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