DrawdownAug 14 2018

How to protect drawdown savings in a market crash

  • Understand how different market scenarios can impact clients' income levels in retirement.
  • Consider whether diversification, cash levels and other strategies can help portfolios recover from a market crash.
  • Learn what advisers need to do with clients to help them through stockmarket volatility.
  • Understand how different market scenarios can impact clients' income levels in retirement.
  • Consider whether diversification, cash levels and other strategies can help portfolios recover from a market crash.
  • Learn what advisers need to do with clients to help them through stockmarket volatility.
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Approx.30min
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How to protect drawdown savings in a market crash

Building up a cash buffer can protect against falling stockmarkets. If the worst happens, and the stockmarket crashes, then having a reserve of cash gives clients an income to fall back on.

Holding one to two years' worth of cash means clients won’t be forced to sell when prices are falling, thereby locking in losses.

Instead of cashing in funds, clients can dip into cash reserves, giving their pot a chance to regain lost ground.

Whatever buffer level you decide on, it is important to understand what is being held. For instance, platform cash deposits are very different from a fund manager’s cash open-ended investment company (Oeic).

Most platforms give access to cash accounts that are linked to the bank deposits which are familiar to investors.

Where there are no cash accounts available, investors may have access to a fund manager cash fund. The prices of these funds can fluctuate and result in values falling, which is not what an investor may be expecting from cash.

Where a client can accommodate flexibility in the levels of their income, guard rails - a minimum and maximum range they can fluctuate between - could be useful. Having guard rails in place will help clients cope and appreciate the need to curtail spending during a period of reduced returns.

Bucket approach

The bucket approach should help to give longer term investments more time to recover. 

Having a bucket of cash to fall back on means clients would potentially not have to reduce their standard of living while the market corrects itself.

Having a medium bucket and long-term bucket may help manage the mood swings of the stockmarket, with the cash bucket being fed by the medium bucket, which is, in turn, fed from the longer term bucket.

If clients can afford to, scale back their withdrawals or place them on hold until markets have recovered.

There is no getting away from the fact that holding onto cash will in itself hold back the performance of the investment portfolio, but it’s a choice and a discussion to have with clients.

There is still a need for flexibility within this approach, as investment markets can and do bounce back.

Taking profits, which means selling when markets are high, earlier from the long-term bucket could be part of the answer for some clients to either top up their cash, or to use the capital to support this year’s spending.

Pause and turn it off

In drawdown, you can turn off the income taps whenever you like. Selling funds after markets have fallen means there is no chance to make up losses, shrinking a pension fund and reducing its future growth. 

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