When it comes to growing your wealth, you don’t need to worry too much about the ups and downs over the time you’re invested, just the end result. Pound-cost averaging may be part of the investment toolkit – where money is regularly invested to smooth out market volatility.
When it comes to taking it out, it’s less simple.
That’s when sequence risk, also known as pound-cost ravaging (the opposite of pound-cost averaging) becomes a concern.
It’s the risk that a portfolio suffers poor investment returns in the early years when you start making withdrawals for retirement income.
Two portfolios can deliver the same average returns and withdrawals but have very different outcomes. It all depends on the sequence of those returns, that’s why it’s called sequence risk.
If you sell when a portfolio is down, the capital is reduced and there’s less money invested when the investments start to grow again. This can significantly impact the ability of your client’s portfolio to last as long as it’s needed.
Diversification can help with this, but in big market moves or times of inflationary stress it can’t fully protect against the impact of withdrawals in falling markets. And choosing lower risk investments means that the portfolio doesn’t have the growth needed to keep up.
Limiting withdrawals in such times can help, but it’s not a great outcome for your client.
How to solve it?
Decumulation isn’t simply just the reverse of accumulation. It requires different strategies to manage it - and different approaches will suit different clients.
A solution could include annuities, taking the client out of the market altogether. But that removes the potential for future growth or leaving a legacy for their family. Partial annuitisation could offer a middle ground, providing a guaranteed income while allowing some assets to remain invested.
Managing sequence risk is another important consideration. Parmenion Passive Drawdown is designed with decumulation in mind, using a volatility fund to help ride out periods of market turbulence while optimising for investment growth in retirement.
Some advisers also use bucketing, separating assets for short-, medium- and long-term needs to avoid being forced into making sales at difficult moments. This can provide reassurance for clients by giving them greater clarity over how different parts of their retirement plan are intended to work.
For advisers using a bucketing approach, the Parmenion platform supports multiple pots, which can each be invested in our Passive Drawdown solution.
Retirement planning can be complex, with different clients needing different approaches. Whatever their goals, we're here to help you navigate the options and make the process as straightforward as possible.
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This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
