Your pension is just like any other investment – it will be affected by changes in the market or political or economic uncertainty. While it can be concerning to see the balance of your hard-earned savings fund decrease, these pension fluctuations are normal and should not cause you alarm.
Here’s why your pension savings balance could be going up and down:
Changes in the Stock Market
Most people contribute to a defined contribution pension, which are funds that invest in the stock market to create growth over the long term. However, in the short-term, you’re likely to see the balance of your pension move up and down as the stock market does.
For the last decade, stock market trends have seen extended periods of growth – something that has helped to boost pension fund returns. However, the decline in the markets in 20201, caused by the global Coronavirus pandemic, brought around the second-biggest stock market crash. This has impacted markets around the world and has had a knock-on effect on many share prices.
But There Is Still Hope
In the past, stock market slumps have often led to significant returns years after. Following the 2008 global financial crisis, the top 500 companies on the US stock market finished up over 20% in 2009.
Ups and downs are the nature of investments. It’s impossible to predict how long market slumps will last, but historically crashes tend to bring only short-term turmoil.
Keep a Cool Head
When evaluating a pension fund’s performance, you should consider what has been lost or earned over the fund’s lifetime. Your balance during a downturn, if you’re focussing on short-term performance, will seem worse than if you look at them over a more extended period.
Besides, declines in the market can work in your favour – some experts believe this is the time to save more into our pension because you’ll be able to purchase pension units at a better price.
The average pension will be invested in different assets, in what is known as a diversified portfolio. This portfolio invests your funds in cash, shares, bonds and other assets in locations across the globe, depending on your investment plan.
A diversified fund means any drops in your pension will be less noticeable, and you can profit off markets that are performing well over time.
Risk and your age
Your pension is a long-term investment, which means your approach to risk may change with age. A plan that focuses on high growth is likely to come with a higher level of risk, and your pension will likely experience many fluctuations. This type of investing can be ideal while you’re in your 20s, 30s and 40s and can help grow your pension pot significantly.
However, once you reach your 50s, you may want to consider a lower-risk investment to protect your pension ahead of your retirement. Lower-risk investments tend to have less fluctuation, but they also have a slower growth rate.
Did you know?
Most pensions are automatically moved to a lower-risk plan as you approach retirement age, to protect against market tremors.
Protecting Your Pension
Most fluctuations don’t usually have a lasting impact on pensions, as these long-term investments have time to ride out the market dips and bring in long-term growth. But those closer to retirement have less time to allow the recovery of their pensions losing money, which is why a balanced approach is needed.
One way to protect your pension is to invest in government bonds2. These bonds are one of the lowest risk investments, but they also yield lower returns. This type of investment means you are effectively lending money to businesses looking to raise funds. You will get regular fixed return unit the bond reaches maturity, and then your original investment will be returned.
Investing in property is another option you can use as in a balanced investment strategy. Some funds will invest in property through their diversified portfolio, but as an individual, you can also invest in property. While this provides a physical asset that increases value over the years, it requires an upfront investment that may not be attainable for everyone.
Got Questions? Check These First
How Does a Diversified Portfolio Investments Protect My Pension Against Market Fluctuations?
To grow your pension fund, it should be invested in several places. A good pension plan will invest your assets across a range of funds such as shares, bonds, cash and property. This diversified investment model reduces risk and protects your interests, ensuring you won’t be left with a shortfall after retirement.
Why Do Changes in The Stock Market Cause My Pension to Fluctuate?
Most pension plans are defined contribution pensions and invest your funds in the stock market to create growth over the long term. This means your pension balance sheet is linked to the stock market and will move up and down as the market does.
How Should You Evaluate a Pension Fund's Performance to Account for Fluctuations?
You should evaluate a pension fund’s performance based on the amount lost or earned over the fund’s lifetime. If you’re focusing on short-term performance, downturns will be more pronounced than if you view at them over a more extended period.
How Can I Manage My Risk to Reduce Fluctuations in My Pension?
Because your pension is a long-term investment, you may want to adjust the risk you take to match your age. A plan focused on high growth is likely to come with a higher risk level, and your pension will likely experience many fluctuations. This type of investing can be ideal while younger and bring significant growth. However, as your retirement age approaches, you may want to move to lower-risk investment to protect your pension form large fluctuations.
A balanced investment strategy and solid planning for the future can reduce the impact market fluctuations can have on your pension pot. There is no one way to protect your savings from ups and downs, but with a level head and diversified portfolio, you can still benefit from your long-term investments.