At Cameron James, we are well experienced with the stress and anxiety that market volatility can cause for our clients. In today’s economic climate, it is more important than ever to have a solid investment plan in place that can weather the ups and downs of the market.
Here, we review a recent conversation with a client who was concerned about the state of their pension portfolio. Providing insights into arguably the best approach to market volatility and how we work with our clients to support and navigate them through challenging times. Before we discuss the conversation, let’s discuss market volatility and how it can cause pension losses in 2022.
Understanding Market Volatility and Its Implications
Market volatility refers to the tendency of financial markets to experience sudden and significant fluctuations in value. This can be caused by a wide range of factors, including geopolitical events, economic indicators, and investor sentiment. You can also learn more about market volatility in one of our YouTube videos below.
In recent years, the COVID-19 pandemic has been a major driver of market volatility, with lockdowns, supply chain disruptions, and changes in consumer behaviour all contributing to uncertainty and market instability.
For investors or pension holders, a volatile market can have a number of implications. For example, it can lead to sudden drops in the value of investments, which can be particularly concerning for those nearing retirement and with limited time to recover losses. It can also make it more difficult to make informed investment decisions, as it’s hard to predict how markets will perform in the short term.
However, it’s important to remember that market volatility is a normal and expected part of investing. No investment is completely risk-free, and volatility is a necessary component of the long-term growth potential of investments such as equities.
While it’s natural to feel concerned during times of market turbulence, it’s important to take a long-term view of investment returns and avoid making knee-jerk reactions based on short-term fluctuations.
Client Concerns On Market Volatility
Hope you are well.
I am looking at the depressing status of my pension and wanted to check with you if there is anything to do to improve things? Any changes in the portfolio could help the situation in any way at this point where I’ve lost £77000 from my pension?
What’s your current view about Scottish Mortgage future?
IFA Approach and Response
Thanks for your email.
I am very well, thank you, hope you are too.
I understand your concerns. As you will have likely seen from most reputable sources, 2022 was an extremely volatile market year.
It will go down as one of the worst equity years on record. It narrowly averted being as bad as the 1930s in the final few months of the year. It is not something specific to only you and your SIPP portfolio. Clients globally looking back at their portfolio returns across 2022 felt the market volatility.
No one can reliably predict the markets, and no level of portfolio diversification can protect from systemic market risk like we saw in 2022. Unfortunately, anyone who claims they can reliably predict the market is either naive or often talking in hindsight.
When a portfolio losses money, which can happen (and regularly does happen on average every 4-5 years), clients often ask about the need for changes. However, making portfolio changes at a time when equity markets have fallen so sharply is nearly always the worst possible time. It is, unfortunately a retail client mentality that they need to ‘go in and fix something’ and that something must be done to address the issue. Some IFAs may pander to make it ‘look like’ they are doing something, but this is often more for show than any intrinsic portfolio reasons.
Some clients in December 2022 (who emailed back to the Annual Review) were asking about ‘changes’ and then January 2023 produced one of the best months on record for equity markets. We do make portfolio changes and rebalances over the course of time, at Cameron James. And we will always automatically make you aware of any portfolio adjustments that we recommend. However, like most good asset managers, we are proactive in our portfolio allocation rather than reactive to short term market movements.
Your portfolio is 15.63% down.
In the context of what has happened in 2022, and one of the worst years on record for equity markets, do you think the portfolio has performed badly?
I appreciate no-one likes to see losses, and in my earlier years as an IFA, I used to worry somewhat when I saw portfolios down. However, your portfolio has actually weathered the storm pretty well, which has been helped by the uplift in the markets that we have had in early 2023, as markets have started correcting themselves back towards their long-term upward trend.
While I cannot predict the markets, I think Scottish Mortgage will have an extremely bright future. I personally buy the fund on a regular basis whenever I have surplus capital that needs to be allocated to the market. Its track record is exceptional. When looking at its top holdings, Amazon, etc, you have to ask yourself, is there something intrinsically wrong with Amazon as a company? Have they during 2022 suddenly changed their entire business model, and they are now a terrible company with no market share or new ideas?
The answer to these questions is, arguably, no. Amazon, like most global companies, had billions of dollars wiped off their market value through systemic risk which sprung from The Fed raising interest rates to curb insane levels of inflation (that was triggered by CV19 and supply chains). All these events are entirely beyond Amazon’s control and have nothing to do with them being a good company or not.
To play devil’s advocate, if you had left money in cash for the past 1-year, with the 12-month inflation running at 8.8% (if you actually believe the UK gov) then the purchasing power of your money would have been eroded by 8.8%. The only proven long-term method for a portfolio to remain above inflation is the equity markets. However, there is no reward with risk. And you have to trust the markets long term.
Additionally, it is worth remembering that your CETV from your DB scheme would now be worth around 60% (c.£300K) of the transfer value you achieved (c.£500K). As the UK 10-year and 20-year gilt rates increased as Governments increased interest rates, which is what the scheme, actuaries used to calculate CETVs. As such, by not moving your DB scheme, you would already be c.40% worse off from a CETV perspective.
The financial panning you have done is extremely valuable. Not necessarily because you predicted all of this happening and wanted to secure that higher CETV as you knew Governments would raise rates at an unprecedented level in 2022 and that your CETV would drop by 40%; but more through your market timing of exploring the DB.
Even a year one from your DB transfer, I would now very much struggle to get a DB transfer under age 45 approved by my compliance. Never mind under age 40. So again, market timing was very much in your favour on the transfer.
Long Term Returns
It is also important to consider, that you have not actually gained or ‘lost’ anything until your 57th birthday at the very earliest.
You have c.20 years (as UK SIPP pension age will almost certainly raise again from Age 57) until you are able to realise any gains or losses from your pension pot, during which time there will be numerous gains and losses each year in the market.
You cannot control that your first year in the markets was one of the worst on record. But the last 20-years of equity returns is likely a better benchmark and barometer to use than the past 1-year, which will only make up around 5% of your time invested.
I would be heading the same warning if your portfolio was up by 15.63% in a year. I would be reminding you that such returns are exceptional and not the norm. As per your pension losses in 2022, are the exception and not the norm.
I appreciate my email may come across as ignoring your concerns. But, far from it. I know your portfolio holdings inside out, and I monitor them on a regular basis. Arguably too much at times. However, I have been doing this job for far too long to let short term market movements cloud my judgements for my clients and make rash decisions.
Slightly longer emailed then I originally intended… but I trust it is valuable for you to have a little more background.
As you can see from the conversation above, at Cameron James, we empathize with our clients’ concerns about their pension losses in 2022 and market volatility. We believe that it is every client’s right to ask questions about their pension portfolio and understand the performance of their money.
Navigating and considering the impact of market volatility on your pension portfolio is crucial, and having a trusted IFA like Cameron James by your side can make all the difference. Our approach to market volatility is proactive rather than reactive. We work with our clients to develop a long-term investment strategy that can withstand short-term market fluctuations.
Our experienced team of IFAs is always monitoring the market and providing valuable insights to our clients. With our help, you can navigate challenging through volatile market conditions and stay on track to meet your long-term financial goals.
Book a free initial consultation today to learn how we can help you weather market volatility and build a strong financial future with your UK pension transfer.