After months of investments tumbling in a downward trend, July seemed “to mark a positive turning point for global markets,” according to an update from PensionBee.
In fact, China was “the only leading stock market to fall in value.” This brief rebound had “created speculation about whether or not stock markets were beginning to stabilize, or even recover.”
But August reminded us all that we’re “still firmly in the grips of a bear market,” the team at PensionBee wrote in a blog post.
For a few weeks in August “an appealing picture was forming, as US companies had better than expected earnings and share prices grew in response.” What changed? On 26 August, the Federal Reserve effectively announced they must “continue to substantially raise interest rates to tackle inflation in the US.” As a result, share prices in US companies fell.
It’s important to remember that on balance, “all major stocks are still witnessing negative returns for 2022, and that bear markets aren’t permanent.” Despite this recent economic dip, the gains in July “have outweighed the losses in August for many investors.”
As noted in the update from PensionBee, August saw many of the world’s stock markets “tell a similar story of share prices rallying upwards before falling down again.” Compared to some of the double digit swings we’ve seen this year, “this smaller margin of market movement could be comforting to some investors.”
In the US, the S&P 500 “fell by 2.28% in August.” In the UK, the FTSE 250 “fell by 4.16% in August.”
In recent months the scale of volatility in global stock markets appears “to be slowly reducing, giving investors optimism for further stability and perhaps even growth.” The revived interest in US technology companies “had temporarily increased share prices and created positive returns for investors.”
This recovery is small “in comparison to the year-to-date losses that investors in 2022 have seen.” Undoubtedly, stock markets will “need more time to fully recover from the three economic shocks: the war in Ukraine, the UK’s rising inflation rate, and China’s supply chain disruptions.”
PensionBee also mentioned that seeing your pension balance go down can be alarming, “even if you already understand that with investments, your money moves around daily depending on what’s happening in global stock markets.”
When staring at your balance screen you may wonder “where has my money gone?” Is the loss “purely from market volatility?”
As explained by PensionBee, investing is “buying assets with the aim of generating positive returns.” When you invest, you’re “purchasing an asset at one price with the hope that same asset will increase in value over time, and create a profit when sold.”
But there are “no guarantees with investments.” In broad terms, “owing anything from artwork to property to shares in a business can be considered an investment.”
“Buying a property for £165,000 in 2012, and selling it six years later for £225,000 in 2018 would be seen as a successful investment, as it produced a £60,000 profit. Whereas buying a Damien Hirst painting for £30,000 in 2008, and selling it a decade later for £20,000 in 2018 would be an unsuccessful investment, as it lost £10,000 in value.”
Whilst there’s no crystal ball when it comes to investing in ‘real’ assets (such as property), there is “more guidance when it comes to ‘financial’ assets (such as your pension), as we’ve got lots of historical data to point towards when considering how these may perform over time.”
Although a single investment (like a painting or a property) may fail to create a profit, “spreading your money across different investments may reduce your overall risk of investment failure.”
That’s why diversification of your investments is “so important.”
Diversification is “a strategy of investing your money in a mix of assets.” Most pension funds contain “a mixture of different types of investments such as bonds, property, cash or company shares, all batched together in a plan, for easy and cost-effective investing.”
PensionBee pensions (like all pensions) are “made up of units.”
That means when you invest, “by transferring old pensions or making contributions, you buy units in your chosen pension plan.” If you own 100 units in your plan and each unit is worth £1.25, “then your pension balance is £125.”
Once a day, on weekdays, PensionBee gets “an update from your money manager with the updated unit price.” The unit price “changes every day and reflects the performance and value of your plan on that day.”
The unit price is “made up of the value of the underlying company shares in the plan eg. if the value of Google falls and you are invested in an index that includes Google, this impacts the unit price of the plan.”
So, if the unit price drops to £1.10 and you have 100 units, “your pension balance becomes £110.”
As noted in the update, unit prices “go up as well as down, and reflect the health of the market on any given day.” The principle is, that “if the value of the underlying companies you’re invested in fall, then the value of your plan falls.”
Where the money ‘goes’ is that your portion of that company “has decreased in value and the value of the unit price goes down with it.”
In 2022, a mixture of geopolitical struggles, high inflation, and supply chain issues “created the perfect storm of market volatility, which impacted both company shares and bonds.”
Consequently, the value of your units in 2022 “may have gone down.” As this is a global issue, transferring “to another provider won’t recover your market losses.”
It’s important “to remember that the value of your pension will go up again, when the markets recover.”
Choosing to withdraw your money when your balance is down “might seem tempting, but if the unit prices improve after you’ve taken your money out, reinvesting your money into your pension would cost you more, as prices would be higher.”
Also, as inflation erodes the real value of cash over time, investments like pensions “still prove to be a competitive choice against the rising cost of living,” the company claims.
UK’s PensionBee Reveals What Happened to Pensions in August 2022 Republished from Source https://www.crowdfundinsider.com/2022/09/195526-uks-pensionbee-reveals-what-happened-to-pensions-in-august-2022/ via https://www.crowdfundinsider.com/feed/