Retirement specialists at Tideway Wealth warn investors not to take too much risk when investing drawdown pension accounts. Often an individual’s pension money is deemed irreplaceable capital at the point of retirement, replacing their salaried incomes.
“We are increasingly seeing clients presenting us with 85% plus of their funds earmarked for drawdown invested in global equities and nursing losses from 2022.” Says Sam Ratnage Tideway Wealth Manager and Chartered Adviser.
“The last 10 years have seen many investors shun bonds and move more into global equities even close to and in retirement. This is contrary to traditional thinking which would shift investment more to bonds as you get older, with shorter time horizons and more need for income.
The temptation is to hold on to these investments and hope for a recovery. “
2022 saw a collapse in bond prices as well as equity values but the outlook for the two different investment asset classes now is distinctly different.
The outlook for equities remains uncertain despite price falls in 2022.
“Equities may do well in coming years, but it is no sure bet, and the head winds are significant:
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- Higher costs are eating profit margins
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- Recession looms as consumer disposable income shrinks
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- The cost of borrowing money is significantly higher
It is too early yet to say what the full impact of easy monetary conditions from the last decade has been on equity prices, but it is quite likely some areas of the equity market have not yet fully repriced for 4-5% base interest rates.” Says Ratnage.
With inflation still elevated it is very unlikely that central banks will be looking to bail out equity investors in 2023. It is clear their focus is on reducing inflation.
Meanwhile bond markets have also repriced. Tideway highlight that returns are now available in credit markets with some bonds paying 10% p.a. or more from household names such as Sainsbury’s bank. Such bonds are not readily available to retail investors but can be accessed through active fixed income managers and regulated unit trusts which are both liquid and benefit from a manager who can avoid companies with high risk of default.
These funds have also been hit hard in 2022 but have been recovering since the Autumn mini budget and are now fully priced for much higher rates.
The above graph shows the gradual increase of Tideway’s high yield bond fund against the investment associations measure of global equity markets.
“Our role as wealth managers is to get the job done without unnecessary excessive risk. We can see fixed income funds delivering regular and sustainable income over the medium to long term after costs without the need to take significant risks in unclear equity markets.” says Ratnage.
Over the very long-term equities are likely to outperform bonds again, but the long term for equities can be too long for drawdown investors that need to generate income now. Global equities with limited yields may be too hopeful a strategy with short term equity markets so unclear. Conversely bonds are paying income and yield now and have fixed maturity dates to return capital, so bonds do offer a lower risk and clearer return profile for drawdown investors with irreplaceable capital.
Ends
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- The content of this document is for information purposes only and should not be construed as financial advice
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- Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise
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- We always recommend that you seek professional regulated financial advice before investing
“Our role as wealth managers is to get the job done without unnecessary excessive risk. We can see fixed income funds delivering regular and sustainable income over the medium to long term after costs without the need to take significant risks in unclear equity markets.”