Asset allocation has been proven to be the most crucial factor in determining investment returns, and Sequence Risk has a significant influence on portfolios from which money is being withdrawn. So, it is particularly important to make sure that your portfolio has the right asset allocation in retirement says Philip Wise, retirement income planning director at Informed Choice.

There are no ‘hard and fast’ rules to rebalance your retirement portfolio but you must seek the correct financial advice before changing anything, also avoid making knee-jerk reactions in response to the financial markets.

There are two main approaches to rebalancing: the time-based approach, where you rebalance every year, half-year or quarter or the rebalancing band approach where you only rebalance if an asset class moves outside of pre-specified tolerances, adds Wise.

Craig Melling, investment manager at integrated financial planning and wealth management firm Progeny says: “Firstly, in times of stress, monitoring asset movements, “drift”, in portfolios is imperative. Rebalancing, if tolerances are breached, will ensure clients remain in risk and asset allocation remains appropriate. Secondly, on rebalancing, there is no right or wrong answer to frequency. However, it is our view that it should be a mechanical process with limits and designated timescales, for example quarterly, six monthly, for example. The reason for this is that investor emotion is stripped out of the decision-making process, as in times of market stress, emotions are heightened, and investors can be guilty of irrational behaviour. Having a clear asset allocation and rebalance process keeps you focused. The final point to remember when rebalancing is cost. This will have an impact on the portfolio and additional costs will eat away at returns, therefore having a clear strategy will again limit emotion driven trades.”

Best strategy

Robert Barfield, chartered FCSI at private wealth management firm Arlo Wealth says: “The first step any adviser should take is to ensure their clients’ portfolio meets their risk profile. Advisers should manage expectations and outline what income levels are sustainable or not. While the rise of exchange-traded funds (ETFs) have allowed people to keep investment costs low, it can mean the risk management of a portfolio is weak with no downside protection. Making sure that an individual’s investments align with their goals will mean it performs in line with any expectations they have and limit the chance of any nasty surprises.

A comprehensive and effective tax plan is an essential part of managing a retirement portfolio. Working through it carefully and communicating clearly with the client can ensure that more money goes into their pocket rather than is unnecessarily paid in tax and helping them to meet their retirement goals.

Additionally, advisers should be on hand to discourage individuals from putting their portfolio at risk by steadily withdrawing funds during retirement, regardless of market conditions. Once the money is withdrawn from their investment portfolio and spent it is gone forever. To manage this risk, advisers should make sure they have suitable investments within the portfolio, and they know exactly where the clients’ income is coming from for the years ahead.”

Further Reading

FCA delays pension transfer specialist qualification rules to October 2021

Guest Post: Impact of Covid-19 on Retirement

FCA confirms landmark review of pension freedoms advice