Big falls in stock market indices can be very worrying for investors, especially for those approaching retirement who are depending on their pensions to provide them with an income when they stop working.
Recent months have seen significant market volatility due to concerns surrounding inflation. Here we look at what market turmoil might mean for your money and what, if anything, you can do to protect yourself from sudden market swings.
While many people may not think of themselves as investors, the reality is that if you have a pension, you are one.
Pensions base their growth on investments, so if you have a defined contribution pension, it’s highly likely that your pension provider will invest a large proportion of its funds in stocks and shares, as well as other assets such as bonds, property and cash. This means that if stock markets fall and stay low, it could reduce the value of your pension pot as a result. You can find out more about how defined contribution pensions work in our guide What is a defined contribution pension?
If you’re in a defined benefit (also known as a final salary) pension scheme, it’s down to your employer to make sure it can pay you the pension you’re entitled to – no matter what’s happening to stock markets around the world. So this essentially means you should receive the pension you have been promised. Learn more about defined benefit pensions in our article What is a defined benefit pension?
What should you do when markets fall?
It’s nerve-wracking watching the value of your investments plummet when stock markets fall, but it’s really important to try not to panic or act in haste. A general rule is that if you don’t need the money right now, it’s best to leave it where it is in the hope that markets recover over time.
If you are worried about how falling stock markets might affect you, bear in mind some of the following investing golden rules:
1. Try not to make any panic decisions
Unless you need your money in a hurry, selling shares when stock markets are falling could be one of the worst things to do, as you’ll be turning paper losses into real ones. If you are able to leave your money invested for longer, go back to basics, ask yourself why you invested, why you’ve taken the amount of risk you have, and think about how long you originally planned to leave your money invested. This might help ease some of your anxiety around leaving your money invested. If you find it difficult not to focus on the potential downsides, our article 9 ways to develop a positive money mindset may help.
2. Focus on the long term
Watching stock markets fall across the world might fill you with dread but experts advise that investors should remember that investing is for the long-term, and you should take at least a five year view, but preferably longer. Hopefully, this will enable you to ride out any stock market bumps and give your money more time to grow.
Jason Hollands, managing director at online investing platform Bestinvest said “‘Knee-jerk reactions to short-term stock market fluctuations rarely go well for the individual investor.
“Chopping and changing your investment portfolio in reaction to news events can be fraught with risk. It can be like trying to change an aircraft engine mid-flight. The worst days in the markets are often followed by some of the best days, so it is often the case that private investors can be caught short when making switches while prices are lurching all over the place.”
3. Making regular pension contributions can help smooth market volatility
Watching the value of your retirement savings fall can be extremely worrying, but if you’re currently making regular contributions into your pension, stopping them could prove a costly mistake.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Market volatility is unnerving and it’s common for people to think about reducing, or even stopping their contributions when they see their pension value take a tumble. However, in difficult times, it’s worth remembering what goes down comes back up, and if you stick with it in tough times, you could actually benefit from the impact of short-term fluctuations.
“Continuing your contributions means that when the market recovers from a downturn, not only will your fund recover, but it can also benefit. By paying into your pension regularly, it means you pay in when markets are lower, when your money goes further and buys more units. It means you stand to gain even more from the recovery.”
4. Diversification matters
Putting all your eggs in the same investment basket means you’re much more exposed if something goes wrong with that particular investment.
It’s a good idea to check that your investments, whether in a pension, stocks or shares ISA or held outside these tax-efficient wrappers, are well-diversified. This means that you should ideally invest across a wide range of assets and funds, so that if one or more of these performs particularly badly, hopefully any losses might be offset by gains made by other investments.
Maike Currie, investment director at Fidelity International, said: “Regardless of how experienced an investor you are, it is almost impossible to predict how the market is going to behave. It may sound counterintuitive but staying invested through volatile times can be the best approach. Trying to time the market leaves you at risk of missing unexpected opportunities that might arise from market corrections while also posing the impossible question of when is best to buy back in. Taking a long term approach and remaining invested in spite of highs or lows is more likely to get you the outcome you want. As ever, diversification is key.”
A number of pension funds have a function called ‘lifestyling’, which means that as you get closer to retirement, they automatically sell some shares at regular intervals and move your money into less risky investments, such as bonds and cash. This essentially helps to protect you from big swings in your pension pot value just before you need it. However, current high inflation and rising interest rates have meant the value of lifestyling funds has fallen recently, and some commentators think there could be worse to come.
Most pension providers offer this function automatically on their default funds, but if you aren’t sure about where your retirement savings are invested, it’s worth contacting your provider to find out. Find out more in our guide Where is my pension invested?
Laith Khalaf, head of retirement analysis at AJ Bell said: “Investors who are approaching retirement should definitely take a look under the bonnet of their pension plans to see what’s going on, and if any automatic switching is taking place, they can then make an informed judgement on whether it’s appropriate for them, based on what they’re going to do with their pension.
“If you think you might be invested in a lifestyling fund, check your latest valuation or speak to your pension provider. The funds in question will normally be called “long gilt” or “long corporate bond”, and will invest in long-dated government or corporate bonds. If you are going to buy an annuity with your pension, you might consider sticking with a lifestyling strategy. But if you aren’t, then you should give careful consideration to picking another type of fund to see you through to retirement, and beyond.”
Where to go for more help
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The consultation is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.