Again, an adviser will typically be able to choose the best option for their client from a range of packages designed to match a variety of risk profiles and retirement goals.
But as clients approach the transition from accumulation (CIP) to decumulation (CRP) the spectre of sequencing risk rears its head. This is where poor performance in the late stages of accumulation or early stages of decumulation has a significant impact on the value of a portfolio.
If you have a poor investment event at the wrong time, or there is an economic shock outside anyone’s control, it can have a material financial and psychological effect on a client.
Those whose retirement date landed in spring 2020, for example, will have watched in shock as the value of the FTSE 100 fell by almost a third in little more than a month.
Drag and drop
The vast majority of clients would not be able to stomach such losses, which could cause extreme anxiety, as well as “pound cost ravaging”. Advisers will be familiar with the concept of “pound cost averaging”.
A combination of regular investing, alongside investing one-off lump sums, can help to smooth out the impact of market volatility on clients’ investments over the long term. This is because with regular investing, they are doing it regardless of whether prices are high or low at the time.
For savers in accumulation who are prepared to wait for prices to rise before accessing their investment, pound cost averaging represents an opportunity to buy more units more cheaply as markets fall. It also avoids clients delaying putting money to work while they wait for the “perfect” time to invest.
Ultimately, the return on a client’s money is more likely to be determined by the overall trend in the market than by the price they get if they invest a lump sum on one specific day.
Take this example over a three-month period, with £1,000 being invested each month, from June, with an initial unit price of 100p.
In July, the price drops to 90p, and in August goes back up to 100p. In the table below, you can see that the clients’ £1,000 investment in July enabled them to purchase more units at the lower price of 90p. This means the £3,000 invested over the three-month period is now worth £3,111 as at August.
Month | Amount invested | Unit price | Units bought | Value | Total value |
June | £1,000 | 100p | 1,000 | £1,000 | £1,000 |
July | £1,000 | 90p | 1,111 | £1,000 | £1,900 |
August | £1,000 | 100p | 1,000 | £1,000 | £3,111 |
Now this example is not representative of the current market, and there is no guarantee that investing regularly means that an investment will be better off for doing so. But it does illustrate that regular investing tends to lead to better outcomes in temporarily falling markets, as pound cost averaging represents the opportunity to buy more units more cheaply.
