When we think of investing, we think about building up and growing a lump sum. A technical term used for this is accumulation. However, an increasing number of clients are now at a time when they need to spend that money – and a technical term for this is decumulation.

Many clients in decumulation are, of course, in retirement and they need a regular monthly income, beyond the interest or dividends paid from their investments. Naturally, they will spend some of their capital as a result, which slowly shrinks the value of their portfolio over time – and which is okay, as long as it is understood, planned and properly managed.

The activity of spending or selling a fixed amount each month creates a whole new risk when capital goes up and down – called sequence of returns risk. If you were to spend all of your money over a 30-year period, you would be better off if your portfolio enjoyed its best years of growth at the beginning and endured its worst years at the end – because great investment returns when you have nearly spent all your capital won’t really help you.

Therefore, the sequence of the returns matters in decumulation when, in brief, it doesn’t in accumulation.

The impact of this has been long masked post-2008 and the global financial crash, because of a bull market which has not only been largely kind to investors, but which has also been relatively consistent, straight and one-directional.

However, as we have now seen in 2020, real market volatility has returned with a vengeance. Make no mistake – a shock fall in markets as we have experienced this year will affect everyone, whether in accumulation and decumulation, proportionate to their risk profile.

A few years before retirement or a few years after and it’s much the same. Yet it is continual ups and downs beyond that, which damages the investor and client who is taking regular withdrawals.

What is sequence of returns risk?

In its rawest sense, sequence of returns risk represents the difference between the outcome for a client who sells a fixed amount of an investment each month and one who doesn’t. It is also the difference in outcome from investing in different funds with the same overall return, but with a different path or different sequence of returns during the investment.

The number of units or shares which need to be sold to provide the fixed withdrawal is greater when the value of shares or units is lower – and less when it is higher. When more units are sold, the remaining units and thus the client’s portfolio have to work much harder to compensate. The more frequently that happens, the faster capital is depleted.

What is the answer?

Dynamic Planner Risk Managed Decumulation funds – live in Dynamic Planner from 3 April 2020 – are more intensively managed, from a risk perspective – and sequence of returns risk is minimised as a result. The end client then experiences less frequent bumps and spikes in the road, from volatility, which is micro-managed to smooth out monthly performance and risk in comparison to other solutions.

Chris Jones, Dynamic Planner Proposition Director, said: “The growing number of clients spending their investments can be served in different ways: spending income naturally distributed to them, spending cash in an advised portfolio, or by regularly selling units.

“Our Risk Managed Decumulation filter in the software supports the latter. No doubt, recent market events will bring this area of advice to the fore – and we are determined to support advisers closely moving forward with leading-edge investment analysis and cash flow modelling tools.”

Find out more how Risk Managed Decumulation funds can help your clients in drawdown by talking to one of our consultants.