Since October 2019 there have been two major world crises, Covid and the Ukrainian war that have impacted our savings and investments in terms of stock market volatility.
Just as we see the value of our savings fall, gradually rise again and then fall with each emerging crisis, our feelings and sometimes our behaviours follow a similar pattern.
It is worth understanding the curve of investor behaviours in a little detail to understand how our behaviour may correspond to the peaks and troughs in pension and investment value.
The curve in the diagram below is one which is regularly adapted and used by many investment companies and is not trademarked to any company in particular. The curve demonstrates the types of concerns and feelings that those with pensions and investments may be going through during market up-turns and down-turns.
For our purposes we have adapted the curve so that we as advisers, can reassure our clients that what they are feeling is perfectly natural.
All investments carry a degree of risk, but there is a range of investment choices that can be considered, depending on what level of risk an investor is wanting to take. Whilst most investments offered within a regulatory capacity are managed across diverse portfolios to “dilute” the risks associated with market volatility, when there is a global crisis, there will be a downturn in the value of all investments, regardless.
From the curve, we can see that when pensions and investments are performing well people feel a degree of optimism which, as the market grows stronger, can give people a sense of excitement. They see the value of their pensions and investments keep rising and if the value rises enough people can feel almost indestructible and euphoric (what can go wrong?). When people are close to retirement, seeing a pension rise in this way, can really give people sense of security and help them believe that everything is on track.
Removing this sense of security with a slide in the value of savings at first may be met with a sense of denial that this is happening, but the more the markets slide downwards the more a sense of panic can set in. Some may get to a point when they think that investing has been a waste of time, wishing that they had kept the money in cash, but as with all crises that have been before the market does recover and with it comes a recovery in how people view their pensions and investments, having hope for the future again.
The point to all this? If we can weather the storm when it comes, remain patient and keep calm in the knowledge that our pension (and many investments) are one of the most tax efficient ways of saving and will recover in time, we should manage to plan well into retirement. Reacting in a way that is in line with market volatility can create an element of confusion at best and a loss of savings at worst.
Understanding the natural cycle of feelings during troubled times will help us manage behaviours that may damage our chances of recouping more in the future if we left investments alone and waited for the recovery.
Of course, there are always circumstances where using pension money after the age of 55 years old (under current pension freedom rules) to support life situations will arise and this is a different matter if clients wish to remove a partial sum for these purposes. Pensions can support us in this way, helping us through troubled times, whilst not impacting too greatly on the income set aside for retirement. It is important that people, if they are considering this, seek advice, so that income modelling can be done to assure affordability for the purpose.
Treating a pension or investment as a flexible form of long- term saving is not a mis-calculated waste of money. We are bound to be affected when the value of our hard- earned investments tumble but waiting for the up-turn again, has historically be shown to be the best course of action.