Why investing is a long-term plan
Iain McGowan, Investment Director
So far, 2022 has been a bumpy year for stock markets and your pension value may have gone down but there’s no need to panic. While we understand that it can be unsettling to see the value of your pension dip, it’s actually perfectly normal for stock markets (in which your pension is invested) to move up and down over the short term.
What causes investments to fall?
In response to events – like the coronavirus pandemic, or Russia’s invasion of Ukraine – which cause uncertainty, the price of company shares and other stock market investments that your pension is likely to be invested in, can experience sudden changes or volatility. On top of these events, we’ve also seen inflation, the rate at which prices of goods and services is rising, reaching a 40-year high, and signs that interest rates are starting to increase.
These pressures can lower people’s confidence and make them less likely to spend in the short-term as they wait and see what might happen. What history tells us is that once these events stop or we get used to them, markets tend to recover.
Short-term blips but long-term growth
The key phrase here, is ‘short-term’. While volatility usually happens over short periods of time, your pension is a longer-term investment, which you’re likely to be saving into over many years. Experience shows us that, although the stock market can react and fall during periods of uncertainty, it usually recovers in the long run.
You can see this pattern in this graph (PDF, 181KB). The dips show how company shares, also known as equities, in the UK have fallen in response to events like the Global Financial Crisis or the Covid-19 pandemic. But if you look at the long-term trend, it’s upwards. In other words, despite the falls along the way, values tend to grow over the long term.
Taking a step back
That’s why it’s important not to panic. Seeing your pension value fall can be scary, especially if you’re nearing retirement, but taking a step back and looking at the longer-term picture can help set your mind at rest. As an example, someone who withdrew their investments in March 2020 when uncertainty about what would happen with the pandemic caused a dramatic fall in the markets, would have missed out on the recovery we saw later that year. In fact, if they’d continued to invest when the market was in that dip, they could have added more shares at cheaper prices.
Similarly, if you’re nearing retirement and you’ve been investing for some time, your pension will already have benefitted from the upwards trend and growth in value you can see in the chart, despite the dips. It’s also likely that your fund will have been moved automatically into less risky investments as you approach your retirement date, so the potential impact may not be as bad as you might think.
Taking a balanced view of risk and return
When it comes to investing your pension, taking a balanced view of risks and potential returns is part of making your money work harder. For the majority of investors, your pension is invested across different types of investments, or assets, which helps spread your risk when things get bumpy. We also consider how close your target retirement date is when we look at the different assets you’re invested in.
In the early years, when you can benefit from the longer-term potential of investing in things like equities, that’s what we’ll do. As you get closer to your target date, your funds will move into lower-risk assets like bonds, where the opportunity for value growth might be lower, but so too is the risk.
Although past performance isn’t a reliable guide to what might happen in the future, over time, equities have historically performed better than bonds (loans to a government or company) and cash. It’s again down to the difference between short and long-term. Because equities are linked to how companies perform, they can be volatile in the short term and especially when there’s uncertainty around the economy. But in the long term, they tend to show strong performance.
Supporting you for the long term
That’s why we believe that equities continue to be important in helping create the returns that long-term investors need to have a comfortable retirement, and it’s why we think they’re an important part of your pension portfolio. It’s why we invest heavily in equities in the early years of building up your pension. It’s our belief that this can lock in growth in the early stages of investing in your future, so you can benefit from the long-term trends.
We’re committed to supporting you through good times and times of uncertainty. There’s lots of information on our website that can help you understand more about how your pension works and what that means for you. If you’re reviewing your pension investments, it’s a good idea to discuss your plans with a financial adviser. This can help you understand and explore different options and how they might affect your long-term goals.