Is there a market correction just around the corner?
To be frank, we don’t really know what the markets will do in the short term. And neither do any of the media pundits who claim current economic or market events are looking similar to a previous historic downturn. Negative commentary attracts more readership than positive, and that’s why it’s important for investors to disassociate themselves from the ‘white noise’ of media coverage which stems from the need to get readership and advertising dollars, rather than coming from an educated, informed perspective.
Ok! That’s probably a little unfair. There are media folk out there who do have a deep understanding of the issues. Unfortunately, their real opinion is only disclosed four or five paragraphs into the article, by which time most of us have moved on to the next story, but are left with another negative view of the investment environment.
So how can investors, particularly retirees who are no longer accumulating wealth and would suffer more dramatically if there was a market downtown, protect their portfolio from potential volatility?
The most popular method we use with the majority of our clients, particularly those in pension mode, is to use something called ‘the bucket approach’. This is where you might allocate two to four years pension payments to a separate ‘bucket’ invested in a cash account with no downside. The balance of the portfolio is invested in growth assets but the performance of the markets over that period has a much lesser impact when you are only drawing down from the cash ‘bucket’.
Another option is to invest part of the portfolio into a guaranteed annuity. The annuity provides the level of income that covers all basic needs while the balance of the portfolio is dedicated to more luxury items, and that level of spending may be determined by how well it performs.
You may also want to talk to your adviser about reviewing your risk profile and your tolerance to risk. If you are continually worried about what might happen then a more conservative portfolio might be a better option.
Finally, diversification helps to mitigate risk and ride out volatility when it occurs. Again, talk to your adviser about how well diversified is your portfolio.
Unfortunately, though, there is no one strategy that will provide complete security unless you are 100% in cash, and then you will get a very low return. Whereas we know that markets will perform well over the longer term; you just have to be prepared to ride out occasional storms.
On behalf of myself and the Wealthwise team, I would like to wish you and your family a Merry Christmas & a Happy, Healthy and Prosperous 2018.
Wealthwise offices will be closed from 5pm Wednesday 20 December and will re-open Monday 8 January 2018.