The spread of COVID 19 across the world has led to the biggest weekly fall in share values since 1987. Global stock markets are down 26% from their highs of three weeks ago. The direct and indirect impact on businesses has led to a fear that we are falling headfirst into a worldwide recession.
Investors are spooked and so far, any emergency fiscal and monetary packages have not been enough to stop the large sell-off. But what impact has this had on Pension funds?
What effect has COVID 19 had on my pension funds?
Pension funds, clearly, have been affected by these sharp falls in share prices. The extent of the impact will be largely down to the risk level of the fund/s you are invested in. Most pension funds are invested into a mix of assets, and some may have as little as 20%-30% invested in stock markets.
A key point to note is that stock market returns over the last 10 years have been very good to investors. Despite the sudden drop this week, the S&P 500 has grown by 7.8% per annum. Since August 2016, the S&P 500 has returned 8.2% per annum. Remember, sharp drops make the news, steady growth doesn’t.
Should I switch to a Cash fund?
What your current fund value is telling you is that if you sell your assets today, this is the price that you will receive for these assets. At this point, it is a paper loss. The loss will only crystallise if you panic and switch to cash. If you are worried about this, you can talk to our experienced Advisors.
Could things get worse?
Some feel that it will be harder to control the virus in western economies (compared to China). That it’s still too early to gauge the effect on businesses and that firms will be stretched financially, which could lead to job losses or closures.
Conversely, history has shown that this type of sharp sell-off involves a heavy dose of fear and an over-reaction by investors. Central Banks have cut interest rates and governments are providing significant fiscal supports. So yes, prices could fall further but it is also possible that the worst has been priced in.
How long could this last?
Confidence levels that the virus is being contained will be key. If the number of cases being identified daily, reduces, then fear levels should subside and normal stock market valuations return.
Is there an opportunity here?
Unless you are approaching retirement age, a pension investor should see themselves as a buyer of assets. As such, you want a reduction in the price you are paying for these assets. You want more for your money. The sudden drop in stock market prices provides a discount.
If you were planning to make a pension contribution this year to reduce last year’s tax bill, perhaps now is the time to act.
As quoted by Warren Buffett, one of the most successful investors of all time; “Widespread fear is your friend as an investor because it serves up bargain purchases.”
Summary:
Initial reactions of worry to the recent headlines are normal. Closer inspection for many pension plan holders will show that the impact on their plans is not as severe. The advice at these times is, don’t panic. Your pension plans are long term investments and deserve a long-term approach. If you want to review the impact on your Pension plan, we’d love to help.
