In March of this year, financial markets went into freefall as the coronavirus crisis deepened and countries around the world went into lockdown. On the back of that, many people will have seen the value of their pension plans and investments fall substantially – me included.
Fast-forward six months, the pandemic is still with us, and everyday life is still a long way from the old normal. However, some markets have recovered some of their losses, and some like the S&P 500 even went higher than their pre-March levels.
I’m not being complacent though. I’ve seen market crashes and significant market volatility before – and I know they can happen again, sometimes when you least expect them to. And with the coronavirus pandemic continuing to have a significant impact on all aspects of our lives, as well as the global economy, we may see further market volatility and, potentially, more significant market falls.
There are things we can all do to help make sure that our pension plans and investments are as well prepared as possible for this.
1. Remember some of the basic but golden rules of investing - stay calm and think long term
It’s human nature to be concerned when you see the value of your pension plan and investments falling. Many people’s gut reaction is to get out, sell their investments. If you sell though, you’re likely to be selling after markets have already fallen and, importantly, before they rise again. That means you’re locking in losses and won’t benefit from any recovery. So over the long term you’ll potentially have less than if you kept your money invested throughout the whole period.
It’s also important to remember that investing is something you should take a long-term view on. Market ups and downs are part and parcel of investing – the value of all investments can go down as well as up and you may get back less than was invested. But history has shown that markets generally recover and, over the long term, investments rise in value, although past performance isn’t a guide to future performance.
I’ve been working with investments for well over 20 years, and have seen some major market crashes. They’ve been painful, and I won’t underplay the concern and worry they’ve caused many investors.
Human nature commonly leads people to sell after a market crash, and to buy once confidence and returns have improved. This is essentially ‘buying high and selling low’– a move that’s unlikely to help you maximise returns. So it’s important to try to take emotion out of any decision-making, and not make short-term decisions on a long-term investment.
For more on this, read Market crashes – what can we learn from history? by Holly Mackay from Boring Money.
2. Think about having a good mix of investments to help lessen the impact of market ups and downs
You can’t control market ups and downs, but you can do something to help control how much your investments are affected by them.
Different types of investments behave in different ways at different times. So if you’re investing in only one or two kinds, you could be exposing yourself to quite a degree of risk. Making sure that your money is spread across different types of investments and geographical locations - called diversification – could mean that the overall value of your investments is less likely to fall as dramatically than if you were just invested in one or two kinds.
The good news is that if you’re invested through a workplace pension plan, particularly if you’re in your plan’s default investment option, it’s likely that your investments will already be well diversified. If you’re a Standard Life customer, you can check where you’re invested by logging in to online servicing or downloading our app.
3. Understand how much risk you’re comfortable and able to take with your investments
Generally, higher risk investments will tend to be more affected by market ups and downs. That means you’re likely to see bigger and more frequent fluctuations in value, although they also have more potential for growing in value over the longer term.
So if you’re uncomfortable seeing large movements in the value of your investments, you might want to consider lower risk options. However, this has to be balanced with making sure you take enough risk to meet your financial goals.
Think too about how much risk you’re willing to take with your investments – basically how much money you can afford to lose. And bear in mind that how much risk you’re comfortable and able to take can change as you go through different stages of life.
For example, when you’re younger, you might be fairly comfortable taking quite a lot of risk with your pension plan investments as you’ll have time to ride out any ups and downs in value. But as you get closer to retirement, you might want to move into lower risk investments to help cushion your plan from significant falls in value.
If you’re not sure how you feel about risk, try our risk questionnaire.
4. Think honestly if you have the know-how and time to pick and manage your investments
Around the house I’m an avid DIY-er, but I happily pay an expert to do the stuff that’s not safe for me to do myself or that I don’t have the time to do. It’s no different with investing – think honestly if you have the know-how and time to choose between different funds, build a portfolio and then manage it regularly. There are lots of websites, tools and other resources that can help with some of these. But are you able to do it better than an investment expert?
And the more significant your investments are, the more you might want some guidance and expert input. For example, if my pension plan is worth £150,000 and it’s going to be my main source of income later in life, I might want some help making sure it’s invested the right way to help give me more peace of mind. On the other hand, if I’m investing £25 into an Individual Savings Account (ISA) each month, I might feel fairly comfortable making my own decisions.
At Standard Life, we offer a range of ready-made investment options, managed by experts, that can do most of the hard work for you. These include lifestyle profiles, which automatically move your money into usually lower risk investments as you get closer to retirement, to help prepare them for how you plan to take your money.
If you’re invested through a workplace pension plan, it’s likely that you’ll already be in one of these. But it’s a good idea to check that the lifestyle profile you’re in is still aligned to your plans – and consider moving to another one if it isn’t.
For example, if you’re planning to leave your money invested when you retire and take a flexible income (also known as drawdown), make sure that you’re not in a lifestyle profile that’s designed for people who are planning to set up a guaranteed income for life (an annuity). If you are, you could be taking unnecessary risk because these investments are designed to move in line with annuity rates. If annuity rates fall significantly just before you retire, this could have an impact on the value of your pension pot and your retirement plans.
How Standard Life can help give you more peace of mind about your investments
We can’t guarantee that your investments won’t go down as well as up in value, or that you’ll get back more than was invested. But to give our customers further peace of mind, we have teams of experts responsible for working closely with the fund managers who run our ready-made pension investment options. They make sure these perform as expected, include the right mix of investments and take the right amount of risk.
Since 2015 we’ve also had an Independent Governance Committee to make sure that our workplace pension schemes are providing value for money. This includes reviewing and assessing the investment options available to members, and making recommendations about changes where necessary. You can find out more about the committee and what it does here.
Looking for more help and guidance?
The Pensions Advisory Service website is a good source of information about how the coronavirus pandemic could affect your pension plan and investments. Alternatively, if you’re still concerned about the impact of future market falls, you might want to speak to a financial adviser - there’s likely to be a cost for this. You can find one in your area at www.unbiased.co.uk if you don’t already have one.
The value of investments can go down as well as up, and may be worth less than was paid in.
The information here is based on our understanding in September 2020 and shouldn’t be taken as financial advice.