Despite the high degree of volatility we are currently seeing in the financial markets, it is important to keep a cool head and not lose sight of our long-term goal. Stock market fluctuations are not uncommon – they are part and parcel of investing. How does this affect your pension?
Your pension capital is invested for the long term. It is thus inevitable that there will be periods when prices decline substantially. We know that such periods happen, but obviously we do not know when. It is however known from much historical analysis that investing in the long term produces better results than saving, for example. If we look at historical price fluctuations, we see that declining prices are ultimately followed by rising prices. It is therefore important when investing for a pension not to lose sight of the long-term horizon.
A focus on the long term can help to put short-term price volatility into perspective. It is well known that hasty panic selling and buying and attempting to time periods of price declines and subsequent recovery can turn out badly. More to the point, this often leads to heavy losses, partly because those who sell in haste may miss the subsequent rally. For example, if someone stopped investing after the credit crisis, they would have missed a return of 12% a year. This is why we apply a long-term strategy.
Your pension capital is invested with diversification
It is an important principle for the investment of your pension capital that your investments are diversified. We invest throughout the world in numerous companies, sectors and investment categories such as equities and bonds. Not every investment will be equally hard hit by the current turbulence, and also this approach means that we avoid a situation in which a price decline or possible bankruptcy of a single company will have a serious effect on the value of your investments. This diversification limits your risk.
Investing with the lifecycle method
We invest your pension contributions using the lifecycle method. This method takes account of a member’s age, so when they are young we focus on generating a return. For these members, there will be time to recoup any losses when the economy picks up again. As a member’s retirement age approaches, we gradually invest with less risk. This ensures that market movements will have less effect on the final result.
This is why the lifecycle consists of several elements. The return portion that is the focus in the younger years should bring about capital growth in the contributions. For this, we invest in equities, among other things. But at a certain moment we start to reduce this and gradually increase the investments in what are known as the matching funds. The timing of this depends on your risk profile. In the matching funds, we invest in government bonds and other related instruments. These funds offer more certainty regarding the expected amount of pension benefit.
Periods of high volatility can give one the feeling that something has to be done immediately. But the principles we apply still apply in the current situation. Keeping a cool head in difficult times is the best that we can do.
We invest for your pension scheme according to a previously set risk profile. Your employer has agreed most of the standard options for investing in your pension scheme with us. But you can decide to choose a different approach in certain respects, and thus have how you invest adapted to your wishes and personal situation. The risk profile is one of these standard options where you have a choice. You can use the profile selector to decide what is best for you. You may perhaps be inclined to change your profile immediately because of the current high volatility, but it is especially important in periods like this to make sure you give this careful consideration.
Do It Yourself investing
If you are choosing the fund in which you wish to invest yourself and are no longer investing according to one of our lifecycles, you can still use the profile selector to see which risk profile is most appropriate for you. You can also contact your investment adviser if you have questions about your investments or want to know about possible actions to take.