Pension savers, sit tight
If you want a happy, worry-free Christmas then as well as the usual injunctions about not raking up past familial misdemeanours over Christmas dinner, you should probably also avoid looking at your pension fund statement.
The average balanced managed fund is showing a loss of just under 24% in the past six months. It’s the same story of you look back over the past year; even over two years the average fund is down 20%.
If you have been invested in one of the more volatile sectors such as emerging markets, the picture could be even worse. In fact, if you go back five years, funds have only risen less than 18%.
Everything is down
Looking across the various asset classes over the past 12 months, just about everything has lost money, including property, minerals, agriculture, small companies, large companies, junk bonds, investment grade bonds, the list goes on.
In equity terms, the Ghanaian and Iraqi stock exchanges have done rather well, but most UK investors have probably been relatively underweight in Ghana and Iraq (apart from the military, and that may not count). Back in the mainstream, the only winners have been gilts and cash – and then only if you weren’t holding your cash in Iceland.
So, where do we go from here? Well, the first message for pension investors is; don’t stop now. There is an inbuilt human tendency to buy high and sell low. This is an opportunity to avoid that mistake.
Don’t stop contributing
If you are making regular contributions into your pension, do not stop. You are buying cheap units and it doesn’t matter if they are worth no more in a year, or two or even three years from now. What matters is what they will be worth when you reach retirement.
If you are 10 or more years from retirement then just keep going, because any change in strategy now is more likely to compound your losses than it is to improve the situation. Even if you are only five years from retirement I think that today there is a strong argument for staying in the market rather than crystallising your losses now.
Avoid lifestyle strategies for now
I have a particular concern about “lifestyle” strategies. These are programmed trades that automatically switch you out of equities and into gilts in the run up to retirement. Today there is a real risk that you will move out of one asset class that has already fallen into one that is about to fall.
Making predictions about the year ahead in such volatile times is to make oneself a hostage to fortune. However, the best value appears to lie in investment grade corporate bond funds and in large-cap high-yielding equities (but perhaps not the banks).
For the longer term (and personally I still have around 20 years to go until retirement), the eastern economies of China and India still look like a good bet for regular contributions; the Chinese have better savings and the Indians have better demographics but they both look like better long term growth prospects that many western economies.
Take a long-term view
Pensions are long-term investments and generally it is a good idea not to get carried away by short-term sentiment. If you want a happy retirement, keep saving regularly and don’t worry too much about the bumps in the road along the way.
Credit: Tom McFail