The headline news has been dominated by Greece over the last few months, the closure of Greek banks and pictures of queuing pensioners all adding to the sense of fear among ordinary investors planning for retirement. The uncertainty and the risk of contagion across the financial system has certainly added to equity market volatility, with huge swings in the major indices.
Given the influence of central bank policy since 2009, investors have become accustomed to rising equity markets with very little volatility. However, it is important to remember that equities have historically been one of the most volatile asset classes. A return of volatility could be viewed as a good thing as investors may have become overly complacent. Those investing for the long term also have an opportunity to invest contributions at lower valuations.
The most important thing for members of a pension scheme is to align oneself to the most appropriate fund given one’s willingness and ability to take risk, time to retirement and overall retirement goal. The Invesco risk framework, with 5 risk profiles, caters for the dispersion of member risk and return objectives, categorising funds based on asset allocation and hence their expected risk/return characteristics. Therefore, if you are unsure about your current situation, it would be advisable to complete the risk questionnaire to ensure you are aligned to the appropriate risk profile.
The challenge for investors is that bond markets have also been heavily influenced by central banks, the dreaded reach for yield. I have covered this numerous times in recent blog posts. Even if yields stay low returns will be more challenging over the next five years, while long dated government bonds are really only suitable for investors who want to match the future cost of purchasing an annuity at retirement.
Absolute return funds, seen by many as the silver bullet, are designed to be more robust in a challenging environment. The fund manager can make short term tactical asset allocation decisions within a more unconstrained opportunity set and add strategies designed to limit the downside in the event of a significant market correction. However, it is important to remember that absolute return funds still invest in risk assets and therefore cannot guarantee a positive return in all market environments.