Don’t panic over your pension fund
If you’re alarmed by a slump in the value of your occupational pension fund as a result of a coronavirus-induced fall in the financial markets, please try to get the situation in perspective.
At the time of writing on Thursday, the Covid-19 capital market volatility was still evident, although major US and global stock indexes were climbing from the recent lows on pronouncements of new infectious cases levelling off.
Investments markets aside, on personal levels, individuals and families are still very challenged with serious illnesses and/or the aftermath — of isolation, unemployment, and managing emergency cash cushions. Additionally, the US unemployment rate climbed to more than 16 million benefit claims.
Those of us gratefully not as affected, but still in distancing precautions, may now have some time to review our finances, and contemplate future planning goals.
What does your pension fund look like now after during this latest capital market global volatility?
The first thing to keep in mind when you open that statement, especially if the numbers are in negative territory is that based upon historical trajectories in finance markets, the eventual outcome may not be permanent loss positions.
Please don’t react immediately by moving your pension portfolio to a more conservative selection. Taking that action is a sale, at a loss, negating current chances for your portfolio to recoup.
Instead, start a broad review of the overall performance of your pension asset allocation over the previous years you have owned it.
• Has your pension grown, generally?
• If you were invested during the market collapse of 2008, and you didn’t change your allocations, did your portfolio eventually recoup those paper losses?
• If so, do you think the eventual results of a return to normal capital market trends will this time will recoup losses as well?
If your answer to all three of these questions is yes, then perhaps, you simply should consider taking a no-change action to your pension portfolio allocations, but just a wait-and-see attitude for the eventual return to normal market valuations.
Your first question may be — will that happen?
History does have an impact; we know that investment markets do eventually recover. The enclosed chart demonstrates the recovery times for numerous crashes/recessions going back more than 30 years through the last blip in 2015.
It has been stated that this time is different.
Yes, it is, far different, a global market compression, to highly functioning economies, caused by a natural catastrophe. The responses to this crisis are also immediately different given the push for major expansive stabilisation and rescue programmes.
We are seeing that as you read this that major country central banks continue to inject extraordinarily massive amounts of cash into circulation to prop up markets and economies as one well-known business network commentator stated “to keep businesses afloat so that employees have jobs to go back to”.
The US Federal Reserve announced two days ago that they would be buying junk bonds and junk ETFs as part of their primary and secondary market corporate credit facility programme, while the S&P Index of the 500 hundred largest companies in the US and the Dow Jones Industrial Average had recovered half of their losses, from the low of March 10 by the close on Thursday.
The second item to consider: what are your portfolio allocations relative to your time frame in the workforce, as this can dictate your forward planning.
For instance, when did you start your career?
If you are young, you may not have even experienced the last recession in 2008, thus your career time is very long.
Your portfolio allocation may be in the neighbourhood of 80 per cent stocks, 20 per cent bonds and cash, that means somewhat more volatility, but chances for far greater appreciation than an older individual’s allocation who is closer to leaving the workforce.
Recovery time is on your side. You can afford to wait out market downturns, knowing that in an upsweep recovery, appreciation grows.
If you are closer to retirement, you’ve experienced a number of these recessionary market crashes and are still invested, but more conservatively, say 30 to 40 per cent stocks and 60 to 70 per cent bonds and cash.
Time is not on your side, as each decade passes, your focus should be more and more on capital preservation.
The third item to consider, if you want a bit more assurance in relation to your investment choices, is to review the list of individual securities within your pension portfolio and their risk profiles.
As you may well be aware, asset allocations in investment portfolios cover the entire global spectrum, from very conservative safe sovereign debt to far more risky products.
You may want to see a preponderance of mature company/country stocks and bonds, companies that you know are successful, governments that you know are stable and economically viable.
Companies whose products you consume or products you purchase on a routine basis. Companies that have been consistently in business for a number of years, with a good track record of profits and stable revenue.
These stocks can be reviewed, mutual fund fact sheets, generally, will list the top ten stocks / bonds, and you can locate the remaining allocations by reviewing the annual, or semi-annual financial statements of the fund or investment portfolio.
It is always well to remember, too, that pension investment portfolios are managed by highly-qualified investment professionals whose job is to manage these assets for your best interests.
These simple steps will give you a better understanding of your pension portfolio and a bit more comfort that you are on the right track.
The coronavirus catastrophe will end at some point. Globally, and regretfully, too many individuals are gone. The recent market downturn will eventually stop and recover. Normal commerce will resume. Businesses, most of them, will ramp back up. We will start consuming again. We will look to the future with hope, and begin to plan again.
We will continue on because we are survivors, too. But we will mark this time in all our lives, and we won’t forget.
• Martha Harris Myron, CPA, JSM, Masters of Law, international tax and financial services. All proceeds earned from these columns are donated to The Bermuda Salvation Army Food Kitchen
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