Dangerous to cash out of equities when you retire

Investors are often advised to get out of equities close to retirement and invest their portfolio in less risky assets such as bonds and cash. But this can have disastrous effects on the longevity of their pension says Marius Fenwick of Mazars Moores Rowland Financial Services.

Lifestaging is a common approach to investing, and entails structuring a portfolio according to the investor’s stage of life. It’s based on the principle that the younger the investor, the more risk can be taken as there will be time for losses to be made up; and taking risks increases the potential for returns. As investors age they’re typically advised to guard their nest egg by cashing out of equities, or risk being affected by a major market fluctuation just before they retire.

Fenwick says this approach was reasonable when pensioners retired at 60 and lived until 70. But now, many people are retiring at 55 and living into their eighties. “In this scenario you have to continue to provide for growth in the portfolio, not just for income, and only equities can achieve this. You need to provide for at least 15 years of growth as well as income,” says Fenwick. This means that even if you’re 70, you should have equities in your portfolio. “If you can’t beat inflation, you’re in trouble,” he says.

This doesn’t mean, of course that all your capital should be in equities. Each client’s exposure will depend on their respective risk profile. Fenwick says Mazars’ believes strongly in asset diversification, and its portfolios always consist of cash, bonds, equities and property. Once a client has retired, they always take at least two years’ worth of income and invest that into the money market and pay his or her pension from that. The rest of the portfolio is then invested in different assets with the objective of producing growth. The income paying money market account will be topped up as and when required from the asset classes that produced a positive return during the period of investment.

“Paying a pension from a money market account prevents the sale of equities in a volatile market. When unit prices are losing value, you don’t want to sell more units to provide income because this compounds the problem which makes recovery very difficult,” Fenwick concludes.