How does market volatility affect retirement savers?
Updated 01 December 2015
When stockmarkets are falling it can be tempting to take your money or move your retirement savings elsewhere. But if you don’t need to access your savings for a few years you should think carefully before reacting to short-term volatility.
The importance of thinking long term
If you can tolerate the ups and downs, most pension and ISA investments tend to offer better returns than a bank account over the long term. For example an investor who held global equities (aka company shares) could have earned 9.1% a year between 2004 and 2014. This compares to 2.4% a year for cash over the same period.
The risk of locking-in a loss
Taking out savings just after a fall can lock-in market losses, and means you’ll miss out on short-term gains if markets rebound.
The global equity investor in the above example would have weathered some tough markets over the 10 years of their investment. In 2008 their investment would have fallen -19.4%. However, if they had withdrawn their savings at that point, they would have missed out on the 21.2% market rebound the following year.
That's why falls tend to have a greater impact on those who need to access their savings in the short-term, because they will have less time for them to recover.
Markets are difficult to predict, and where market falls are more sustained this can of course have a negative impact on the end value of your retirement savings. You should be aware that past performance isn’t a guide to future performance and you may get back less than you originally invested.
What should I do if I’m worried?
If you’re concerned about the impact of market falls on your retirement plans, you should review your investments or speak to a financial adviser.
* Source for performance figures: Lipper for Investment Management, based on returns of the FTSE All-World TR Index in £s.