Investors have had a stressful two weeks. Equity and bond markets have shown dramatic volatility and the price of gold has surged. The US stock market no longer looks “priced to perfection“.
If there’s one group of investors who have every right to feel concerned, it’s retirees and those approaching retirement. If tariffs are basic economics, withdrawing money in a falling market is basic investing, a reminder that relying on timing the stock market when you most need it can be a painful experience.
“Charlie Munger once said ‘if you can’t stomach 50% declines in your investment you will get the mediocre returns you deserve,‘” says Michael Field, chief European market strategist at Morningstar.
“No sane person enjoys watching the value of their portfolio decline, but some of us have the luxury of not needing the money for at least a few years. Time enough for the market to recover lost ground.
“The same can’t be said for those people heading into retirement. For people in drawdown, market movements over the last few weeks could have materially dented their principal, meaning that they may have to live off less for years to come if markets don’t soon recover.”
Should I Adjust My Pension Withdrawals?
Financial advisors know this all too well. They testify to the shock and awe that’s characterized recent events for their clients.
“It is especially worrying times for those in drawdown,” says Rob Mansfield, independent financial advisor at Rootes Wealth Management.
“President Trump has ripped up the economy playbook of the past generation in a bid to correct perceived unfairness against the US. It’s a form of economic bullying and some countries are scrambling to try and do a deal to end the pain.
“China, however, seems to be digging in for a longer fight. It’s unclear at this stage who will win this war of attrition. Sadly, lots of people caught in the middle will be feeling the pain. It is a miserable time to be investing whilst you’re waiting for things to play out though.”
There are answers, however. Investors approaching or in retirement could potentially review or amend their planned or actual withdrawal rate. This limits the negative impact of withdrawing money from an invested fund during a falling market. The other option is to consider how you can generate ‘natural income", which is explained below.
Flexible Pensions Are Key in Volatile Times
“The flexibility of [pension] drawdown is a great attraction for many in retirement,” says Alistair McQueen, head of retirement and savings at Aviva.
“One aspect of this flexibility is how you take your income. For example, ‘natural income’ is the income that investments generate, typically via dividends. During periods of market fluctuation, it makes sense to consider withdrawing only this natural income. This avoids eating into the underlying capital value of your investments.
Another strategy is to rely on cash savings instead, if you have them.
“Cash may not reap the rewards when markets are rising, but equally will not be hit so hard when markets are falling,” McQueen says.
“This would leave your more-exposed investments untouched. You could even stop your drawdown withdrawals completely if you have income from elsewhere, perhaps from defined benefit pensions or property. You could then wait for the storm to pass.”
Mansfield agrees: “For those relying on a total return strategy and selling units regularly, these types of conditions can be very damaging. Investments that yield an income such as dividend stocks and bonds can help provide a natural income stream.”
Diversification for All Market Conditions
In periods of real turbulence, it pays to have a well-diversified portfolio. That means spreading your money over lots of different types of investments.
“Diversification is working well,” says Mike Coop, chief investment officer EMEA, Morningstar Investment Management.
“This one of the reasons why we continue to prepare portfolios for a range of scenarios rather than the current scenario—because it’s hard to know what will happen next.”
Diversification should be visible in any good financial advisor’s financial plan for their client, particularly if their clients are older and have a lower risk tolerance.
“It’s really hard to see any logic in the self-harming US administration’s approach to tariffs right now,” says Darren Lloyd Thomas, a chartered and certified financial planner at Thomas & Thomas Finance in Wales.
According to Thomas, rising bond yields and diversification across commodities has helped to shelter his more cautious clients from the pain of the last few weeks.
“Things are grim right now. The only good thing that I can state with some confidence, is that our client portfolios are holding up much better than the equity indexes around the world. This is particularly noticeable within our more cautious client portfolios, where UK gilts have started to offer some shelter,” he says.
“Meanwhile, elements of gold inclusion in funds, such as our Orbis Global Cautious holding—has certainly helped to slow the falls for clients in our least risky, or ‘Level One’ portfolios.”
Darren Cooke, director and chartered financial planner at Red Circle Financial Planning in Derbyshire, says any good advisor’s plan will allow for moments like this.
“A few clients of mine have made investments in their ISAs and pensions for the new tax to take advantage but that’s all,” he says.
“I deferred a couple of pension transfers rather than risk clients being ‘out of market’ while they went through. Any good plan builds these events into it, mine certainly do. If it worked before, it should work now. No clients have changed their plans as a result.”
Stock Markets Could Recover
If you’re unsure what to do and you have plans that depend on a stable income, it may be worth seeking financial advice.
In the meantime, however, it’s back to basic economics and basic investing.
“My gut feeling at this stage is that things may get a bit worse before they get better – but as always – time is a great healer,” Thomas says.
“The White House [tariffs] juggernaut can’t roll on forever. If deals are not done soon, the American people will soon have something to say about the end of their cheap stuff.
“Eventually, this situation is going to snap back around so our firm mindset right now is to weather this storm and be ready to take advantage of the recovery when it comes.”
Valerio Baselli contributed to this story.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
