A diverse pension portfolio is important in volatile times

2020 has been an interesting year for pension investors, with stock markets fluctuating quite wildly as a result of Covid-19.

This is likely to continue over the next number of months, with factors such as the US presidential race, Brexit talks, geopolitical tensions and possible vaccines likely to produce fresh bouts of volatility.

As we look towards 2021 we will need to traverse many more obstacles that require caution, making the next number of months something of an endurance test for Irish pension investors, says Richard Kelly, head of client business, Ireland, at Legal and General Investment Management (LGIM) It is understandable that pension investors might be concerned.

“In these markets it makes sense for all investors, no matter what age they are, to take a fresh look at their pension investments. Does the asset allocation you have make sense for your risk appetite? Are you saving enough to meet your pension goals? Does your portfolio have sufficient diversification?

“Many investors will remember the depth of pension scheme losses in Ireland at the height of the financial crisis but also the strong rebound of global markets ever since,” he says.

Because of volatility it is important to have portfolio diversification.

“By having exposure to different asset classes investors can spread their risks and can also take advantage of any opportunities that may emerge during these market turbulences,” he adds.

But while investors will surely fear the ups and downs as they unfold, Jonathan Daly, head of retail distribution at Zurich, says that as pension investors are in it for the long term they “really shouldn’t worry about what happens in the stock markets every day or even every month”.

“History has shown that stock market falls will happen from time to time but in the long term investing in equities is the best way to make good returns on your savings,”

Some interesting facts to remember when it comes to investing in equities, he says, are “by missing just the best 10 days in the market from 2003 to 2017, your investment returns would have been 48 per cent lower. So try not to worry if the markets fall. History has shown that they will recover, and switching out after a fall might mean you lose on these upswings.

“Also, in any 10-year period the odds of global equities posting positive returns is 96 per cent and in any 20 year period global equities have never made a loss,” he says.

Even if we look to this year, with a major stock market fall of more than 30 per cent in February and March as a result of Covid, they quickly recovered, and the S&P 500, for example, is now at a higher level than it was at the start of the year.

“So even during a global pandemic equity investors have been able to make a positive return,” Daly says.

Robust plan

It is all about having a robust plan from the outset, says Ann Prendergast from State Street Global Advisors.

“The best default investment strategy for pensions are called target dated funds. Over 90 per cent of all pensions in US are in these fund, and increasingly so in the UK.

“A 25-year-old has 40 years till retirement; they will be defaulted into a fund and they will stay invested in that fund for 40 years. Because they are only 25 that fund might have 75 per cent equities, some money in diversified assets and some in other multi-assets. It appears quite risky but they’re only 25 and have 40 years ahead. They want to benefit as much as they can from greater returning assets in the shorter term. Within the portfolio we will have other mechanisms that will react to short term events in markets to try to protect some of the downside.

“But as they grow older, age 40 plus, 75 per cent in equities is not going to be a great investment choice. We glide the investment from the higher risk into lower risk over the period of the investment so that at closer to retirement, 55 per cent of the portfolio is going to be invested in bonds or cash and 20 per cent in equities. It’s much less risky.

“So in the current year, for example, the person that is closer to retirement won’t feel the full brunt of what’s happening. They can’t tolerate as much downside as someone who is much younger,” she says.

Personalised approach

What events such as the global pandemic have really highlighted is the need for a personalised approach to investing, says Emmet Leahy, head of financial planning at Davy .

“Without such investors can take poor decisions and get really hurt by some of the short-term noise. For example, you don’t want high market exposure for short-term needs as a crash could come at an inopportune time. For longer-term need our clients know they are able to ride out a storm such as earlier this year and any that may come as time is on their side. In particular they will be rewarded for doing so with stronger longer-term returns,” he says.

It’s important to remember volatility isn’t new.

“Over the last 20 or 30 years rare events which we call black swan events have not been that rare when you think about it. For this market shock event luckily a lot of clients learned from the global financial crisis and approached with a longer term mind-set as they had personalised plans in place which certainly helped to avoid any knee-jerk reactions.”