable, but if you are buying one specifically for its fixed return, then to you it should be seen as locked in.

If you are buying one to speculate, then don't see it as locked in.

Its about the purpose for which you bought it? And sticking to your plan?

The argument also works the other way if yields fall, the value of your bond can rise above the redemption value.

Agreed. And in this situation you should immediately sell the bond as there is no advantage to holding it to maturity.


I think this is a one sided thing - the bond has a guaranteed value that should be seen as a minimum value. But it can go up and when it does you should sell it. if it doesn't go up, or if it falls, you have the luxury of a guaranteed return that you knew exactly what it was in advance. Zero risk.

 

[booyaka]

So using the same theory @danlightbulb

You buy a house at £500k and have a £400k mortgage on the property.

What is the valuation on the house? £500k?

But using your example - it's only £100k since if you "liquidate" or "sold" the house tomorrow - you only actually have £100k as you own £400k on the mortgage to clear.

This is why the valuation is the value of the account / product / bond / share on the day of the valuation. It's nothing to do with holding to maturity or the end of the mortgage / the penalties / exit charges etc etc.

If you want to do it your way - feel free to value things your way. But you can't expect everyone else to do that also

 

[danlightbulb]

So using the same theory @danlightbulb

You buy a house at £500k and have a £400k mortgage on the property.

What is the valuation on the house? £500k?

But using your example - it's only £100k since if you "liquidate" or "sold" the house tomorrow - you only actually have £100k as you own £400k on the mortgage to clear.

This is why the valuation is the value of the account / product / bond / share on the day of the valuation. It's nothing to do with holding to maturity or the end of the mortgage / the penalties / exit charges etc etc.

If you want to do it your way - feel free to value things your way. But you can't expect everyone else to do that also

In reality its both isn't it. The house is worth £500k AND you have a £400k liability. Therefore a net of £100k is correct. If you were valuing your entire portfolio, you'd show both assets and liabilities.


Another example maybe is life insurance. I have life insurance. If you value 'me' today Im worth X. If Im dead, Im worth 5X. Both are valid, just depends on the assumption made.


Having said that the difference with bonds and any other asset is that its a guaranteed future value. I think that's the key difference. I don't know why you wouldn't include something in a valuation that was guaranteed to occur.

 

[booyaka]

In reality its both isn't it. The house is worth £500k AND you have a £400k liability. Therefore a net of £100k is correct. If you were valuing your entire portfolio, you'd show both assets and liabilities.


Another example maybe is life insurance. I have life insurance. If you value 'me' today Im worth X. If Im dead, Im worth 5X. Both are valid, just depends on the assumption made.

you dodged the question.

What's the value of the house?

 

[danlightbulb]

you dodged the question.

What's the value of the house?

I don't think giving one figure tells the full picture.

I would say the value of the house is £500k gross, £100k net of liabilities.


I suppose you could say of the bond, its value is £95 present value, £105 at maturity. Both would be correct and that's fine. Im saying why would you take the former unless you had to.

 

[throwaway4372]

The cost is approx 1 Sunday

 

[danlightbulb]

The cost is approx 1 Sunday

Meh its January, cold outside and dark. Nowhere else better to be.

 

[Mercenary Keyboard Warrior]

I still don't have an answer to why you would value a cash account with a withdraw penalty ignoring the penalty. The present day value of that account in cash terms is incurring the penalty, so why don't you include it?

I told you. They are valued at current value, which for your fictional cash account is the market value. £1 is worth £1.

Should you say you are going to have to liquidate that account its value, to you, would immediately become lower as you know you face a penalty.

It should be pointed out that the value remains at its original notional value. £1000 is £1000.
However your going to face a penalty of 10% when you withdraw. That doesnt change the value of the £1000 from being £1000.
Its just that you get £900 and the financial institution gets £100.

Its really not a good example you have got there since it can be clearly demonstrated how its value changes the moment you decide to liquidate it early and suck up the penalty.

 

[Mercenary Keyboard Warrior]

I don't think giving one figure tells the full picture.

I would say the value of the house is £500k gross, £100k net of liabilities.


I suppose you could say of the bond, its value is £95 present value, £105 at maturity. Both would be correct and that's fine. Im saying why would you take the former unless you had to.

There is one correct answer.
Its £500k.

Asset value £500k
Liability for Dan £400k
Net assets value for Dan £100k. Note this is net assets value, not net house value.

You sell the house. The next guy buys with cash.
Its value remains at £500k. It hasn't risen from £100k to £500k.
The value of the house does not vary due to the funding method.

 

[danlightbulb]

Its really not a good example you have got there since it can be clearly demonstrated how its value changes the moment you decide to liquidate it early and suck up the penalty.

But so does the bond! The bond's value is £105 if you hold it to maturity, and £95 if you liquidate it now. What's the difference?

In choosing to liquidate the bond you choose to take £95 over £105. You have a choice over what return you get from the bond, depending on when you choose to liquidate it.

Sucking up the penalty is the same as sucking up the loss on the bond. In both cases you're choosing to exit before maturity.

 

[Mercenary Keyboard Warrior]

But so does the bond! The bond's value is £105 if you hold it to maturity, and £95 if you liquidate it now. What's the difference?

In choosing to liquidate the bond you choose to take £95 over £105. You have a choice over what return you get from the bond, depending on when you choose to liquidate it.

No the bonds value is £95 now and £95 if you choose to sell it, its not changing.
As I said like shares that have a face value thats irrelevant in deciding what its worth NOW.

Would you value BP shares at $0.25 or £4 today? Apply the same mind set to your bonds.

Or what about a fixed interest account. Its the same, you need to hold it to the annual (or later) payout point to get the return.
Would you assume you hold all your cash interest accounts to their ending fix date and hence assume its worth the capital plus interest now even thought if you liquidated it it would be lower.
That would be rather silly.

I'm really starting to think your trolling now.

 

[danlightbulb]

You are contradicting yourself in my mind.

even thought if you liquidated it it would be lower.

Here you say 'if you liquidated it would be lower. So would the cash account, you'd lose £100.

So are we talking about valuing on liquidated value, or not? It seems to me you choose one way for one asset and the other way for another asset.

Would you value BP shares at $0.25 or £4 today? Apply the same mind set to your bonds.

There's no guaranteed return on a share, there is on bonds. If you had a guaranteed share value of £4 in a year's time, then to you those shares are clearly worth £4 each in a year. In choosing to sell it, you'd consider that future guaranteed value in its worth. You wouldn't sell it (unless forced to) for less than this would you?

I'm really starting to think your trolling now.

Im not trolling, what I cant understand is why you can't see what Im trying to say even if you don't agree with it. There is logic to what Im saying, even if its not compliant with normal accounting standards.


If I cast iron guarantee £10 to you in five minutes time, in your mind you have a tenner don't you. You may have already decided what to spend it on. Its essentially an IOU which you can include in your assets can't you?

The bond is the same. The bond is an IOU for a guaranteed value. Why not count the IOU as the current value of the asset?


Another example is a supplier owing you money. If your business was to be valued, you'd count the cash and its assets, and you'd also include what was owed to the business from others, wouldn't you? This is a future cash that is promised, just like a bond is.