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Fearful investors should look to lessons learned in past crises

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Traders at the New York Stock Exchange last week

Traders at the New York Stock Exchange last week

REUTERS

Traders at the New York Stock Exchange last week

The Covid-19 outbreak is primarily a human tragedy, with some of the most vulnerable in society likely to be most affected. As well as its impact on physical health, we cannot underestimate how Covid-19 will affect mental health. Worries about financial well-being, including effects on retirement savings, are likely to add to concerns for many.

Last week was hugely turbulent for global investors. Monday saw stock markets tumble and this continued over the course of the week.

On Thursday, the Dow Jones Industrial average officially went into a bear market, having fallen by 20pc in recent weeks. Global markets followed suit, with falls across Asia and Europe, including the Iseq Index, falling sharply over the week.

Investors trying to get to grips with the outlook for financial markets need to consider a number of factors. First, there is the direct impact of shut-downs and quarantines on economic growth and the prospect that spending will be cancelled or deferred.

Second, indirect factors include disrupted supply chains and the effects of falling confidence and reduced spending, which are likely to have a significant impact on growth and therefore stock markets.

Governments and central banks are taking action to protect the financial system and support economies. The US Federal Reserve has already cut rates by 0.5pc and more cuts are expected. The Bank of England followed suit this week, cutting by 0.5pc and the European Central Bank is increasing support across the region. We have seen more targeted action in other countries, such as support for mortgage payers in Italy and changes to sick pay policy here in Ireland.

Policymakers are trying to use the tools available to them to help offset some of the negative effect on economic growth but only time will tell how effective their actions are. The ultimate impact will depend on whether the recent outbreaks are contained, how long this takes and whether we see many more outbreaks causing further disruptions.

But there is no doubt that there is a lot of uncertainty ahead.

So what do the falling markets and volatile outlook mean for investors and pension savers in Ireland?

Individuals invested in defined contribution plans are exposed to movements in investment markets. Most of those still far from retirement have the advantage that pension plan saving is a long-term investment. This means they can consider many years ahead rather than focussing on the short-term and can continue to invest through volatile markets. Indeed, any contributions invested now will buy the same assets as last month but at a significantly lower cost.

Changing long-term investment choices in response to short-term market events is generally not advisable and research has shown that many people make changes at exactly the wrong time. However, that is not to say that no action is needed.

Individuals should understand their investments and review if they are comfortable with the level of risk they have chosen to take. While short-term market volatility will not be welcomed, this group may have sufficient time to weather these market fluctuations.

For members closer to retirement, typically within around seven to 10 years, the effect of these swings is more problematic as there may not be sufficient time for their savings to recover before they retire. However, most Irish defined contribution plans offer what is called a lifestyle strategy, investing for growth when a member is far from retirement and reducing risk gradually and automatically as retirement approaches.

This automatic de-risking means that members close to retirement who are invested in this option should have a relatively small exposure to equities and other risky investments. It is still important that members review and understand their investments and whether they are, indeed, invested in a lifestyle strategy.

Anyone approaching retirement should consider taking financial advice on the options available to ensure their investments match their risk profile and preferences.

Trustees of defined contribution plans need to have a good understanding of their plans' exposure to various asset classes and how the funds will react. They should also communicate to members, targeting especially those individuals closer to retirement and encouraging them to make measured decisions that focus on the long term rather than panicked short-term reactions.

On the defined benefit side, funding levels are likely to be materially impacted by the moves we have seen in investment markets. Trustees and sponsoring employers need to understand their exposure to risky assets and the impact of market movements on their plan. They may face tough decisions ahead in these unprecedented times.

Eleven years ago this week, we saw the bottom of markets during the financial crisis. At that time few predicted the months and years that followed. It's worth bearing in mind that at its low point in 2009 the S&P 500 index had dipped below 700, but had more than trebled in value by 2015. Markets are again facing challenges, and short-term investors will continue to look for opportunities.

However, those with long-term investment horizons should remember their inherent advantages and invest accordingly.

  • Caitriona MacGuinness is a pensions expert with Mercer Ireland

Sunday Indo Business