Irish workers nearing retirement have been shocked to discover that their private pensions have dramatically decreased in value in recent months with many contacting pension companies in distress desperately seeking an explanation and reassurance.
T he recent drop in pension values is due to ongoing market volatility caused by the war in Ukraine, according to County Wexford financial advisor Philip Cullen of Gorey.
“We are living in strange and challenging times and everyone is very concerned.We have seen sharp falls and continuing volatility in stock markets, which is causing anxiety for investors and pension fund holders around the world”, he said.
Outlining the scenario currently faced by many older employees as a result of the financial uncertainty, he said: “Picture this – you are approaching retirement after working hard all your life.You are one of the lucky minority that has been contributing into a pension plan.Your mortgage is finished, your children have moved out and now finally, it’s time for you.You have plans to travel, pursue your hobbies and maybe do some upgrades”, he said.
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“You contact your pension provider to start the process only to discover that your pension has dropped in value at the very worst time.
“To make a long story story, this is due to market unpredictability.
There was a recovery in equity markets after the pandemic with global stock markets finishing 2021 up 32%.
“As we entered 2022, equities investments were preferred to other asset types due to a positive global growth trajectory and it was felt that Covid-induced volatility should subside in time.
“Even though inflation was rising, it was felt that supply bottlenecks should ease further and pent-up customer demand would be sated.Interest rates were also not expected to increase to very high or restrictive levels.
“So what happened.Equity markets hit a record high on January 3 and have been falling since.
The first quarter of the year saw a focus on the escalating tensions in Ukraine which culminated in the Russian invasion in late February.
” In turn, energy and commodity prices soared, adding fuel to an existing post-Covid inflation spike.This was a rare combination of supply-driven and demand-led inflation pressures that resulted in central banks rethinking interest rate policy and investors re-pricing risk assets.The result was falling equity and bond prices, with little room to hide in the overall investment universe.”
Philip explained that equities rallied in October, following a poor run during August and September and it remains to be seen if this is the start of an upward movement or merely a rebound from oversold levels.
“In Europe, the European Central Bank (ECB) raised rates by another 75bps to bring the main policy rate to 1.5%.Inflation remains elevated across the currency bloc.Further rate hikes from key central banks are due as inflation remains stubbornly high.Business activity continues to slow across the developed world, with more indicators suggesting a recession will be forthcoming.”
Philip described 2022 as the “annus horribilis” for equities and bonds, driven by inflation and corresponding interest rate rises from Central Banks.
“With all this and more in mind, I would expect market choppiness to persist.
He advised people who are concerned about the fall in pension values to get professional advice – talk to your pension company, a financial adviser or broker.
“If you are an employee and do not know who to talk to, ask your employer to point you in the direction of their designated adviser.
“Getting professional advice is important as no two people or their circumstances are the same and you will need specific advice on your own personal situation.
“This is especially important if you have less than five years to retirement as you may not have the time required to recover from any drop in value.
“Your adviser will help you work out your attitude to risk, sustainability preference, term to retirement, fund and/or income required, fund types and the pros and cons of each of them.“They should also provide regular review meetings and focus on what has changed in your world, (new job, child, marital status etc.) their world (new products, rule changes etc.) and the world (Ukraine, Brexit, Covid etc.)
The Southeast Mortgages and Financial Services director stressed that volatility is a feature of investment markets.
“We know from years of experience that there is no shortcut to investment success.Yes, some people have struck lucky through buying and selling a high performing share at the right time, or indeed through investing in commodities or the likes or crypto-currencies and have enjoyed huge returns.But each of these approaches carries significant risk and for every winner there are usually many losers.
“I read a recent financial column in which a reader asked, ‘What are the best shares to invest in to maximise my investment?’ It’s a good question, but if we knew the answer to it, we’d be very wealthy people! It’s a bit like knowing the result of a race before the race is run.”
“Volatility in investment markets is perfectly normal.Markets historically have trended upwards over time, but unfortunately for investors, this doesn’t happen in a straight line.If we go right back in time to 1825, we can see that markets have delivered positive returns in 138 of the last 195 years, just over 70% of the years.
“This tells us that given time, markets historically move in investors’ favour.The problem is though, we can’t tell you what will happen next year.The key is to avoid making rushed decisions based on recent short-term or expected events.
“This volatility from year to year and within individual years is simply a feature of investing.Successful investors set up their investments and pensions with a long-term plan in mind and cut out the short-term noise.
But of course, if you are within sight of retirement, find this short-term volatility too difficult to live with or find yourself fretting over every movement in the markets, get advice.”
Successful investors tend to use a “buy and hold” approach based upon a long-term plan and not short-term market movements.
Think of your money like a bar of soap – the more you touch it, the more it disappears.
“The key is time in the market not market timing.Some people have asked us in recent weeks should they move to cash.We don’t have a crystal ball as to where markets will go, but we know from experience that trying to time markets is folly.
“What inevitably happens is that people exit markets when they are cheap (after they have fallen), and then as they rebound again, investors go back in too late when the market is expensive.
“How do you know when is the right time to go back in? What will the recovery look like? Who know if it will be V-shaped, U-shaped or even “Nike Swoosh” shaped! Time in the market as opposed to market timing is the key to success, so we suggest you sit tight, ignore the short-term volatility and maintain your long-term perspective.
“As the wisest investor of them all Warren Buffett says: ‘The stock market is a device for transferring money from the impatient to the patient.’ Impatient people sell in depressed markets and take hurried, rash decisions that usually cost them money.
Patient people sit tight.”
Offering some tips on achieving investment success, he said investment is not built on short-term tactical decisions.Instead, it is based on a carefully constructed plan.
“First of all, you need to be crystal clear about your investment objectives.
What will investment success look like? How much is enough in terms of an investment return? You need to also be clear about your investment time frames, as the investment term should definitely impact the make-up of your investment portfolio.
“You must be clear about your approach during the investment term.Are you leaving the investment to run for the term or are you going to dip into the investment, and if so when and for how much? How often will you formally review the investment?
“In our experience of helping investors to develop their plans, all this information needs to be clearly documented first of all.
Otherwise it can soon get forgotten if the investment climate changes.Before any action is taken during the lifetime of the investment, the plan should be revisited – after all this is your guiding document.
“Make sure your portfolio reflects your appetite for risk.It is critically important that you have the right portfolio for you.
There are many people who claim genius status in having constructed their own portfolio.
Yes, they may have enjoyed very significant returns, but at what cost?
“Their portfolio may be so high risk that they can’t sleep at night! High risk portfolios typically generate higher returns in good times, but when markets fall they suffer greater losses than lower risk portfolios.You won’t hear as much about these, as people tend to keep a little quieter about their losses.
“It is important to be crystal clear about how much risk you are willing and able to take with your investment.What level of short term losses are you happy to bear in the pursuit of longer term success? Are you going to sweat over every dip in the markets or can you happily live with short-term volatility?
“Diversity your assets.There are endless stories of how narrow portfolios have ended badly.
Wealth tied up in only bank shares or property ended very badly for Irish investors just over 10 years ago.People who went ‘all in’ on technology stocks 20 years ago suffered huge losses in the dot com bubble.
“An important principle of successful investing is to stay diversified across a number of asset classes, geographical regions and sectors.If one sector or asset class takes a hit, it only accounts for a small proportion of your overall investment.
“Stay on your best behaviour.A real challenge is to prevent investors tripping themselves up.FOMO (fear of missing out) is a constant danger for investors – seeing a stock or asset class inexorably rise and deciding that they have to get in on the action.
They end up buying at the peak, and only see their portfolio then fall in value.Likewise when portfolios fall, people panic and sell their assets.Often this happens at the bottom of the market, with people simply locking in their losses.
“’I stepped out – and I stepped in again – This well-known line from the ballad Lanigan’s Ball has been the curse of many investors, who have spent their lives trying to time their entry and exit from markets.
This is a well-trodden path to significant investment losses, as panicked investors exit falling markets and subsequently miss the recovery that follows, locking in their losses.
” They then wait on the side-lines as the markets race ahead again and go back in as markets approach their peak.
They end up selling when markets are cheap and buying when they are expensive.
“As the wisest investor of them all Warren Buffett says: ‘The stock market is a device for transferring money from the impatient to the patient.’ Impatient people sell in depressed markets and take hurried, rash decisions that usually cost them money.Patient people sit tight.
“Keep on saving.Volatility is unsettling, but it is also short-term when considered as part of your long-term financial plan.The key is to stay committed to your plan and keep saving.If you continue to save every month, you buy in at a variety of price points – some will turn out to be very cheap after a market fall, others more expensive.But the key is to actually be invested, and to benefit from those 70% of years in which markets move ahead.
“Shut out the noise, don’t look at the performance of markets in the last week, month or year.Instead focus on your financial objectives and the performance of your investments in helping you achieve them over the long-term.
(if you have a long term).”.