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In light of coronavirus and recent market falls, the first piece of advice we’d give to ISA, pension or drawdown customers is not to panic. It’s wise to consider taking action, but when it comes to investments, decisions made in haste and under stress are rarely good ones.
These products are longer-term investments, meaning at least five years (and usually far more for pensions). So, recent stock market falls should be viewed against this long-term horizon. It’s rarely wise to base long-term investment decisions on short-term market fluctuations.
Context is important. For example, the stock market drop we’ve witnessed since the beginning of the year was preceded by a period of growth. The FTSE 100® index rose in value by more than 12% during 2019 1, highlighting that longer-term investments should be judged over the longer term.
As well as not panicking, these are the five calm actions I would recommend to customers.
- Understand your own situation
The headlines typically report movements in the main stock market indices, such as the FTSE 100. But most people aren’t invested solely in equities, nor in funds that solely track these indices. Most people’s investments are across different types of assets, helping to spread their investment risk. So, base your consideration on your own situation not on the headlines. You may be able to look at your pension or ISA online and view your investments that way. With this information you may want to consider rebalancing your investments, to ensure your risk is spread.
- Don’t rush to switch your investments or cash in
When markets are falling there’s a temptation to take your money and run. But to do this after a period of falls in the markets would be to guarantee any loss in the value of your investments that you’ve suffered. By remembering that your ISA, pension or drawdown is for the longer term, you may feel more able to ride out the storm.
- If you’re using drawdown, review your withdrawals
The flexibility of drawdown is a great attraction for many in retirement. One aspect of this flexibility is how you take your income. For example, ‘natural income’ is the income that investments generate, typically via dividends. During periods of market fluctuation, it makes sense to consider withdrawing only this natural income. This avoids eating into the underlying capital value of your investments. Another withdrawal strategy could be to withdraw only from cash savings. Cash may not reap the rewards when markets are rising, but equally will not be hit so hard when markets are falling. This would leave your more-exposed investments untouched. You could even stop your drawdown withdrawals completely if you have income from elsewhere, perhaps from defined benefit pensions or property. You could then wait for the storm to pass.
- If you’re in drawdown, you could also consider annuities
When the new pension freedoms took effect in 2015, it was predicted that we would witness the ‘death of the annuity’. This hasn’t happened. Millions of people continue to see value in annuities and the guaranteed income they provide. During times such as these, the attraction of an annuity’s guarantee is understandable. But purchasing an annuity is a significant decision. And one which when made, cannot be reversed. So, if you’re keen to explore this option, shop around and consider your options carefully.
- Get financial advice
If you’re unsure what to do, your best investment could be to seek some professional financial advice. An adviser’s expertise should be in navigating situations like the one we’re in and, while there may be a charge, the peace of mind this brings carries value in itself.
Remember, by keeping calm and taking control you’ll be better placed to navigate today’s uncertainties.