How to keep calm when stock markets fluctuate
The value of your pensions and investments can be all over the place in turbulent economic times. Here are reasons to stay calm and our suggestions for what you can do in these situations
These are challenging times. Every month – sometimes every week – seems to bring something new which hits our longer-term financial plans such as pensions, ISAs or other investments. It’s accepted that these types of investment can go down in value as well as up and you could get back less than has been put in. But it can be hard to keep this perspective when doom and gloom seems to surround us.
So, when there’s volatility in the investment markets, what’s the first piece of advice we’d give to longer-term savers and investors? The answer: don’t panic. Calmly consider your situation and calmly consider acting if you feel you need to. Do your homework and get help. Investment decisions made in haste and under stress are rarely good ones.
If you’re looking at your longer-term investments, here are four first steps to calmly consider.
1. Focus on the longer term
Events are moving at pace and it can be tempting to react to the latest breaking news or influential tweet. If you’re seeking a quick financial return, this may be justified. But for pensions, ISAs and many other investments it’s the longer term that matters. Keep up to date with what’s going on, of course, but don’t forget the bigger, longer-term picture. Breathe!
2. Understand your situation
The headlines typically report movements in the main stock market indices such as the FTSE 100. But most people’s pensions and investments aren’t solely invested in stocks and shares, nor in funds that purely track these indices. Most are split across different types of assets, helping to spread the risk.
Base your thoughts on your own situation, not on the headlines. Have a look at the value of your funds and then consider any action you might take. Don’t be led by media headlines alone. Request financial advice if you are unsure.
3. Don’t rush to cash in or switch investments
When stock markets are going down there can be a temptation to take your money and run. But doing this during or straight after a period of market falls guarantees that any recent losses in the value of your investments are made permanent. By remembering that your pension, ISA or other investments are for the longer term, you may feel more able to wait for the storm to pass.
4. If you’re in retirement, know your options
Your considerations may be a little different if you’re already using your savings in retirement. But the principle of ‘don’t panic’ applies just as much.
If you’ve started taking money from your pension using income drawdown, you can flex what you take from your pot and when. In doing so you can go some way to reducing the impact on your underlying pension fund during periods of instability. For example, you could limit your withdrawals to your pension’s ‘natural income’ (the income your investments may have generated over the period) without eating into the underlying investments. Or you could just take withdrawals from any cash savings. Each approach could allow time for your underlying investments to potentially regain any ground they’ve lost.
And you may want to look again at the option of an annuity. In return for a lump sum payment, annuities can offer a guaranteed income for life. At times like these this guarantee may be more highly valued. And as interest rates rise, the income offered by new annuities may also rise. But purchasing an annuity is a significant decision and one which cannot be reversed after a short cancellation period. So if you’re exploring this option obtain advice and consider your choices carefully.
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