By Alan Morahan, Managing Director, Employee Benefits at Punter Southall Aspire
Since January 2020 until now, we have seen a lot of activity in the stock market. Markets showed a muted reaction in January when the Coronavirus outbreak was first announced, seemingly underestimating the impact on economic conditions.
The penny finally dropped for investors in late February and we have now seen the most serious stock market falls since 2008.
It is tempting for investors to look at these events, as well as the year ahead, and to feel a sense of worry. How will my pension investments perform? Is there anything I can do to brace myself in case things get even worse? How can I ensure I benefit if things go better than I might expect?
Learning to cope with and navigate market volatility is crucial to successful pension investing.
Employee Benefits at Punter Southall Aspire offers the following four tips:
#1 Pensions are long-term investments
It is notoriously difficult for investors and fund managers to consistently predict what will happen in the markets. Consequently, it is sometimes hard for them to make effective pre-emptive decisions.
The essential point is this: whilst past performance cannot guarantee how future results will transpire with your investments, committing to a long-term strategy tends to offer greater rewards than trying to actively predict every short-term movement of the markets.
#2 Expect inevitable falls
This is more of a psychological observation, but it is important nonetheless. It is a lot easier to cope with a temporary fall in your investments if you expect these to happen over ten, twenty or thirty years. Investing is never a continuous, straight upward line. Rather, when done properly, it tends to be a jagged line with many ups and downs – yet following an overall upward trajectory. The key here is not to panic, and to remember the nature of the beast.
#3 Diversify appropriately
It is important to remember that the pension default investment options most members are invested in are typically well diversified. Pension default investment strategies tend to be widely invested around the world and, in most cases, will include asset classes other than equities such as bonds.
Many default funds will also move you across a range of funds as you get nearer to retirement, which reduces your exposure to the stock market. If you would like to know where your pension is invested, you can find out by contacting your pension provider.
#4 The benefits of regular saving
‘Pound cost averaging’ is the process of regularly investing money, usually on a monthly basis, to smooth out the impact of the highs and lows of the stock market.
So, whilst you may be concerned about the current falls in the stock market, as a member of your employer’s pension plan you commit regular sums towards your pension pot over many months, years and even decades. You are not paying in a single large amount at one point in time. Not only does this remove the pressure of trying to time the markets correctly, it can sometimes lead to stronger returns overall. During these times you might keep buying into your investment choice but for a cheaper price. If its value then rises again in the future, you could potentially be better off than if you had tried to time buying these stocks with a lump sum.
As mentioned above, if you are concerned about your pension, in the first instance you should speak to your pension provider who will be able to give you further information.
Alternatively, you can seek individual advice from a financial adviser. You should be aware that an adviser will normally charge for using their services.