Making the most of your pension pot is simply a matter of investment management. But of course, buying the right investments at the right time is not simple at all.
It is a highly skilled discipline, which requires expert knowledge, and at least some ability to predict the future.
You could simply leave your pension arrangements to a fund manager who will use his or her skills to make the most of them. However, most will want to follow your wishes as to the style of investment you are looking for.
We have written before about the importance of asset allocation and the importance of taking the appropriate levels of risk with your pension investment. But there may be another tactic to consider with your pension. The decision on whether you need an active or passive approach to investment.
The value of your pensions and investments can fall as well as rise and you may get back less than you invested
The passive approach
Past performance is not an indicator of future performance and should not be relied upon.
Continuum are brokers, not investment or fund managers, this article is for information purposes only and does not constitute advice.
All investment is designed for the long term, and one school of thought is that over time, the passive approach will mean better returns. Instead of chasing the top performers in the market, it simply chooses some good solid stock, and lets time and compound interest take its course. The markets will do the work without further involvement.
This has actually been an effective strategy in the past few years. As the world recovered from the financial crisis and markets have steadily risen, the passive or buy and hold approach has paid off. It has been possible to simply set an asset allocation and, with only occasional rebalancing, leave it in place long enough to build up a sizable pension pot.
It may not have felt like it at the time, but investors have had it relatively easy in recent years. The recovery has helped them grow their wealth, almost without it mattering where they invested.
But the future may not be like the past.
The active approach
The recovery from the financial crisis may not yet be complete, but its first phase, where low and even negative interest were used to stimulate the world’s economies is. It means that many of the certainties we have enjoyed in recent years may no longer hold.
For example, equity and bond markets may have risen in unison as economies picked themselves up. It may be unlikely that they will continue to do so as standard market behaviours start to reassert themselves.
The returns of various asset classes, and the difference in returns from bonds and equities will start to diverge. Risk profiles will start to change.
Keeping a close eye on these changes, and rebalancing portfolios accordingly may start to become key to investment management. Fund managers may need to adopt an active management approach simply to keep the risk allocation of your pension fund appropriate.
This will be all the more essential if inflation continues to run high. This would tend to make fixed income investments such as government bonds (which can be a mainstay of passive investment for cautious investors) look far less attractive.
With something as important as a pension pot you need to be certain of having the right approach to investment. Passive ‘buy and hold’ could still provide returns. and it’s hard to find sectors where active managers consistently beat trackers – but a more active approach may be vital to preserve and grow wealth in changing economic conditions. At Continuum, we would be pleased to help you look at the most suitable solution for your investments – and your pension pot.