What pension members should be doing to minimize their exposure during these uncertain times

There are lots of questions swirling around about what is driving the market volatility and, more importantly, what pension members should be doing to minimize their exposure during these uncertain times.

First, we must recognize that there are current challenges in the market globally that are causing investments to respond in such a negative way—currently down just over 15%, year-to-date. This negative return effect can be directly linked to (and is the result of) the financial aftermath of governments globally imposing restrictions for the past 24 months during the COVID-19 pandemic, supply chain issues, rapid inflation, the Russia-Ukraine war, along with sanctions, increased energy prices, and historically low savings rates, most recently followed by rate increases that are directly impacting borrowers.

Many financial economists suggest it is “the perfect storm” and a road that will be bumpy for some time (Bogdanova 2022). However, it could be argued that this volatility is normal after a long bull market—a market in which securities or commodities are persistently rising in value (as defined in the Merriam-Webster Dictionary)—and that it too shall pass (Arnott 2022).

Applying the core principles of investing (investing based upon your risk tolerance and your time horizon) is a key component when making investment decisions within your pension plan. It’s essential for pension members to understand that you cannot eliminate volatility—you can minimize it through diversification, but you cannot eliminate it. Investing based upon core principles brings common sense and rationale into decision-making.

Make no mistake, it can be aggravating to look at investments that are performing negatively and wonder what can be done to minimize the bleeding. However, it can also be viewed as an opportunity for people who are still working and contributing into their employer-sponsored pension plan. This opportunity presents itself by way of another core investment principle: dollar cost averaging.

Dollar cost averaging means that by contributing regularly, you will buy units at different price points within the market (both at lows and at highs). In the case of a very challenging market, you’re effectively buying more units at a cheaper price with your monthly pension contributions (which is a good thing) and, as the markets recover, you should see more significant growth.

On the other hand, how do you manage your personal retirement plan when you’re a retiree in a volatile market? This is where is gets tricky. Should you time the market for a rebound (assuming you have some time on your side)? Or, should you crystallize losses to stop the bleeding now and reallocate existing investments into something risk free? Neither approach applies the fundamentals of investing, and both are driven by emotion—which is toxic when it comes to making investment decisions.

For retirees, a sound investment decision is to be in a conservative risk model where you have minimized your risk exposure. Though not completely immune to market movements—you will still experience a wobble here and there—you are immune to significant market swings that more aggressive risk models deliver. Furthermore, as the markets rebound, conservative risk models which have historically had minimal losses should rebound quicker as there is less loss to recapture.

At Freisenbruch, we are here for you when it matters most. If you are feeling even slightly unsettled, I encourage you to click on our Investor Profile Quiz—it’s a great tool to check in and ensure that your risk tolerance and time horizon still match your objectives.

Carla Seely is the Chief Operating Officer at Freisenbruch, if you would like any further details please contact cseely@fmgroup.bm or call 441 297 8686.

75 Front Street, Hamilton
Open Monday through Friday from 9:00 a.m. until 5:00 p.m.
(441) 296-3600