My answers to some of the questions I was asked while recording the New Accumulators podcast season.
What Should I do When the Next Recession Hits?
Short answer, do nothing. Or better still, find some more money and invest it while markets are down. Let’s define a recession: the technical definition is two consecutive quarters where the economy has reduced in size. Recessions are normal and come around as part of the economic cycle. While they can be quite painful, they are usually fairly short-lived.
They usually mean a drop in markets. That’s normal too and it’s helpful to know that a falling market represents shares being ‘on sale’ – you can now buy them cheaper than they used to be.
What you must never do is think you can go into cash, sell your investments, ride out the recession and then reinvest. If YOU could do that, we ALL could do that, and we’d never lose a penny. You’ll get the timing wrong and do serious damage to your wealth building if you try and time in and out of markets.
You may have seen charts that show the impact of missing the best 20 days trading out of the last 20 years or similar. The message is clear – STAY IN THE MARKET! Don’t try to time it; it’s a fool’s errand. Instead stay invested, even if your gut is telling you that you want to bail out, if you have the spine to stay in, your future self will thank you.
There’s an argument that if you miss the 20 best days, you might also miss the worst days too, which might seem like a positive. However, sometimes the very worst days are followed very quickly by the best days. This has happened throughout history.
Don’t panic. Ignore the news. Don’t invest money you’ll need in the next three years or so, because it’s unlikely that a recession will last that long. Spread your money around using multi-asset funds or a collection of trackers taking in different asset classes and geographical markets. If you invest like that, you’ve nothing to fear from recessions.
For what it’s worth, I don’t believe we’re heading for a recession in the next 12-18 months. Growth is slowing a bit, the world economy is still growing and there are enough reasons to be cheerful right now, I reckon, despite the efforts of our politicians to screw it all up for us.
How do I Choose Which Pension Fund to Invest in?
Many people struggle to choose the right fund for a pension, specifically in the context of workplace pensions. They find that, while they’d like to invest in the sort of passive, multi-asset fund I recommend, such a thing isn’t available in their workplace pension. Chances are there’s something near though.
The first step is to approach your pension provider, which is usually an insurance provider, and get a list of all the available investment options for your particular pension scheme. Perhaps you can find a web page with all that information, or there will be a phone number on your most recent statement.
You’re not looking to change the pension provider, but to see what changes can be made with the existing provider. This is a lot cheaper and a lot less hassle in the long run. Hopefully that list will show you which sector the funds are in. Sectors are collections of funds which are invested in the same way; collections of peers’ funds if you like. The idea of that is so you can compare a fund with its peers.
Look for the Mixed Asset sectors, of which there are three: 0.35% shares, 20-60% shares and 40-85% shares, and then the Flexible Investment sector. If there really is no fund you can access which falls into one of those sectors, then look for funds with risk profile type names like Balance, Cautious, Conservative, Adventurous, Defensive. Take a look inside those and you’ll likely find that there’s a blend of asset classes in there.
Don’t lose sleep over this. Pick one or and crack on and keep it under review. Make a point of checking in to see if new funds are available, and make sure you review your chosen fund or funds each year.
It isn’t going to make or break you, although having pension money in too cautious a fund isn't always a great idea. Given the timescale before you’ll even be likely to access that money, it’s best to take more risk than you’re thinking about doing.