Velliv’s recommendation: Stick to your investment profile
Updated on 12 March at 13:35: The coronavirus has created a great deal of uncertainty in the past few weeks, and it has negatively impacted the stock markets as they have seen significant declines in that same period. This has left many with pension savings with the question of how to respond to this situation – is it time to change your investment profile or not?
Our recommendation is to remember that pension savings are a long-term consideration and that financial market fluctuations are an integral element of the investment world. You should also remember that Velliv’s investment products are characterised by broad risk diversification. Depending on your investment choice, this will mean investments in alternatives, real estate, bonds, etc. In VækstPension Aktiv, we have also maintained an underweight of equities investments throughout this fluctuation period. This is the very reason why we have performed well during the first part of the market fluctuations witnessed since the middle of February of this year. The newspaper Børsen recently published an article showing that VækstPension Aktiv is the pension product with the best performance among commercial pension companies. Read the Børsen article here.
We recommend that you stick with your investment profile
“We believe that, as a rule of thumb, you should stick with your investment profile both when times are good and when they are bad. The investment profile should reflect the risk profile desired in the long term”, says Anders Stensbøl Christiansen, Chief Investment Officer at Velliv. He adds:
“If you change your investment profile, you should be aware that it is difficult to ‘time’ the financial markets in such a way that you match the top and bottom levels. The situations where people are tempted to reduce the investment risk are very often situations in which the market mood is very negative. Experience from previous crises shows, however, that it is usually costly to change the risk profile during times of unrest. It is difficult to predict market movements, and the typical scenario witnessed is one where private investors both exit the market too late and are too late in joining the upturn that always follows a major drop in prices”.
A very small number of days generate large parts of returns
History shows that missing the best days in the equities market results in significantly lower long-term returns. Very few days generated large parts of the returns from global equities since 1970. Removing the 10 best return days from the period eliminates nearly 50 per cent of the total returns from equities. It can, in other words, be extremely costly to miss out on the good days. The challenge is that the best days for equities are typically right next to the worst days, as witnessed during the financial crisis of 2008 and 2009. This illustrates the importance of adopting a long-term approach as a pensions saver.
There are also costs associated with a change from one investment profile to another, such as from a medium risk to a low risk. In the situation where the saver then returns to medium risk later, there is a risk of paying costs for two changes – and missing out on returns for the interim period.