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Correct market timing is difficult so drip-feed cash into investments

Mitigating equity risk doesn't mean just having to hold cash
Correct market timing is difficult so drip-feed cash into investments

Simon is a 54-year-old freelance IT consultant who earns £50,000 a year. His wife is 49 and earns £55,000 a year as an administration manager at a public sector institution, where she has worked for 30 years. Their home is worth £300,000 and has an outstanding mortgage of £40,000.

Reader Portfolio
Simon 54

Sipp invested in funds and cash, Isas invested in direct shareholdings and cash, property


Buy larger home, partially retire at 60 years, fully retire between 65 and 67 and draw £25,000 a year from investments, grow Sipp to £500,000 and grow cash savings to £100,000 in six years

Portfolio type
Investing for goals

"I hope to semi-retire at age 60, and fully retire between 65 and 67,” says Simon. “I remarried last year after divorcing in 2015, when I gave up two-thirds of my pension pot as part of the divorce settlement. I had £75,000 in my self-invested personal pension (Sipp) four years ago, but this reduced significantly. So I decided to grow this as aggressively as possible, and will invest up to £40,000 a year into it for the next five to six years. I currently have £243,000 in my Sipp, but would like this to grow to £500,000 by the time I am age 60, which shouldn’t require any significant growth. I also have cash worth £30,000 in an individual savings account (Isa) and hope my cash savings will grow to £100,000 or more by the time I am 60.

"I want an annual income of £50,000 a year between ages 60 and 65. I don’t plan to contribute to my Sipp after age 60, although will not draw from it until between ages 65 and 67. After that point I hope to draw an income from my investments of £25,000 a year, which is 4.17 per cent of £600,000. I’m also trying to save £100,000 or more within my company as a potential source of income during market downturns so that I don’t have to draw from my investments at such times.

"My wife has a defined-benefit (DB) pension into which she has been making contributions for 25 years, and a small amount of savings.

“We are near to the point of paying off my wife's mortgage, but would like to move to a bigger property, which will mean taking on a larger joint mortgage in the short term of up to £100,000. However, we are concerned that this might affect our plans for retirement saving.

"I have been investing for four years and have a low risk tolerance, but am prepared to take on more risk to hit my saving targets as I need to secure a decent retirement income while still working full time. But I am nervous about a serious market downturn, which is why I have cash worth over £100,000 in my Sipp, although this is probably wrong.

"I like global equity, and UK income and growth funds. I also have commercial property and specialist funds because I am trying to diversify my equity exposure, but am struggling to establish a firm strategy.

"I am a big fan of investment trusts and would like to invest in Monks Investment Trust (MNKS), but I think its share price valuation seems full. I would also like to have exposure to Japan and India, but am concerned about volatility because of my investment timescale.

"I have recently bought Fidelity Special Situations (GB00B88V3X40) and would like to increase my exposure to UK equities via City of London Investment Trust (CTY). I have also recently started investing in direct shareholdings, mainly higher-yielding UK large-caps, and some shares I think are good value. I hold Melrose Industries (MRO), Standard Life Aberdeen (SLA), Barclays (BARC), Lloyds Banking (LLOY) and Legal & General (LGEN).

"But I recently sold Finsbury Growth & Income Trust (FGT) after making a gain of 10 per cent on it and 3i Infrastructure (3IN) after making a gain of 25 per cent."


Simon's investment portfolio

HoldingValue (£)% of the portfolio
Bankers Investment Trust (BNKR)23,4148.27
BlackRock Frontiers Investment Trust (BRFI)13,9234.92
BMO Commercial Property Trust (BCPT)16,2345.73
Fidelity Special Situations (GB00B88V3X40)12,4754.41
Henderson Diversified Income Trust (HDIV)10,3953.67
HG Capital Trust (HGT)10,6863.77
RIT Capital Partners (RCP)31,35011.07
Witan Investment Trust (WTAN)23,6178.34

*Invested in Melrose Industries, Standard Life Aberdeen, Barclays, Lloyds Banking and Legal & General (LGEN)





Chris Dillow, Investors Chronicle's economist, says:

I like that you have a realistic target for your pension wealth, based on high savings rather than optimism about returns. But should you have such a huge cash holding and a bond fund too?

You are concerned about a serious downturn, but this may not be necessary. The above-average dividend yield on UK equities, and record net foreign selling of US equities in the past 12 months, suggests that market sentiment is currently depressed. This is the exact opposite of what is usually the case before a serious downturn. For me, the only reason to fear a downturn is that we’re approaching the time of year when they are more likely. Most other indicators are okay.

So could your personal history be making you unusually fearful? Research by Alessandro Bucciol and Luca Zarri at the University of Verona and US economists Stefan Nagel and Ulrike Malmendier has found that people who have experienced losses in their past and in different contexts remain fearful of equities even many years later. Might this be true of you?

Given your caution, holding lots of cash and bonds is one way to manage equity risk. But there are others. You can use your labour income as insurance. If you are more flexible about when you semi-retire you could respond to a market downturn by working longer and saving more.

Or you could use 'dynamic hedging'. Although this sounds technical, it isn't. Stock market falls are not usually a result of heightened risk aversion, which makes investors seek higher expected returns to compensate them for holding shares. And share prices often fall too far. Both these suggest that you can insure against losses by investing more when prices are low and expected returns are high. In this way, high future returns offset low returns today.

And you are planning to do this. If you invest the same amount of money regularly, the set sum will buy more shares when prices are low and expected returns are high. Most of your planned pension savings are not yet invested, so you will be better able to use dynamic hedging than most investors.

You could also follow the 10-month rule, whereby you buy when prices are above their 10-month or 200-day moving average and sell when they are below them. The idea here is that a serious market downturn, as opposed to a mere dip, plays out over many months. And falls often lead to further falls as leveraged investors become forced sellers or people simply throw in the towel. Selling when prices dip below their 10-month average protects you from long bear markets – the nastiest type of equity risk.

Holding cash is good, and everybody should have some, but it is not the only insurance policy. There are other things you can do to mitigate equity risk.

The invested portion of your portfolio seems well diversified. It includes frontier markets – the thinking man’s emerging markets – and exposure to unquoted stocks as well as general equities.


Kay Ingram, chartered financial planner at LEBC Group, says:

You and your wife hope to fully retire in 13 years’ time when you are 67 and she is 62, gradually easing work commitments in around nine years. You also want to move to a bigger house. Both of these objectives are achievable, but you should consider what your income needs are now and in the future, so that you can plan to achieve your goals.

Before making any changes to your investments you should invest in a cash flow plan. This would take account of all your current and future sources of capital and income, and enable you to make strategic investment decisions based on the yields needed to inflation-proof your income. It can be updated each year to stress test how sustainable your income will continue to be. This will mean that adjustments can be made to it and that you can maximise your tax efficiency.

A cash flow plan helps you to choose an appropriate level of risk by identifying the investment return required to meet your long-term income needs, and to inflation-proof your income. This may also help to resolve your dilemma over short-term investment risk, which currently means that you are exposed to potential losses with your investments and the risk of inflation erosion with your cash. Correct market timing is hardly ever achieved on a consistent basis, so drip-feeding some of your pension cash into investments that match the yield you require may be more appropriate.

You assume that a 4 per cent yield will be achievable in 12 years’ time, but this is not certain. Your planning should take account of the effect of inflation and taxation, which will reduce the spending power of the investment income. By adjusting the assumptions made in a cash flow plan each year, changes in market returns, inflation, taxation and income needs can be accounted for. Unless you plan to secure some of your retirement income by purchasing an annuity, a cash flow plan will be essential to the lifetime sustainability of your income.

Your current net joint income is £6,270 a month, after tax, National Insurance (NI) and pension contributions have been deducted. A wide range of lenders would be willing to offer you a repayment mortgage over a 13-year period. There are several deals available that are fixed for the first two to three years at less than 2 per cent, and these, for example, would cost you between £720 and £800 a month initially on a £100,000 loan and 27 per cent loan-to-value ratio for a home worth £360,000. Interest rates may rise after the fixed period and all lenders will require a detailed analysis of your current expenditure, which may help them define your likely future income needs and wants, and work out what the likely shortfalls are and how to cover them.

If you increase the size of your mortgage, you should take out a life and critical illness policy that would cover early repayment of the loan.

Your wife's pension comprises two parts: pre-2016 service, which will be payable from when she is age 65, and post-2016 service, which will be payable from when she is age 67. She should get a statement of pension payable from her scheme. When you are 67 she will only be 62, but could take the pension early. However, this would mean that the scheme will reduce the annual amount, so she could leave it until she is 65 and fill the three- to five-year gap in other ways. Early retirement reductions are worked out by each scheme at the time of the request for early retirement, and typically involve a 4-8 per cent cut in the annual pension for each year before the scheme retirement date.

You will both be eligible for state pensions from the age of 67 and should get forecasts now to see what they are likely to pay. State pension forecasts can be obtained online at Those who have made NI contributions for 35 years do not necessarily get the same as each other. Your wife has been in a contracted-out scheme for 30 years, so is unlikely to qualify for the full flat-rate pension of £168.60 a week. Periods in contracted-out schemes lead to a reduction in the amount paid.

Every year that you pay NI post 2016 you will earn 1/35th of the new pension, which is worth £250 of pension per year. If you have not been contracted out you may have extra earnings-related state pension, which may be paid on top of the new flat-rate pension. Even though you and your wife have worked for a similar number of years and paid NI at similar rates, your entitlements could be very different to each other.

Your Sipp can be accessed from age 55 or left invested indefinitely. After 2035 you are likely to have a significant amount of your income guaranteed by your wife's and both your state pensions. So you could use your Sipp and your other investments to live off in the early years of retirement, and then stop or reduce the withdrawals from your Sipp to give the funds a chance to rebuild for the longer term. Other than the first 25 per cent of each payment, your pension income will be taxable, so building up both your Isas to produce tax-free withdrawals to fill the gap years would be a good idea. Also, as a couple you are not as tax efficient as you could be because your wife is not maximising her Isa contributions – another reason why she should seek to increase these.

If either of you die prematurely the other could be in financial difficulty. You should nominate each other as your beneficiaries under your pension plans. Death benefits from pension schemes do not form part of your estate so are usually paid tax-free, but nominations need to be in place so that the trustees of the scheme can take account of wishes. Your wife's scheme pays out three times salary as a lump sum, and your Sipp would pay the fund value at the time. If this leaves a shortfall the difference can be made up with life assurance written in trust.

As you have recently married you may need to rewrite your wills as marriage invalidates earlier wills.

Your wife's pension scheme includes generous early retirement options in the event of ill health. But you are self-employed with your own company, so should take out ill health and critical illness insurance, and maybe also locum cover.

You may be better off investing all of your Isa in equity, bond and property funds to maintain longer-term inflation protection. As a 40 per cent income tax payer, you can earn interest on your cash savings of up to £500 a year tax-free, and cash Isa interest rates tend to be lower than some of the rates available on other bank accounts. Use any surplus income to build a cash emergency fund in place of your cash Isas.

Hoarding cash in your business is also likely to mean that the interest paid on it is negligible. You should pay yourself £2,000 a year in dividends, as you can earn that amount of dividend income tax-free. And consider gifting some of the shares in your company to your wife, who could also receive dividends worth £2,000 each year tax-free.


Ben Yearsley, director at Shore Financial Planning, says:

I have always been fascinated by perception of risk. You are a case in point. You say your attitude to risk is low and, to be fair, having around 36 per cent of your Sipp in cash corresponds with this up to a degree. But the investments you hold alongside this cash are at least medium to high risk, with holdings such as BlackRock Frontiers Investment Trust (BRFI) very high risk.

You want to grow your Sipp from £243,000 to £500,000 over the next six years mainly via contributions of £40,000 a year, and then for it to increase its value to £600,000 by the time you are 65 to 67. If your income levels continue to allow your target annual contributions and pension rules don’t change, these goals seem reasonable as you are not banking on huge or unrealistic growth from your Sipp investments. Growing your Sipp from £500,000 to £600,000 over, say, six years after you have stopped contributing only requires growth of 3 per cent a year. Drawing about £25,000 a year from your Sipp by age 66 or 67 – around 4 per cent of £600,000 – is also a reasonable goal.

You're building up cash in an Isa. If the pension rules change you could draw a tax-free income from your Isa by investing it rather than leaving it in cash, on which the interest rates are paltry. 

With regards to having a cash pile, if there was a market fall would you invest at that point? No one knows when that will be and, even if you managed to time it correctly, would you be brave enough to invest your entire cash pot in one go? I think a better strategy is to identify what you want to invest in and how much in total you want to put into these investments, and then gradually put the money into them over the next six to 12 months.



Ben Yearsley says:

Inflation protection is a core aim of Architas Diversified Real Assets (GB00BRKD9W23), and this fund would also add to your portfolio's diversity. It invests in esoteric areas such as aircraft leasing, as well as more mainstream alternative assets such as infrastructure.

Renewable energy and infrastructure are currently hot sectors, and many of the listed funds offering exposure to these areas are on premiums to net asset value, although the underlying assets are largely uncorrelated to equities. So instead of buying an investment trust focused on one of these areas, for example solar energy, maybe look to one of the number of funds that offer broad exposure across various of these sectors, such as TIME Defensive Income Securities (GB00BZ17GL78).

Personal Assets Trust (PNL) aims to preserve your wealth in inflation terms and grow it over time. It’s a multi-asset portfolio of shares, bonds and gold, and its manager, Sebastian Lyon, will dial up and down the risk as he sees fit.

TR Property Investment Trust (TRY) mainly invests in pan-European property shares, but also has about 8 per cent of its assets in physical UK commercial property. It is managed by Marcus Phayre-Mudge and has a good performance record.

For exposure to UK equities I’d look at something undervalued such as Temple Bar Investment Trust (TMPL). Its manager, Alistair Mundy, invests in out-of-favour companies, of which there are many in the UK at the moment.

I don’t see any problem with you investing in India and Japan. You have at least 10 years until you need to draw on your Sipp, which is a perfectly adequate time frame.

Japan is cheap and remains one of my favoured markets. Good ways to access it include Baillie Gifford Japan Trust (BGFD) and Man GLG Japan CoreAlpha Fund (GB00B0119B50).

India is a higher-risk market and perennially expensive, although that is probably a reflection of its growth prospects, and Prime Minister Narendra Modi’s recent re-election is probably a good thing for markets in the long run. A fund such as Alquity Indian Subcontinent (LU1049768085) is my favoured way of getting exposure to this market, or if you want to do it via a broader fund First State Asia Focus (GB00BWNGXJ86) has about 20 per cent of its assets in India.