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 Woman at kitchen table

Volatile markets and your retirement plans

16 April 2020

5 minute read

When you see the value of your investments plummet, it’s hard not to panic, but those who are close to retirement, or just retired, will undoubtedly be more anxious than most. So, what can you do?

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest.

What you’ll learn:

  • How volatile markets can impact your retirement plans
  • Think about the reasons why you’re investing
  • Remember to focus on the things you can control

When it comes to investing, we’re always warned to be prepared for a bumpy ride as stock markets can fall as well as rise. And we’re certainly having our nerves tested at the moment as fears about the impact of the coronavirus pandemic continue to grip the stock markets.

How volatile markets can impact your retirement plans

People often underestimate the extent to which investing requires you to understand – and be able to control – your emotions. This is true in normal market conditions but becomes vital in periods of extreme uncertainty.

There will be many investors currently looking at pension balances that are significantly lower than they were a few months ago. It may seem like the savings you worked hard for are evaporating, and the retirement you can afford is reducing on a daily basis. An emotional reaction here is understandable, but don’t let it further hurt your chances of meeting your retirement goals.

It’s usually recommended that you review your investments (including pensions) once a year. But, given the current stock market conditions, if you’re nearing retirement or have just retired, it’s definitely worth revising your plans now, bearing a few things in mind.

Remember why you’re investing

When you see share prices tumble and hear experts on the news talking about the worst period of stock market volatility since the 2008 financial crisis it can be easy to forget why you’re invested in the first place. However, even if you’re nearing or already in retirement, you’ll probably still have years, possibly decades, ahead of you to giving you time to recover, hopefully, any losses and even grow your investments further. However if you rely on your investments to generate income or lump sums you need in retirement (either currently or in the near-term), you may need to re-think your expectations.

A sensible pension investment strategy will reduce risk as you get closer to retirement , although still remain invested to, hopefully, provide growth through retirement and help your money last. This is to help protect against exactly these sorts of conditions, and will have a greater impact the longer you are from needing to access your investments. And importantly, if you’re following this sort of investment strategy you should be cushioned from some of the impact you’re hearing and reading about in the news.

So if you’re having a bit of a wobble, take a breath and remember that you’re investing for the long term and still have time on your side. Try to avoid watching the markets day-to-day as this will increase anxiety and make you feel you should do something. Long-term plans should be looked at through long-term lenses.

Is cash king? (Beware of locking in losses)

If you don’t need the money that you have in investments, don’t rush to sell anything without fully considering the consequences. If you sell, you’re turning ‘paper losses’ into cash losses and because shares have tended to perform better than cash over the longer term, you have less chance of recovering your money. However, human psychology means many will be thinking it’s better to get out now rather than risk losing even more. However, it’s important to bear in mind that what’s happened in the past to investments – their performance – is not a reliable indicator of what will happen in the future. It is possible that you will recover losses (or even make gains) by holding on but the future is always uncertain.

And even without the current stock market volatility, as we get older, we generally become more risk averse and people often veer towards holding more money in cash because it feels safer. However, even cash is not without risk.

The long-term effects of inflation can diminish the value of cash, especially in a low interest rate environment like we’ve got at the moment. Interest rates on cash savings accounts are at record lows and lower than inflation. This means that holding cash is likely to result in a loss of spending power.

While past performance is not indicative of future returns, over the longer term, shares have typically produced higher returns than cash although, there will of course, be highs and lows along the way – as we’re currently experiencing. If you would like to read more about the differences between holding cash and taking investment risk, click on our previous article: “Should you save cash or invest?”

Interestingly though, many investors are seeing the recent falls in stock markets as an opportunity to invest because they can buy shares at lower prices than a few months ago. It takes some nerve as it could be a rocky ride for some time yet but if you’ve got money you can invest for five years or more, it may be worth considering.

Focus on the things you can control

If your investments have fallen in value, there’s no doubt that it could impact the retirement plans you already have in place. However, while you can’t move the market or reliably predict when it’s at the ‘bottom’ (or ‘top’), you can control your own actions in response.

You’ve probably got a clear idea of when you want to retire and how much extra you’ll want to live off to supplement other income you’ll be getting. If you were relying on your investments for this and don’t have any other funds to draw on, you may decide to delay your retirement date or accept that you’ll have a lower income.

And if you’ve already retired, there are a few things that you can think about:

  • Consider postponing any upcoming large one-off expenses or reducing discretionary spending
  • If you already have cash savings, use this money first, meaning you delay selling your investments, giving more time to recover.
  • In periods of poor performance if you use just the income your portfolio produces, then you don’t have to sell, again giving you more time. However, it is important to point out that a number of companies across a range of sectors have suspended dividend payments this year due to the coronavirus pandemic. This is intended to allow companies to retain cash to shore up their balance sheets during this unprecedented period of market distress . If you reinvest dividend payments rather than take as income, dividends can be used to buy more shares, which hopefully will grow in value, boosting overall returns. This is known as compounding, whereby your returns also earn returns. So if you are no longer receiving dividend payments, it can therefore have a negative impact on the future growth expectations of your investments.

Conclusion

You’ve probably been planning for your retirement for years so don’t let the uncertain times we’re currently living through risk de-railing your long-term plan. Yes, review the situation and take action if necessary but don’t make any knee-jerk decisions you may later regret. You don’t need to rush anything – focus the mind and remind yourself of what you’re trying to achieve.

If you don’t really have a plan and aren’t confident about making your own decisions, or have a plan but are worried and not sure what to do, it’s worth seeking independent financial advice.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds and the other investments that we offer are designed for the long term so you should only consider them if you can stay invested for at least five years.

All of these investments can fall in value as well rise; you may get back less than you invest.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

Find out more about our Ready-made Investments.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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