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The safe way to draw income during difficult times

In times of market volatility, how you draw an income from your portfolio can make a difference to the long term and it can help steady the nerves.

In the April 2020 Investment Committee meeting, the committee discussed the two ways in which we can make withdrawals to fund client income. In short, we can either withdraw money on a pro-rata basis across all funds, thus maintaining your existing risk profile, or we can take it solely from the defensive funds and let the portfolio risk drift slightly over the year.

Whilst the pro-rata method has the advantage of leaving the risk profile undisturbed, it results in the sale of equities at low points in the market, which can lead to understandable worry about taking income at times like these.

In contrast, drawing from the defensive part of the portfolio results in a drift in the risk profile. In difficult times it brings the portfolio back in line, and in good times pushes it further away from the original risk level. We have therefore always defaulted to the pro-rata method.

However, taking an income from the defensive part of the portfolio leaves the equities in the portfolio untouched, and they have time to recover. Perhaps, more importantly, it is easier to steady the nerves if we know that the income is coming from the rock-solid defensive part of the portfolio.

Most clients have enough defensive assets to secure 8 – 10 years of dependable income, no matter what the stock market is doing. That is reassuring and reiterates why we have a mix of defensive funds and growth funds that can help us when we need it.

The investment committee has decided that, in future, we will draw solely from the defensive part of the portfolio and the short-dated bond fund. The committee felt that on balance, for most, an approach where the volatile equities were left untouched was safer for income withdrawal.

Perhaps, more importantly, the reassurance that this approach should bring to clients, knowing that they have years of secure income, is worth more than the worries about risk profile drift.

I guess it brings us back to the ‘Whiskey and Water’ analogy we have used to sum up our portfolio approach. Or, if you prefer, ‘Gin and Tonic’.

Both should steady the nerves.

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Miles Noble

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