Market volatility is a phrase that’s used a lot in the financial world, but what does it actually mean and how can it affect your pension?
What is market volatility?
Market volatility is the term to describe how much and how quickly the prices of investments, like stocks, go up and down. High volatility is when prices change a lot in a short space of time and low volatility is when prices change slowly and by smaller amounts.
What causes volatility in the stock market?
Market volatility can be influenced by lots of things such as political and global events.
Often when there’s uncertainty in the economy, we’re more likely to see high volatility. For example when a new government is formed, investors are unsure of how it might impact the companies they’re invested in. They might decide to sell their stocks, which lowers prices. Positive news like a breakthrough in technology might see investors rushing to buy stocks, pushing prices back up.
Global events like the COVID-19 pandemic or conflicts also create volatility because there can be uncertainty around how these events will play out in the long term. Some investors might prefer to take their money out of the market, while others see it as an opportunity to buy assets at a lower price. This tug-of-war between buyers and sellers is what creates the ups and downs.
How market volatility impacts your pension
As the money in your pension is often invested in the stock market, volatile periods can impact its value.
Most UK pensions are linked to other countries’ economies through investment in company shares, bonds and other assets. It means that anything impacting those markets can affect the value of the holdings in your pension fund. It can also lead to a chain reaction that influences interest rates, stock markets, and currencies in other countries too.
What to do if you’re worried about your investments
Most pensions are diversified. This means your retirement savings could be invested in different types of assets, across the globe, depending on the plan you’ve chosen. As a result, a decline in one type of asset or location can usually be offset by growth in the others.
Your pension is a long-term investment, so volatility in the short term isn’t the end of the story. If retirement is a long way off, starting a pension pot as early as you can is beneficial. The market will have plenty of time to recover from any dips, and your investments have time to bounce back.
If you’re closer to retirement it can feel scarier. There are different types of pension funds tailored to your life stage to take this into account. You might choose a lower risk fund that’s invested less in the stock market and more in government or corporate bonds.
Summary
The important thing is not to panic. Historically, stock markets balance out over time, although this isn’t guaranteed. Regular contributions and saving as soon as possible gives you more time for things to balance out and offer better returns. You can check where your money’s invested on our Plans page or log in to your BeeHive to see your specific plan.
Market volatility is a normal part of investing. It can be scary but learning how it works and taking steps to protect your pension can help you navigate it.
Risk warning As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
