Q: Market volatility is top of mind for me now that I’m a few years into retirement. What are the best strategies to protect my portfolio against market downturns when I’m no longer investing for the long term and will need to make regular withdrawals?
We asked David De Pastena, head of portfolio insights at Dynamic, to answer this one.
Your concern is understandable and appreciated, said Mr. De Pastena, and you’re not alone in this. He suggested several strategies to help mitigate this risk.
First, transition to a paycheque portfolio in strong markets. “During favourable market conditions, a paycheque portfolio is designed to deliver a consistent monthly distribution generated organically by the underlying investments,” said Mr. De Pastena. “This approach typically blends bonds, dividend-paying equities and alternative investments.”
He also pointed out that by living off income rather than selling capital, retirees can continue meeting their cash-flow needs during market downturns while allowing invested capital time to recover.
“Instead of focusing on a magic number, such as the 4-per-cent withdrawal rule, the key is achieving the right balance between continuing to deliver the retirement cash flow people need, while not selling the investments that are generating that income,” said Mr. De Pastena.
The paycheque portfolio uses a diversified mix of investments paying monthly with sustainable yields and the lowest possible tax burden for non-registered accounts, he explained. “This way, the focus is to deliver consistent and sustainable income in bull and bear markets alike. More simply, the approach is to spend income, not capital.”
Mr. De Pastena also advised minimizing or deferring capital withdrawals during market corrections. When markets decline, the priority is to avoid losses. Reducing or postponing large capital withdrawals during these periods helps preserve portfolio value and increases the likelihood of long-term recovery.
And lastly, he noted that it’s important to be intentional about where withdrawals come from. Not all assets behave the same during periods of market stress. He also suggested that bonds and other defensive assets often hold up better, or may even appreciate, during equity sell-offs.
“By sourcing withdrawals from cash reserves or short-term, high-quality fixed-income holdings, retirees can limit the need to sell depressed equity positions and reduce the risk of locking in losses.”
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.
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