Market sell-off: 5 rules to help you avoid a big pension mistake

It’s hard to ignore the headlines about the potential damage caused by trade tariffs.

And it’s not just the headlines. Anyone checking the balance of their pension savings recently is likely to have had a nasty shock as well. The announcement of US trade tariffs - and the chance that other nations retaliate with tariffs of their own - has triggered a sell-off in stock markets around the world, dragging the value of retirement funds lower in the process.

In times of extreme market volatility - as we have seen since the announcement - raise the risk that individuals act in haste and make lasting mistakes with their finances. There are lots of reasons, however, why they may not need to worry as much as they think, and why panicking now is likely to be the worst response.

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Here’s five considerations to keep in mind as markets continue to swing about. They could help you avoid making a lasting mistake with your pension.

1. If retirement is still a way off, you can worry less
   
   The true impact of the falls we’ve seen depend on how long you have until you need to access your pension money. Anyone still with many years until they need their pension money - at least 10 years - can probably afford to relax more in response to these developments.
   
   If your pension investments lose value in the short-term there will be plenty of time for those losses to be recovered, as history suggests they will be. Money held in a pension cannot typically be accessed before age 55 anyway (rising to age 57 from April 2028) so there is no need to sell investments and crystalise a loss - you can just wait it out.
2. Invest globally and you avoid the worst of the falls
   
   The S&P 500 - the major index tracking the US market - has fallen sharply in recent days and this has grabbed most of the attention but when you look at stock markets globally the fall has been less severe.
   
   The MSCI World Index - the index covering all major stock markets across the world - is at time of writing only 2.25% down over the past year. Even with the heavy falls we have seen it is only the last year or so of gains which have been wiped away.
   
   That’s important because your pension - where it is invested in stock markets - is likely to be invested globally. The default investment options within most workplace pensions, for instance, will spread your money across different regions to minimise the damage from big losses in any one of them.
3. If you still have lots of contributing ahead of you, things just got cheaper
   
   Imagine you were going to the supermarket to buy the weekly shop, and groceries suddenly fell in price by 10% or 20%. That would be good news. So why not with assets like shares as well?
   
   Yes - falls in share prices reduce the value of what you already hold, but they also mean that you can buy more at lower prices. That’s actually good news for anyone who still has many years of contributions to pensions ahead of them. Lower prices now can actually help their long-term success because it allows them to buy more cheaply.
4. The run up to retirement should mean less risk
   
   Not everyone has decades to go before they’ll need their pension money. If you’re a bit closer to retirement the concern is that steep losses won’t have time to recover.
   
   Yet many pension savers in this position will enjoy some protection from the stock market falls because they hold a proportion of their money in lower-risk assets like bonds and cash.
   
   The performance of bonds has been disappointing over recent years but in the recent market sell-off they have performed their role of counterweight to shares, rising when the stock market has fallen.
   
   Like cash, bonds pay a predictable return and those issued by governments are considered a relatively low-risk investment. That means they are attractive in times of economic stress. Fears of an economic slowdown caused by the tariffs has seen a flight to the safety of bonds and their price has risen.
   
   Many workplace pension schemes will automatically increase your allocation to bonds in the run up to retirement to protect against precisely the sudden losses for shares that we have seen this year.
5. Selling now could leave you chasing your tail
   
   Selling doesn’t just mean getting one decision right, you need to know the right moment to buy back in as well. If you decide to sell you pension investments now in the hope of missing even worse markets falls to come, you can easily end up chasing your tail trying to work out the best time to re-enter the market
   
   If you are sure that investments are the best place for your long-term retirement savings then it is easier - and often beneficial - to just stay invested. Extreme volatility often means that very bad days in the market are followed by very good days - and you need to be invested for both if you want to capture the long-run performance of investments. 

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• Find out how our retirement specialists can help you

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA or pension and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.