How can you sit out the equity market falls? Dr Benjamin Holdsworth advises on the crucial mistake to avoid.
For many investors, the purpose of accumulating wealth in a portfolio is to provide an income either now or in the future that is, at the very least, able to cover their basic needs and hopefully a bit more.
The level of portfolio-derived income required is unique to each investor. Some will have pensions related to final salary and possibly other income from other sources, such as property. Others will need to rely more fully on their portfolios.
Portfolio income comes from the natural yield that a portfolio generates in the form of dividends from companies and bond coupons (interest payments), with capital making up any shortfall.
When markets rise, as they have done most years since the global financial crisis a decade ago, portfolios may even grow after an income has been taken, although this will not always be the case.
On the other hand, when markets fall, it can begin to feel a little uncomfortable, as dividends may be cut and equity values may be down materially as we have seen in the first quarter of 2020 – the upturn in April has helped a little.
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