Trustnet Magazine 61 April 2020 | Page 56

In the back know that this is really damaging businesses – some fatally – but customer demand will return with a vengeance, so expect a boom after the bust when the pandemic has subsided. The reason I’m interested in how long it takes for markets to recover is that it would make sense to maintain a cash buffer to insure against a market crash if you’re in or close to retirement. If you can refrain from touching your portfolio through a crash and wait for it to rebound, then the losses won’t be crystallised. Instead, you could draw down from your cash pot over this period, which would mean all of your investments have a chance to recover. So, what can be done to protect yourself against the negative impact of a crash? It is not just sequencing risk that can ruin your carefully laid retirement plans. There are five key strategies that you should consider, some of which may fly in the face of popular wisdom. Keep a cash buffer in retirement For investors, keeping money in cash – or cash equivalents – seems daft, but as a primary weapon to defend against sequencing risk and market falls, cash is king. If your portfolio drops 30 per cent, the last thing you want to do is sell TRUSTNET 56 / 57 [ PLATFORMS & PENSIONS ] If you can refrain from touching your investment portfolio through a crash and allow it to recover over time, then the losses won’t be crystallised your holdings at a potential loss, but if you have a cash buffer, you can draw income from this source instead. You may even want to reduce the income you draw down over the period of the market downturn. Your holdings remain intact and they have the chance to recover in their entirety, hopefully springing back up to their previous value and beyond. Once the downturn is over, it makes sense to gradually replenish your cash buffer. Some people say you should have up to five years of cash to ride out any crashes, but this feels a little too much. Three years sounds about right, given this money will shrink after inflation is taken into account. Avoid trying to time the market Many platforms have reported brisk activity, with customers piling more money into their portfolios, particularly when the FTSE 100 slumped to the 6,000 level. But the trustnet.com