What to do in volatile markets
The impact of the economic crisis of 2008 is still rumbling on.
In its wake lie investment theories which have been turned on their head, pain for anyone trying to earn a return that at least covers the cost of rising living expenses and market moves which reflected investors complete focus on buying any asset which they considered to be safe while scaling back exposure to anything they considered risky.
For example we've seen the 10-year bonds of safe governments at around or below 2%, we've seen the virtual elimination of any real yield on UK index-linked securities while certain countries have had to pay 9%+ on their bonds in order to entice investors to buy them.
The biggest change that all investors are starting to appreciate is that market valuations whether it's the FTSE All Share, Dow Jones Index or any of the European indices are no longer determined solely by fundamentals such as asset type or company valuations but also by the actions of policy makers.
It is this greater dependence on politicians and central bankers rather than old fashioned fundamentals that has torn up the rule book and made the outcome far more uncertain and the one thing that is guaranteed to upset the markets more than anything else is uncertainty.
Uncertainty means volatility and we are currently witnessing unprecedented short term market volatility and irrespective of how many Euro summits are held, or how much money is pumped into the economies of the western world it doesn't look like we will be returning to a period of sustained economic growth any time soon.
So what does all this mean for anyone investing money into a pension plan? Well an increase in market volatility means that the range of potential returns that investments can earn is much wider.
However while the sharp falls that can be experienced at such times can be unsettling it can benefit investors who make regular payments into their pensions. When markets are lower contributions buy more units and this can help to smooth out the effect of market falls over the longer term.
So in the face of all this noise and uncertainty remember that while stock markets will move up and down from time to time a pension is a long term investment and its final value will take into account movements in the value of the investments over the whole term of the policy.
The best thing to do is focus on investing in a diversified portfolio of assets which are suitable for the amount of risk your customer is willing to take and remember that sooner or later common sense will prevail and normal market service will be resumed.
For professional advisers only