The following is a transcript of a bonus episode of The Pension Confident Podcast - Understanding market volatility. You can listen to this bonus episode or scroll on to read the conversation.
PHILIPPA: Hi, welcome back. For this special bonus episode, we’re going to be talking more about market volatility. Earlier this month, we discussed some of the key need-to-knows for savers worried about big swings in the value of their investments and indeed their pension balances. That was episode 39 of the podcast and if you missed it you can listen to it on our feed right now.
But market volatility is a big topic and it’s well worth knowing more about why it happens and how you might want to respond to it because it’s likely we’ll be seeing more of it over the next few months. You’ve raised lots more questions since that episode went out so today we’re back with more helpful explainers from our expert guests.
Here’s the usual disclaimer before we start, please remember that anything discussed on this podcast shouldn’t be regarded as financial advice or legal advice. When investing, your capital is at risk. And for this episode, in particular, it’s really important to remember that past performance isn’t an indicator of future performance.
Now as you probably already know, the market volatility we’ve seen this year has meant pension balances have been fluctuating. But why exactly does that happen? Here’s podcast regular Faith Archer in episode 32. She’s a Financial Journalist and Founder of Much More With Less.
FAITH: A pension balance is just the amount of money that you have in your pension pot. So, think about it like you might check your current account balance, your savings balance.
PHILIPPA: If you’re looking at the number and you’re thinking, “is that a good number? Is that a bad number? Is that what it should be? It seems lower than last year”. What’s the process? How should you address that number? Because as you say, it’s a snapshot, isn’t it? It’s a snapshot of what your pension is worth right now.
FAITH: There’s two things I’d say. One, don’t necessarily panic if it’s lower than a previous number. Don’t worry so much. One of the things about pensions is that they’re investments. It’s not like money in a bank account that the only reason it changes if you take money out or interest is added. With a pension, it’s invested in the stock market, in shares in companies or loans to either companies or governments. The reason for that is you’re taking a bit of risk in hope of higher returns. Pensions, typically, they’re investments over a very long time, multiple decades. You’ve got time to ride out the peaks and troughs, the ups and downs, of the stock market. But what that means is your pension balance isn’t going to be the same day-to-day. There may be some years when it goes down, there may be some years when it goes up. But historically, over the long term, the stock market does outperform just having your money in cash.
PHILIPPA: Now let’s hear from Alex Langley in the same episode, number 32. He’s PensionBee‘s Head of Customer Success. Alex and his team speak to customers every day who get in touch because they’re watching their balances fluctuate and, understandably, they’re feeling unsettled.
ALEX: It can be quite difficult for customers who’re with a company like PensionBee, where they can see their balance every day. I mean, it might be a certain number, and then it goes down, and then it goes back up. Some customers aren’t used to seeing that every day. Some customers will only have had an annual statement once a year with their previous provider.
PHILIPPA: Do you get anxious calls from customers saying, “what’s happening with my pension balance? Why is it so much lower?”
ALEX: Yes, definitely.
PHILIPPA: What do you say to them?
ALEX: It’s really about explaining the context and [helping] them understand that it’s normal for pension balances to go up and down, that historically markets recover. In the biggest financial crisis we’ve had in the past, markets have always bounced back stronger. It’s just really explaining that to customers and getting them to understand that maybe it’s not best to look at the balance every day.
PHILIPPA: As Alex mentioned, we’ve seen this sort of thing before, so let’s go back to Faith and hear her talking about how she’s dealt with volatility in the past.
FAITH: I think it partly depends how far you’ve got to go until retirement.
PHILIPPA: Yes.
FAITH: Whether you’re really engaged with the fact you’re going to need the money relatively soon. Certainly, I’m certainly not suggesting checking it every day. Once a year, definitely a good plan. I probably check mine once every few months. I know certainly when, for example, COVID hit and the markets all plunged, I was almost sticking my fingers in my ears and shutting my eyes and going, “la, la, la”. I didn’t want to look. I knew it’d be scary.
PHILIPPA: You knew it’d be bad.
FAITH: It would’ve dropped. It’d be scary. But I also was pretty confident it wasn’t the end of civilisation as we know it, and things were likely to come up. So, I just stepped away, didn’t look for about four months. And I think that was much better for me.
PHILIPPA: And that feels like a good time to talk about exactly how our pensions are invested and how they may be diversified to try to insulate investors against those market swings we’ve been hearing about. Here to tell us a bit more about that is Martin Parzonka, he’s PensionBee‘s VP Product.
MARTIN: Most plans that you’d invest into in a pension are diversified
PHILIPPA: When you say diversified, you mean?
MARTIN: Having money in the US markets, having money in UK markets, in emerging markets, Asian countries, African countries. It’s good to have that spread.
PHILIPPA: Pension funds don’t just invest in stocks and shares, do they?
MARTIN: That’s right. It’ll also be bonds. There’ll be some money held in cash as well. Commodities, property, pretty much anything you can put money into.
PHILIPPA: Commodities being things you make stuff out of, copper, gold, that sort of thing?
MARTIN: Oil.
PHILIPPA: Yeah, all that sort of thing. They have this very diverse, to use your word, range of investments. That essentially is all about insulating you from risk, isn’t it?
MARTIN: That’s right.
PHILIPPA: If something goes badly, hopefully something else is going well.
MARTIN: Yeah. It’s important also to have a look at the type of investment plan you’re putting your money into. So not all plans are like that. Some will just be 100% company stocks, and that’s OK, depending on your risk profile. If you want that, you can have that. Some people want it 100% in bonds. That’s OK.
PHILIPPA: Personal choice.
MARTIN: Yeah, personal choice. Exactly.
PHILIPPA: And even plans which are 100% invested in company shares or equities as they’re called - or 100% in bonds - they may be geographically diversified - which means they hold shares in companies or government bonds all around the world. How does that help? Well if one country’s market dips, another might see gains. So that might help to balance things out and that’s how global markets play into our pension balances.
So let’s move on to dealing mentally and emotionally with those fluctuations. Here’s Founder of Money to the Masses Damien Fahy and PensionBee’s own CEO Romi Savova in episode 34 reminding us that volatile times can sometimes be an investment opportunity.
DAMIEN: I think it’s important to have an idea where your money’s invested - if people are invested in tracker [pensions], if the market crashes, what tends to happen is people panic and then they might sell out. And by understanding what’s really going on, what’s driving the ups and downs, it actually encourages people to stay in the long term and invest in the long term because they’re understanding this is the natural flow. It’s a bit like you’re trying to surf and getting wet. You never realise that’s what’s going to happen. You’re going to fall off the board every now and then. What’s going on in your pension is the natural cycle.
PHILIPPA: Yeah. I mean, as you said, that’s the other side of handheld technology knowing where your pension is right now, this minute, isn’t it? I mean, Romi, you must see this. People, if they want to, they can look every day on the app.
ROMI: Some people look more than once a day, even though the balance only updates on a daily basis.
PHILIPPA: Is that a good thing? Because obviously -
ROMI: - I think it’s alright.
PHILIPPA: You do?
ROMI: It’s alright. I do. I truly believe that if you give people enough time to learn these things that, Damien, you’re speaking about, that markets do go up and down, your pension will go up and down. It’s supposed to go down because that’s a good investment opportunity, and it’s supposed to go up as well because that’s what long-term growth looks like.
PHILIPPA: So market volatility is part of life and it isn’t necessarily bad news in the long run. And as Romi went on, in her experience, the longer people invest, the wiser they get about dealing with these ups and downs.
ROMI: We’ve had a couple of market downturns since PensionBee came into the financial landscape. I remember all of them really well.
PHILIPPA: Yeah, I’ll bet.
ROMI: I remember 2018. I remember 2022. 2022 was substantially more severe than 2018. But what we did see is that people who had been with us, customers who had been with us in 2018, had seen a dip, had seen a recovery. They looked at 2022 differently to the customers that had recently joined us because they’d always been kept in the dark by their pension provider before us.
PHILIPPA: Ah ha!
ROMI: So, they hadn’t had the benefit of that transparency over the past 10 years. But now we know that when the next downturn eventually does come - and it’ll come because that’s how markets work - we feel very confident that the customers who’ve been with us, who’ve experienced what a pension is supposed to do, go up and down, we feel very confident that those customers might see it as an investment opportunity.
PHILIPPA: If you’d like to know more about market volatility and how you can better understand your pension investments, head to the PensionBee website - there’s a host of really straightforward blogs, videos and explainers on there.
You can listen back to all the episodes we’ve clipped today in full wherever you get your podcasts. We’re on YouTube and in the PensionBee app too so why not subscribe right now so you never miss an episode? While you’re there, we’d love it if you could give us a rating and a review. It’s really quick to do.
Just a last reminder before we go that anything discussed on the podcast shouldn’t be regarded as financial or legal advice. When investing, your capital is at risk.
We’ll be back next month with a brand new episode exploring money and ADHD and why the two often clash. We’ll be with guests who’ve experienced this for themselves and as always, we’ll be sharing actionable tips to help you stay on top of your personal finances, whatever challenges you may be having. Thanks for listening.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
