Whether you have a pension, an Individual Savings Account, or other type of investment product, chances are your savings are invested in a fund or mix of funds. Funds pool money from lots of savers which is used to buy investments such as shares in companies or bonds.
Shares offer investors a share of ownership in a company. Bonds act as loans to a government or a company in return for a fixed rate of interest over time and are intended to be paid back in full at a determined date in the future. Shares are considered riskier investments but have the potential to be worth more over the long term. Bonds are often considered less risky: they can still rise and fall in value, but usually less so than shares – and they do offer the advantage of interest payments. You may also be invested in a fund that owns other types of investments, such as shares of companies that own and manage property (like office buildings or shopping malls), or that invests directly in UK commercial property.
Many pension funds will invest in both shares and bonds, and sometimes property or other types of investments. Funds that invest in more than one type of investment are called “multi-asset funds”. This is typically how your Scottish Widows pension might be invested, for example. Different kinds of investments come in a range of options from lower to higher-risk. Mixing different types of investments can offer you different levels of risk and potential reward, depending on what your goals are. This is because different investments do well at different times. Having a spread of investments with different risks balances out the overall risk of a portfolio (a collection of investments) over time.
A fund manager does all the hard work and decides which investments a fund should hold, in what quantities, and when the investments should be bought and sold.
When you’re invested in “the market”, whether it be through a pension or othernvestments, it’s a good idea to track how they’re performing. Let’s look at how shares, bonds, and property performed from June 2020 to June 2021, and what could affect them looking ahead.
Shares performed well over the last year. While the pandemic is not over yet, and there has been slower economic growth, shares in the UK and around the world gained in value overall since the dramatic market drop in March 2020, when the world first went into lockdown. Generally, investors have been optimistic about vaccines and looking ahead to a return to normal economic activity, which has helped share values higher.
Bonds did not perform as well as shares, with most types of bonds having much lower gains or – in some cases – small losses. Generally, the main reason for this has been the threat of inflation (rising prices) as people begin to spend money again. When inflation rises, usually interest rates do too, which drives bond prices down.
Property: Overall, UK commercial property had a small increase in value for the period, and property management companies had strong gains. With most of the world in lockdown for much of the year covered in this report, some types of properties didn’t do well (such as stores and hotels that were closed), while others did better (such as warehouses that were very busy from the increase in online shopping).
Outlook: Financial markets can be prone to sudden changes on a short-term basis. Factors like the health of the global economy or COVID-19 developments, could lead to a more bumpy ride in the in the coming months. We focus on the long term though (generally 10 years or more), because we believe that it’s the best way to deliver positive results for our customers to help them meet their investment objectives over time.
Pensions are a long-term investment. The retirement benefit(s) you receive from your pension will depend on a number of factors including the value of your plan when you decide to take your benefit(s) which isn’t guaranteed and can go down as well as up. The value of your plan could fall below the amount(s) paid in.