News Archive - September 2008
Long or short term?
30/09/2008Prospects for the next 12 months look bleak.
World stock markets are falling and there is no real end in sight to this volatility until all of the bad news is out in the open. For many, their gut reaction is to look for the safest investments available. But what is really safe in the current climate?
Most personal pensions give you the option to invest in a range of funds, from money market funds which are designed to give steady returns with a low chance of losing capital, to equity-linked funds which invest in shares and can fall considerably in value. If your pension pot has fallen in value by 20% over the last 12 months, what should you do?
The answer really depends on a few factors. The main one in my opinion is the timescale involved for your investment. If you are investing for the long term (ie you plan to leave the monies invested for more than 5 years) then short-term falls in the value of your investment should be of lesser concern to you. Most pension investments would fall into this category as they are invested over the long term.
Obviously nobody is happy when the value of their investment goes down, but this is the risk you take on when you use equity-linked funds. History shows us that equities (shares) have outperformed cash over the long-term, so if you want to look for returns better than cash then you have to accept the risk of losses in the short term.
If your investment term is shorter then you need to look at the value of your investment once it has fallen and make the decision whether or not you still want to take any further risks with it.The natural thing to do is to hold on to an investment once it has fallen, usually in the hope that its value will recover to its original level so you can then encash it and 'get your money back'. The reality is that nobody can determine how the stock market will move in the short term. If your fund falls 10% in a year, there is just as much chance that it will fall another 10% in the next year. If you are not happy to take this level of risk then you should probably cut your losses by switching into safer areas (like fixed interest or cash) which will make your future returns less volatile. Most personal pensions give you a choice of a range of investment funds which can be changed at minimal or no cost.
Investment risk is a complex area and everybody has different emotions when their investments fall in value. For the majority, the disappointment felt when losing money is greater and more memorable than the pleasure experienced when gaining money.
Mulberry Financial can discuss the risks involved with your pensions and investments, and then recommend alternatives if you think it is time for a change.