Market turbulence is prompting many investors to consider tweaking their portfolios, but new analysis from Moneyfarm warns that trying to dodge volatility can be especially damaging for those nearing retirement.
The digital wealth manager’s research shows that time in the market still beats timing the market. Chris Rudden, head of investment consultants at Moneyfarm, said: “While sharp market swings often prompt investors to move in and out of investments, evidence consistently shows that this tends to erode long-term returns.”
While many investors can recover from investment mistakes during these periods of volatility, retirees don’t have the buffer of a regular salary or the luxury of a long-term investment horizon, meaning they are more at risk of lasting losses, he said.
In particular, Rudden warned that one of the biggest risks retirees face is sequencing risk – the danger of having to sell investments during a market downturn.
If a retiree’s portfolio drops 20% and the retiree then withdraws 20% at the bottom of the market, the portfolio is left 40% smaller, with a recovery to the original value requiring a gain of around 66%, according to Moneyfarm research. If the retiree chose not to make a withdrawal, recovery would have required a 25% gain.
“Instead of trying to outguess volatile markets, retirees are better served by a strategy rooted in practical risk management,” said Rudden.
“Key to this is maintaining a cash buffer equivalent to one-to-three years’ worth of spending in cash or savings products. This provides flexibility during downturns, reducing the need to sell investments at depressed prices and significantly lowering exposure to sequencing risk.”
Rudden also emphasised the importance of a well-structured retirement portfolio, with a mixture of well-balanced and diversified investments designed to fund spending over three-to-six years and higher risk assets targeting long-term growth that can be left untouched for seven-to-10 years.
“While it’s perfectly natural to feel anxious about market volatility, especially when you are approaching or in retirement, our research shows that trying to time the market is far riskier than staying the course with a well-diversified portfolio,” he said.
“With retirement planning becoming ever more complex, as more and more people are frozen into tax thresholds or work multiple jobs over the course of their career, often leaving behind lost pension pots, the most successful retirement plans are built on patience, proper planning and having the right cash buffers in place to weather the inevitable storms.”