![]() There are occasions, though, when correlations between asset classes increase and there are few assets outside cash and high-quality government bonds that provide protection while equity markets fall. This can help protect against the dangerous effects of pound cost ravaging. Diversification, populating a portfolio with various asset classes that move independently of one another rather than in unison, can help smooth out returns but without compromising overall performance too much. How to help combat the risks Keep volatility low Losses created by selling assets to meet income requirements can never be recovered, and taking too much out of a fund just after market falls can damage your wealth and run the risk of exhausting the fund too early. So-called pound-cost ravaging (a play on ‘pound-cost averaging’, a positive effect of investing regularly) is a term used to describe how the effects of volatility drag and sequencing risk are amplified by withdrawals, potentially derailing retirement plans. Essentially, they have a disproportionate effect on the eventual outcome. Negative return in the early years can have a particularly detrimental impact on the value of a drawdown fund, even if they are then followed by good returns. When you are drawing a flexible income from your pension pot it is not just the long-term average return that matters but the sequence of returns. High volatility increases the chances that you will be taking money out when the portfolio is falling, locking in losses and reducing the chance of there being enough money to meet future needs. However, for those in drawdown, the journey is just as important as the destination. Most long term investors tend to get used to volatility, and accept that in the long run the destination is more important that the journey. For instance, if a £100,000 portfolio falls 10% in one year and rises 10% in the next, it will not return to £100,000, it will be £99,000. This is jargon for the simple idea that if a portfolio falls in value, it needs to work harder to get back to its initial value. Here’s why market falls have such a significant impact on investors using pension drawdown and what might be done to help combat them. The fall in markets caused by the economic disruption from measures needed to deal with the coronavirus pandemic was exceptionally sudden and has few historical parallels. These risks have come into sharper focus in the recent market volatility we have seen. You also need to be careful about how much you draw out and when to ensure you leave enough for future needs. Keeping your pension fund invested means the value can fluctuate according to what markets are doing. However, drawdown is also a risky option. This is a complex issue facing retirees, and any decision to use drawdown must be carefully considered.ĭrawdown offers extra flexibility and the potential for better returns and more income from their pension pot - given the relatively low returns on offer from annuities today. Pension investors have two main options at retirement: Continue investing and take out money from their pot as and when needed (also known as pension drawdown), or buy an annuity that guarantees a regular income for life. Guide to finding your financial wellbeing Guide on the taboo of talking about money Guide to financial advice for the next generation Guide to preserving and protecting your wealth ![]() It does not store any personal data.Bespoke Investment Service Foundation Portfolio Service Advisory Investment Serviceĭirect Investment Service DIY Investment ideas Charles Stanley Funds The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. The cookie is used to store the user consent for the cookies in the category "Performance". This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other. The cookies is used to store the user consent for the cookies in the category "Necessary". The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". The cookie is used to store the user consent for the cookies in the category "Analytics". These cookies ensure basic functionalities and security features of the website, anonymously. Necessary cookies are absolutely essential for the website to function properly.
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