In the aftermath of the chaos in financial markets, investors are surveying the landscape with a real sense of shock.
Markets around the world have had some good days since tariffs drove a coach and horses through the global trade system, but they’re still down from the recent highs.
It means investors and those with pensions have been left with some burning questions.
This article isn’t personal advice. Unlike cash, investments can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. If you’re not sure if an action is right for you, ask for financial advice.
What should I do now?
Most people shouldn’t change their long-term strategy.
The risk at times like this is that people feel the need to act – the ‘fight or flight’ instinct is hard to beat.
There’s a temptation to sell investments due to worries about them falling further. However, this could cement your losses and removing the opportunity to take advantage of the potential recovery.
Investing is a long-term commitment of five to ten years or more, and with a longer time horizon, there’s the opportunity for markets to recover and go onto positive growth.
Now’s a good opportunity to check in with how diverse your portfolio is, and if you’re more heavily invested in one area, shift the portfolio to a more balanced position in line with your own goals. You can also take advantage of lower prices to use this year’s ISA and pension allowances, and consider using share exchange to move more of your assets into these tax shelters.
But remember, pension and tax rules can change, and benefits depend on your circumstances. Money in a pension is usually accessible from age 55 (rising to 57 in 2028).
How long will it take for my investments and pensions to recover from the recent falls?
The pause in the tariffs process has brought some calm to the markets, but once that ends, there’s no real certainty over what will happen.
It’s unlikely to be the end of the volatility. However, even if it rumbles on, it’s important to bear in mind that markets go through tough times, and historically they’ve recovered.
One month on from the COVID-19 pandemic and markets were down 31.7%. One year later the market was 7.2% down. Three years later it was up 5.8% from where it was pre-pandemic. This provides useful context, but recoveries aren’t always swift, and we can never guarantee that history will repeat itself.
How markets have behaved in previous times of market turbulence?
Total return FTSE All Share
Event | 1 month on (%) | 6 months on (%) | 1 year on (%) | 3 years on (%) | 5 years on (%) |
|---|---|---|---|---|---|
Black Monday (1987) | -33.3 | -22.4 | -18.4 | -7 | 33.9 |
Dot.com bubble | -39.7 | -29.7 | -24.8 | 8.9 | 14.6 |
Global Financial Crisis | -37.1 | -22.8 | -11.1 | 3.8 | 31.1 |
Coronavirus pandemic | -31.7 | -18.2 | -7.2 | 5.8 | 34.2 |
I’m coming up to retirement and my pension investments have fallen, what should I do?
If you’ve less time for your investments to recover, this can be a worrying time. The key is not to make any knee-jerk reactions that you come to regret, and it can be useful to bear a few things in mind which can help ease the worry.
Your pension investments might not have fallen as much as you think. Most people are in a ‘default fund’ – where you’re invested if you haven’t made a choice yourself.
This invests in a diverse range of assets, designed to help mitigate the impact of market falls. If you’re coming up to retirement, these funds tend to move you gradually into lower risk assets too, known as lifestyling.
Approaching retirement doesn’t necessarily mean this is the moment when you need every penny of your pension.
Annuity rates are better than they’ve been for 17 years, so that could help offset market movements. If you’re in this position, it’s worth doing the maths and considering your options as once set up, annuities can’t usually be changed.
For example, you might have other savings you could draw on for a period until markets have recovered. Alternatively, you could decide to phase retirement, buying an annuity with part of the pot and taking on part time work for a period to close the gap. You can then consider annuitising the rest of your pot later in retirement.
If you’re planning to move into income drawdown, or if you’re already drawing an income from your pension, then you should already have been considering whether your pension investment portfolio meets your objectives – including how much risk you want to take.
Remember though, what you do with your pension is an important decision. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help over 50s and we can offer financial advice if you'd like it.
You should also have built an emergency savings safety net which we think should be big enough to cover one to three years’ worth of essential spending, which you can draw on in order to avoid eating into your pot while markets are down.
Nobody’s perfect, and if you haven’t done either of those things, you’ll need to regroup. It’s going to be vital to consider your monthly budget and whether you can spend a little less on the nice-to-haves for a while - or work on the income side of the equation.
I’m about to use my Lifetime ISA to buy a property, what should I do?
As you approach the time to use your Lifetime ISA to buy a property, it’s important to gradually shift into lower risk assets, so this isn’t such a worry. Some Lifetime ISAs are in cash anyway.
However, if you haven’t done this, you might want to consider the options to close the gap between the value of the LISA and the money you need.
You can speak to your mortgage company and see whether they’re prepared to lend more than you had previously asked for. Now rates have come down slightly, you could still meet their affordability criteria. Alternatively, if family members are able to help, they could pitch in too.
For those not planning on buying anytime soon, there’s much to be gained from putting more money into their Lifetime ISA – making an opportunity to take full advantage of the potential recovery in investments. Even if you’ve got a purchase around the corner you can still put in cash and get the government bonus. Don’t forget that Lifetime ISA withdrawals not used to buy a first home (after 12 months from opening one) or for later life at age 60 will usually mean a 25% government charge. So you could get back less than you put in.
Am I better off in cash savings?
If you’ve never invested before, it’s a logical jump to this conclusion, but market falls like this are huge news precisely because they’re unusual.
Most of the time investing delivers short term ups and downs, on the way to long-term growth that outpaces what you can expect from cash. If you leave everything in savings for the long term there’s a real risk it doesn’t keep pace with inflation, so instead of growing, its spending power shrinks.
We should all have cash to cover emergencies.
While we’re working age, we think this should be enough to cover three to six months’ worth of essential spending and when we have retired it should cover one to three years’ worth.
Beyond that, with a decent long-term time horizon, if you are comfortable with the risks of investing, it’s a missed opportunity to keep your money in cash.
Are there any positives we can take from this?
It’s not all doom and gloom.
Investors making contributions through this period – including into pensions – have been buying into the market at a time when their money has gone further, so they can make the most of the potential recovery.
Over the longer term, there’s an opportunity for all investors to appreciate the importance of considering their holdings as they come closer to needing to access their investments - and whether they want to gradually move some into lower-risk assets.
Likewise, for anyone who has ever felt that the recommendation to hold one to three years’ worth of essential spending in cash in retirement is a bit punchy, this is a useful reminder of the enormous difference it can make to have a robust safety net during more volatile times.
(Photo by Anna Moneymaker/ Getty Images)
