Should you be speculating with your pension savings?

You may have read about the share-buying frenzy in companies like US video game retailer GameStop or cryptocurrencies like Bitcoin – and thought that you wanted to get in on the action with your pension savings. Think again.

Despite the global pandemic, shares of companies involved in the “new economy” - such as innovative technology and healthcare firms - and other non-traditional types of investments have been in the news for their sky-high values. With headlines about investment schemes cooked up in internet chat rooms or on social media, some savers might be wondering if they should be get involved too.

Learning from history

Looking back at history, it’s not unusual to see this sort of market frenzy. The “dotcom” boom, when investors were buying up shares of any and all internet companies, would be a good example. When a lot of people suddenly pile in to invest in a new product, technology or trend, hoping the price will shoot up if it becomes the next big thing, this is called “speculation” and the temporarily inflated price is called a “bubble”.

It’s a bit like gambling. You’re taking a bet on something unknown that could potentially have a big payoff, but is also just as likely to result in a big loss. Looking back at the dotcom era, only a handful of those companies are still around today and that speculation eventually led to a major stock market crash.

With speculative share trading, emotions often rule the day and it’s hard not to be tempted to join in. But when it comes to your long-term savings, like your pension, which you’re relying on to give you a comfortable retirement, it’s important to remember that investing is not the same as ‘trading’ or speculating.

With trading, the short-term price movement is all that matters. Investors are looking for a ‘quick buck’ and the price of something has no relationship to its actual value. Investing, on the other hand, is all about the long term. Managers of your pension investments consider the long-term growth potential of a share or bond. They’re looking to make regular, steady gains. When you think about your goals for retirement, whether that’s 5 or 50 years from now, ask yourself: do I want to gamble that away?

Why focus on the long term?

Investments– such as bonds and shares – dropped suddenly when the pandemic was officially declared last year and the world went into lockdown. By June, though, a recovery had begun and by year end, most investments had bounced back and even posted gains for the year.

History shows us, from the dotcom bubble to the Global Financial Crisis, shares and bonds eventually recover. And in fact, markets go up and down every day, but over the long term – years, even decades – they historically offer the most dependable long-term returns on investment.

Trying to capture what the next “hot” stock might be, or selling your investments when markets drop, can have a big impact on your eventual retirement pot.

You’re probably not missing out

If you’re saving into a pension, then chances are you already have some exposure to growth areas like technology, communications, and healthcare. But - depending on what kind of fund you’re in - this will be balanced out with less-risky types of investments, which can help protect the value of your savings from speculative bubbles in certain industries or companies.

Short-term share trading may be exciting, but we believe it has no place in investing your pension savings, especially given the ongoing economic uncertainty.

Taking a longer-term view can allow your savings to grow safely over time.

If you want to know what you're invested in, and how current conditions are affecting your pension savings, please speak to your financial adviser or employer. We can help you find financial adviser if you don't already have one. Advisers will normally charge for advice.

Finally, to learn more about investing during times of volatility, watch our video series.