INVESTMENT ADVISER | ISSUE 09 2024 19

Markets have recently been through one of their periods of volatility . Perhaps we are out of the other side , perhaps there is more to come . Only time will tell , what we do know is periods of increased volatility in financial markets are a feature not a bug . It is a feature that disciplined investors can take advantage of to improve outcomes .

Volatility is your friend in accumulation , it facilitates the beneficial effects of pound cost averaging , but once you are drawing on your investments it becomes an enemy , leading to ‘ pound cost ravaging ’. The greater the volatility of the strategy the greater the impact . This suggests post-retirement clients who are using unit encashment should be using lower risk , and hence lower return , strategies . One way of avoiding this is to lean heavily on natural income strategies , reducing the need for unit encashment . Income from a portfolio is much less volatile than the capital value .

MSCI WORLD INDEX 90-DAY VOLATILITY

We believe that income cost averaging , using market volatility to build income over time pre-retirement can really benefit clients and avoid the risk of moving to an income strategy at an inopportune moment . Similar concepts can be applied day to day in the running of an income fund .

Volatility is a fact of life when running an investment portfolio both at the aggregate level and at the individual security level . The chart below shows 90-day volatility of the MSCI world index , recent volatility has been greatly exceeded in the past .

Source : Bloomberg 31.08.1994 – 19.08.2024 Past performance is not a guide to future returns .