These are, of course, not the only hurdles faced by stock markets. Over the longer term, there are also wider considerations: to what extent will technology disrupt the current economic and political order, for example? What role will geopolitical concerns play from here?
Significant drawdowns can, of course, have a huge impact on long-term returns. The greater the amount lost, the higher the gain required to break even.
In other words, even relatively short-term losses can have a lasting impact on long-term returns.
While a 10 per cent loss in any one year would require an 11 per cent gain to break even, a 30 per cent loss requires a rise of 43 per cent to break even. That is a conversation not many want to have with their clients.
Add in the fact that losses suffered by retirees making regular income drawdowns are often amplified by the nasty effects of pound-cost ravaging and ascending the risk scale starts to look like a rather dicey strategy.
Possible solutions
We believe it is much more prudent to shift the focus away from recovering what has been lost as quickly as possible, onto the avoidance of permanent capital loss along with steady returns with low volatility.
Multi-asset funds can provide an excellent solution here by aiming to preserve as much of a portfolio’s value as possible throughout the entire market cycle, while also offering a consistent, modest income to replenish any regular drawdowns.
Many invest in near-cash or cash-plus instruments and while this obviously means they do not participate in all the upside on offer when equities are rallying, and fixed income assets are booming, it also means savers are not left holding the bag when the market crashes like it has this year.
Rather, they stand a much better chance of maintaining some form of equilibrium while everything else is falling.
Some way down the line, when things are clearer, risk assets like equities will again offer a great opportunity for savers to recover the losses caused by Covid-19 and pass down as much wealth as possible.
But the bottom line, for now, is that a multi-asset approach centred on capital preservation and smooth, less volatile returns provides unrivalled portfolio insulation in a time of unprecedented uncertainty.
With intergenerational wealth transfers reaching record levels and becoming an increasingly important lifeline for beneficiaries, this cautious approach could prove critical.
Sam Liddle is a director at Church House Investment Management
