My pension pot is currently apportioned 35 per cent emerging market equity, 45 per cent global equity (including UK), 10 per cent UK gilts, 10 per cent property.
I am 20 years from retirement and not averse to risk.
I am convinced there is going to be a major stock market correction in the next 12 months, at least in the UK, Europe and USA.
First, is it silly to tinker with how my pension is invested on the basis of trying to read the market?
Second, if I was certain in my conviction, how would I change the apportionment of my pot now in order to take advantage of the imminent equity market correction?
Stock markets globally have soared in recent years and now some city analysts predict that a major correction will happen sooner rather than later
Myron Jobson, of This is Money, says: The rapid ascent of global markets has struck fear into city analysts in recent months. The FTSE All World index, which covers between 90 and 95 per cent of the investable universe, hit a new peak in August.
Across the pond, the S&P 500 has been trading at record highs or near-about, while the UK’s FTSE 100 index has brushed off uncertainty brought about by the contentious EU referendum ‘leave’ vote and continues to flirt with all-time highs at present.
In Europe, the German DAX hit a new high in late May this year but the index has dipped a smidge since then.
Bull markets do not last forever, however, and some investment experts predict that a crash is nigh, but that is exactly what it is: a prediction.
Back in 2014, the consensus among industry experts was an imminent rise in interest rates but this did not transpire.
In fact, in August 2016 the Bank of England cut the rates to another record low of 0.25 per cent amid the backdrop of uncertainty over the economic outlook of the UK economy following the Brexit vote.
It is impossible to predict the unexpected, that is why investment professionals emphasize the importance of diversification when it comes to investing.
You have earned brownie points for not falling into the inertia snare that so many savers do, especially when retirement is not at their doorstep, but no investment adviser worth their salt would advise you to try to time the market – especially when your retirement nest egg is at stake.
As your question touches on both pensions and investments, we asked an expert in each field to provide some guidance.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, replies: Firstly, no it absolutely isn’t silly to want to take control of how your pension is invested and to tailor that to your own personal risk tolerances and investment beliefs.
We’ve found that members of workplace pensions who choose to take control of their pension pots and make their own decisions tend to do better than those who stay in the default funds. However this is dependent on those individuals taking advantage of investment research to help them weed out poor performing funds.
McPhail says many investors have lost out by attempting to time the market in the past
Given the pension freedoms of 2015, it is increasingly important for all pension investors to take an active interest in how their retirement savings are invested.
In terms of asset allocation, your current investment mix doesn’t look unsuitable for someone 20 years from retirement who is also happy to live with some investment risk and volatility.
You may be right about the forthcoming market correction; equities have certainly been on a sustained run. However I would warn you that many investors have come a-cropper in recent years trying to time the market.
As long ago as 2010 there was talk of interest rates moving away from short-term quantitative easing and yet still we wait.
Similarly, anyone spooked by any of the myriad concerns of recent years, such as geopolitical instability, Italian banks’ liquidity, Brexit etc could have found themselves out of the market and missing out as a consequence: generally, time in the market works better than trying to time the market.
Having said that, if you do want to follow your conviction, you need to explore what options your current pension provider offers you for self-directing your investment choices.
Get in touch with your pension administrator, find out what investment choices are available to you and how you would go about switching.
If they don’t offer you what you’re looking for then it gets complicated because in principle you could switch to another provider but you don’t want to lose out on any employer contributions going into your current pension.
You need to find out all your choices and costs before you take any action of this kind.
David Henry, investment manager at Quilter Cheviot, adds: On first impressions, you seem to be in a strong position. Your asset allocation looks sensible, given that you are so far from retirement and comfortable with taking risk.
While your exposure to emerging markets is significant, and this will have a potential effect on the overall volatility of the portfolio, these economies are currently growing at a far faster rate than more mature markets and I would expect this trend, over a 20 year time frame, to continue.
Henry argues that while shares globally are not cheap, they are not worryingly expensive
For example, you may have seen India’s move towards a cashless society in the news, and I continue to find it incredibly interesting how much more quickly, historically less developed countries have been to adopt such technology on a widespread basis.
In addition, valuations on emerging markets equities are at a significant discount to their developed market counterparts, providing some support to the idea that they should provide superior returns over the medium to longer term in spite of the extra volatility.
You are clearly worried about the potential for a major stock market correction, however I would strongly advise against a significant departure from your current strategy.
Broadly speaking, equities globally are not screamingly cheap – however we would not regard them as worryingly expensive either at this stage (particularly outside of the US).
Were you to make a significant, tactical change to asset allocation at this stage (say selling down half of your portfolio into cash), and we did see a major fall in markets, you may find it very difficult emotionally to be brave at that stage and re-invest.
Conversely, if this most unloved of bull markets continues to grind higher you may be tempted to get back in, repurchasing assets at a higher level and having missed out on dividend payments in the meantime.
Put simply, picking the top and bottom of market cycles is nigh on impossible.
With inflation in the UK currently standing at 2.6 per cent, the only certainty at present is that money held in cash will lose in real terms.
Buying a 20 year gilt today would pay you a total return of 1.7 per cent annually until maturity, more attractive than cash, but still not enough to protect the purchasing power of your capital.
If you are particularly concerned you could look to introduce further diversification within the portfolio by adding a holding in fixed infrastructure. There are liquid, listed vehicles available which invest in these assets.
The counterparty to these contracts is quite often the UK government, and the yields received are far greater than those available from gilts.
In short, remain disciplined and if we see a market correction remember that this is 20 year money – you have lots of time to ride it out.
If you are continuing to contribute regularly to your pension, any downturn will give you the opportunity to add to your existing holdings at a more attractive level.
TOP DIY INVESTING PLATFORMS