The article, written by Richard Dyson, explored the investment technique known as “pound-cost averaging” and it’s flip-side, the less well-known effect: “pound-cost ravaging”, which occurs when investors are drawing income from their portfolio rather than building it up. The “ravaging” happens when regular, fixed withdrawals are made – for example, in retirement – after markets have fallen. To obtain the sum you need, a greater proportion of the portfolio has to be sold.
Dyson explains: “Such withdrawals exacerbate the drops in share values by crystallising the losses. They make future recovery more difficult and they start a vicious cycle where, if you continue to draw down on your pot, you diminish its value even faster. Then you get to the point of no return and your cash pile simply drains away to nothing”.
The risks of so-called de-cumulation are likely to be exacerbated with pension reforms when it will no longer be compulsory to purchase an annuity. Investors, feeling instinctively that they can do better without the annuity providing middle-man taking his cut, are going to have to structure their portfolios in such away that their capital sum outlasts them.
Dyson creates a number of graphs and scenarios in his article, all reaching the inevitable conclusion that “no one embarking on this DIY route of withdrawals can afford to take their eye off the value of their remaining pot. Draw too much in one year, and your risk of running out of cash in the years ahead could be suddenly far greater”.
So what can be done in the forthcoming era of investment self-sufficiency?
David Blake, Professor of Pension Economics at CASS Business School says the reforms are being introduced at a time when ‘the UK has lost its savings culture’ and, in his view, rock-bottom interest rates are only part of the story. Blake says we lack, and therefore need, better designed investment products, which are better suited to accommodating individual risk preferences and savings goals.
You’ll excuse the observation, but that is exactly what the peer-to-peer industry is offering.
Proplend, for example, provides the regular income and above average returns associated with peer-to-peer lending – with managed risk. Loans are secured against quality, income-generating commercial property, which gives predictability to an investment, and diversity and balance to a portfolio. This can all be accessed from as little as £5,000.
An investment in a peer-to-peer loan creates a regular monthly income from the interest income, while at the same time restoring the capital sum via the capital repayments. Of course, it’s not risk free and the possibility of losing capital has to be recognised, however, in the case of Proplend, the first legal charge over the property in question and the ability to take a position in a loan that matches the investor’s appetite for risk, all mean that the risk can be managed.
Another luminary, Professor Clayton Christenson (Harvard) observed: ‘A disruptive innovation is one that allows a whole new population of consumers to access a product or service that was previously only accessible to those with a lot of money or a lot of skill’.
With commercial property investment, previously the preserve of the extremely wealthy and well connected, now been accessible to many, we seem to qualify as ‘disruptive’. If that leads to a better pensions environment, we’re proud to accept the title.
Disclaimer: Proplend does not provide financial or pensions advice. If you need to seek advice, you should consult your independent financial adviser.