Investors approaching retirement who attempt to “time the market” during periods of turbulence risk permanently shrinking their retirement savings, warns Moneyfarm.
The digital wealth manager said “time in the market” consistently outperforms “timing the market” for those approaching or already in retirement.
The warning comes as Moneyfarm research shows that 79% of Britons have little to no idea how much they have saved for retirement.
Chris Rudden, head of investment consultants at Moneyfarm, said: “While sharp market swings often prompt investors to move in and out of investments, evidence consistently shows that this tends to erode long-term returns.
“For retirees, who no longer have the cushion of a regular salary or decades to ride out mistakes, staying invested for longer, rather than trying to second guess the market, remains the most reliable way to protect retirement outcomes.
“Afterall, timing the market requires investors to be right twice, knowing when to get out and when to get back in. Missing even a small number of the market’s strongest recovery days can significantly reduce long-term returns.”
Moneyfarm said one of the biggest dangers facing retirees is sequencing risk. For example, if a retiree’s portfolio drops 20% and they withdraw 20% at the bottom of the market, the portfolio is left 40% smaller. To recover to its original value would require a gain of around 66% compared with just 25% if no withdrawal had been made during the downturn.
Psychological pressures can also push retirees into costly investment decisions. The urge to do something during market downturns often results in selling at precisely the wrong time, locking in losses that may never be recovered, the firm warned. This behaviour undermines the power of compounding, whose benefits increase the longer assets are left invested.
Rudden added: “Instead of trying to outguess volatile markets, retirees are better served by a strategy rooted in practical risk management. Key to this is maintaining a cash buffer equivalent to one to three years’ worth of spending in cash or savings products. This provides flexibility during downturns, reducing the need to sell investments at depressed prices and significantly lowering exposure to sequencing risk.
“With retirement planning becoming ever more complex, as more and more people are frozen into tax thresholds or work multiple jobs over the course of their career, often leaving behind lost pension pots, the most successful retirement plans are built on patience, proper planning, and having the right cash buffers in place to weather the inevitable storms.”
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