Like institutional investors, private investors will look to have a balanced portfolio to draw income from when funds are needed.
This means spreading your investment across different sectors in order to balance risk in your portfolio. This will help to protect against a sudden drop in value of an investment group, guard against the disproportionate effect of a poorly performing investment or limit the impact of unforeseen events in a sector or region.
Basic information on such a strategy can be found at https://www.smartinvestor.barclays.co.uk/learn/new-to-investing/reducing-unnecessary-risk/diversification-explained.html?r=sb.
Your independent financial adviser may have access to Fintech to help with the process. Software for financial advisers can be found at websites such as https://www.intelliflo.com/.
Areas across which investments can be spread include government and corporate bonds, equities, property and cash. Funds and exchange traded funds can provide a shortcut to a balanced holding. They make it easier to build a portfolio more immune to volatility by tracking an index.
Since many funds tend to focus on a single country or sector, a balanced portfolio may require a number of different funds or ETFs to replicate the necessary diversification.
The need for such a wide-ranging investment is underlined when we come to look at income generation and how the investor intends to drawdown from his or her portfolio in the short and long-term. The bottom line is that if your portfolio is unduly exposed to marked fluctuations in a particular sector, your ability to access income for unforeseen, or even planned expenditure such as holidays or school fees will be severely impacted.
Perfect withdrawal rate
The best-laid plans, even using the most sophisticated software will not guarantee a perfect withdrawal rate, but a balanced portfolio with a diversification plan will give the best chance of avoiding a nasty surprise around the corner.
When calculating the rate of income withdrawal everyone would like to run down their portfolio so that it expires when it is no longer needed. The very essence of drawdown, however, is that it fluctuates over the years as the fundholder’s needs vary. A strongly diversified holding will ensure that the fund is able to cope with these stresses and is not compromised by a period in which income demands are higher than normal.
Balancing your portfolio will offer the best protection and ensure income needs are met as and when required.