Keeping calm when stock markets fluctuate

Aviva's Head of Savings and Retirement, Alistair McQueen, offers advice on managing investments in times of market volatility.

Read on or watch via video below.

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.

  1. 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.
  2. 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. 
  3. 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.
  4. 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.
  5. 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. 

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Transcript

Market volatility

How to respond to market volatility

Hi, my name’s Alistair McQueen. I’m the Head of Savings and Retirement at Aviva.

We’ve all be seeing news reports about investment market volatility.  So, we thought we'd prepare this short little video explaining five of the most common questions we’ve been receiving. We hope you find it helpful.

I’ve seen reports in the news about volatile stock markets. What does this mean for me?

The first thing I would say is during times of investment market volatility is try to avoid panic. Investment decisions made under stress are rarely good ones. And the reports we're seeing in the media are typically focused on the movements of the main stock market indexes such as the FTSE100 or maybe the New York Dow Jones.

The reality is that the most of us are not invested in funds that purely track those indexes. So, before you do anything, then I suggest you look at your own investment portfolio. Look at where your pension, your ISA or maybe your drawdown is invested. So, you're basing your decisions on your own situation, rather than that you’re seeing reported in the news.

Should I cash-in all my investments?

In a time of market volatility, there’s an understandable temptation to maybe take your money and run. But I’d encourage you to think before acting. If, for example, there’s a fall in the value of stock markets, and you withdraw your money, the one guaranteed outcome is you are guaranteeing that loss, that you may have incurred over that previous time. 

And please remember that your ISA, or your pension and or maybe your drawdown is a long-term investment, based on long-term market movements. So, maintain that context. Don’t base your long-term investment decisions, on relatively short-term market movements.

If I am taking income drawdown, what should I do?

Over recent years there’s been a great growth in the number of people using income drawdown once they reach retirement. And one of the great attractions of this product is its flexibility. And now is the time when that flexibility does come into its own. Now is a really important time to review the rate at which you are withdrawing money via your drawdown product.

The objective here is to protect your underlying investment, during a time of market volatility. So, perhaps you may want to reduce the rate at which you're withdrawing that money if you can. Perhaps you maybe you want to stop withdrawing money at this time and let the market volatility ride its way through. Or some people choose to do what is called taking natural income. This is just simply taking the income that is generated from your underlying investments perhaps the dividend income. Thereby, protecting your underlying bulk of your investment portfolio.

And remember, this is a long-term investment be it in drawdown that you should be able to ride over that longer-term market volatility. 

Should I purchase an annuity to remove all financial risk?

During periods of market volatility, it’s understandable that many people entering retirement or in retirement may look again at the product that’s called an annuity. Millions of people do use annuities today. This is where you give your pensions savings to an annuity company in return for which they give you a guaranteed income typically for the rest of your lives. So, when the markets are volatile that sense of guarantee can be very attractive.  

But I’d just say look around, and look carefully before you make any decisions. Typically, once you’ve made the annuity decision it cannot be reversed. So, understand your situation, understand the annuity options that are available and shop around to find the best annuity for you.

Where can I get more help?

One of the best actions you can take during a time of market volatility is to get some help. And there are three sources of help that I would identify. 

  • One is Aviva’s own website – aviva.co.uk, provides a wide range of information about managing money and access to financial advice service
  • Secondly, I’d mention the government’s backed MoneyAdviceService.org.uk a wide range and a wealth of information about all issues related to money – have a look
  • And thirdly if you do want your own financial adviser and you don’t currently have one, a website Unbiased.co.uk provides a register of financial advisers across the country

So, by keeping calm, by getting educated and remembering the long-term horizon, you’ll be better placed to navigate these times of market volatility.

We hope you find this video helpful