Don't press pension panic button over Brexit

Liam Croke

Reporter:

Liam Croke

Don't press pension panic button over Brexit

STOCK markets across the world took a nose dive in values following the UK’s decision to exit the EU. This, of course, will have an impact on the value of people’s pension funds and those who have investment accounts that directly invest in specific equities, and others which track and are linked to the performance of particular stock indices.

Before the vote, I spoke with a number of investment firms who manage very large pension and investment funds for their take on what impact an ‘in’ or ‘out’ vote would have on the value of funds. The feedback was the same i.e. if the result was to stay in there would be a short sharp increase in the value of funds; if the vote was to leave, there would be a short sharp decrease, and whilst the decrease would be significant, it won’t be prolonged.

Whether this will turn out to be the case, only time will tell, but it is interesting to look to the past to see how markets performed following a significant world event.

For example back in 1963 when JFK was assassinated markets reduced by 2.9% but 63 days later markets had recovered and were +12.4%.

When the stock market crashed in 1987 its value reduced by 34.2%, but again 63 days later it was in positive territory, up by 11.4% from its pre-crash value.

In 1990 Iraq invaded Kuwait and markets reacted with a reduction of 13.3% in share values but 63 days later markets were +2.3%. And in September 2001 when the world trade centre in New York was attacked, markets dropped by 14.3% but just over two months later, they had increased in value by 21.2%.

What history seems to suggest is that following very difficult times and events, markets drop, only to recover and recover quite quickly at that. No-one can predict what the future will hold and whether Brexit will mirror what happened with other major events in the past, but stock markets do tend to rally within months of an event or disaster, so the moral of the story is not to panic because regardless of what happens, things do tend to improve.

However, a lot of people will have woken up to the news of Brexit the morning after the night before and aside from the impact it could have on our economic growth, border controls in the north etc. they will have also learnt that the stock markets across the world were in free fall and hear how much billions (about $2 trillion was wiped out by the way) have been wiped off company values and how their pension funds will have reduced significantly in value.

Unfortunately some of the initial commentary from so-called experts creates fear and fear makes people sit up and pay attention which makes them make rash and emotional decisions.

One moment they are happy with their pension and how it is structured and the next when the news is bad and the world is apparently falling apart, they convince themselves that investing money or their pension in the stock market is a mug’s game, so they decide to get out.

If this happens to you, it’s perfectly normal by the way, it’s called loss aversion; our brains are wired in such a way that we dread losing money twice as much as we enjoy making it. The impact that loss aversion has is that it can cause temporary lapses in logic and reason. It leads people to sell at the bottom of the market and buy at the top.

If you are buying for the long term and you are happy with the investment or pension fund and know that it is aligned to someone of your age and risk profile, you should stick with your decision. By all means, be flexible, but don’t make knee-jerk decisions based on short-term market volatility.

The issue I see however with is that some people tend to be short term orientated when it comes to investing, because the long term seems to be so far off. You need to hold your nerve because that is what some of the companies you are investing pension funds in do - they plan and are managed with the long term in mind.

The impulse, and instinct when the stock market takes a nose dive is to do something, anything, and of course this is natural, “my life savings and future income are on the line”, one person told me six months’ ago when the Chinese stock market crisis sent stock markets around the world tumbling.

He reacted and readjusted his fund moving it mostly into cash to protect it but when markets recovered he reentered the market but in doing so, he got his timing wrong which meant the value of his fund reduced by 13%.

Had he done nothing and not reacted and left his fund structured as it had been, his loss would only have been 2%. What this meant in real, euro and cents terms to the value of his particular fund was that it reduced in value by €10,450 from his meddling and overreaction.

The lesson to be learned here is that investing in a well-diversified portfolio which includes equities are useful for long-term goals - they return about 8% on average, whereas investing in cash or bonds only return around 2.5% per year. So unless your financial goals have changed in the past seven days, it probably doesn’t make much sense to overhaul an investment strategy based on what happened last week.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie