Question of the month: should I change my pension investment strategy?

My pension is invested in three funds with one of the big pension companies in Ireland.  Its performance seems very poor.  I know that investments can go down as well as up – but can I do better?  And when is enough enough?

– MQ, Co Cork

When markets go down – as they have for most of 2022 – the usual advice is twofold. Firstly, that you should avoid reflex actions to sell as you may crystalise losses forever, rather than have them on paper for a short time.  The second point that is endlessly repeated is that what really counts is time in markets, not timing the markets (in fact Google produces over 60 million search results for it as the image shows).

But is that right?

One big assumption

The trouble with these pieces of advice is they rest on one big assumption: that the funds you have are fundamentally decent, and appropriate for your requirements.  It’s just that your funds have fallen on hard times for a short while.

But what if your fund is really an underperformer, or isn’t appropriate?  It’s likely that when the market falls is exactly when you’ll find out.

So while the general advice to hold your nerve and give your investments time is valid, it certainly true that there are times when you should consider changing your pension investment approach.  Here are six of them.

1. Your fund manager loses their way

Fund managers won’t always get it right – but it’s reasonable to expect that they invest according to a stated approach.  There are times when that can go way off track and investors understandably question the manager’s ability to deliver the desired returns without excessive risk.

One recent example in the UK is the major exposure European Opportunities Trust had to fraudulent German fintech company Wirecard (here’s one account).

If your fund fails to perform to its strategy over a sustained period, it’s could well be time to cut your losses.

2. Your appetite for risk changes

Investing your money is supposed to help you sleep better at night – not keep you awake.  The fact that your money is working for you should be a good feeling. If that’s changed and your investment exposure is stressing you out, it might be time to change down a gear.

Of course the opposite is also true: your money could be invested in low-risk, low-growth vehicles even though you could readily stomach more risk. In cases like that, a behavioural change might be better – for example, if you are still years away from drawing your pension, checking your fund’s performance less regularly.

3. Your timescale changes

How long you are able to stay invested is a key part of the decision to change investment strategy.

To take an easy example: if you need to lay your hands on your money in three months’ time, and will have a problem if it’s slipped by 5%, you should be in very stable assets.

On the flipside, if you’ve decided to defer a house purchase for five years, you should probably contemplate putting the money you’ve saved to work in the investment markets.

Of course, time moves on: for most of us, our investment timescale changes by definition.  So if you’re planning to draw down your pension in the near-term, think carefully about dialling down its risk profile.

4. Your financial resilience changes

Your financial capacity to absorb short-term losses is a critical element in deciding the kind of investments you should hold.  If you have a defined benefit pension along side this pension, low living costs, and own your home, it might be very sensible to invest in high-risk, alpha-oriented portfolio.

If your income is precarious, you’re retiring soon and your costs are rising, your investment choices should be very different.

5. This was never the right fund for you

Thousands of people in Ireland invest their savings and pensions in funds that simply aren’t right for their requirements in the first place.

If your money is invested in, say, 100% cash, or cryptocurrency, or property, or gold, it’s likely you are in this category.  Yes, you might receive strong relative short-term performance in any one of these. But your risk is concentrated and your money has limited opportunities to grow.

It’s definitely worth reviewing, and likely taking action.

6. You just don’t need to take the risk any more.

Lastly, remember that an investment return is the payment we receive for bearing financial risk. But if you don’t need the return, why run the risk?  If you’re financially well-off, or you have a pension which is nudging the €2 million lifetime cap, you may decide it’s just not worth it, and to remain in cash and cash-like instruments.

Make a change for the right reasons

Changing your investment strategy isn’t wrong. But there are good reasons and bad reasons for doing it. For many people, staying in the market, and staying the course during short-term volatility is the right approach. So if you’re asking, ‘should I change my pension investment strategy’ and decide to make a change, be sure it’s for the right reasons.