The benefits of diversification

15 June 2020
This article can help you explain to your clients that investing a pension across a mix of asset types can help to reduce the impact of market falls.

Market movements in 2020

The lockdown measures put in place to contain COVID19 has caused a big drop off in UK and global economic activity. This has resulted in poor investment performance in the short term and interest rate cuts as central banks act to try and limit the economic damage caused by the virus. It’s very likely that you’ll have seen the value of your pension drop recently and this could continue over the next few months. While it can be hard to watch large market drops, it’s important to remember that investing for retirement is a long-term game and it’s very normal for the value of investments to rise and fall as the economy goes through cycles of expansion and contraction. Although not guaranteed, the hope and expectation is that values generally go up over the longer term, despite this short term volatility.

Investing with us

We believe that investing in a wide range of asset classes will result in more consistent performance across a wide range of economic conditions and helps to reduce the risk of having all your eggs in one basket. The Governed Range holds a broad mix of assets- for example: company shares, commercial property, government bonds, corporate bonds, commodities and cash. That spread is deliberate, and means your pension is better prepared to withstand sudden market shocks - so when one particular asset class is performing poorly you shouldn’t be as badly affected. The impact of COVID19 has caused most asset classes to fall in value since the start of the year, except for UK government bonds which have risen in value and helped to offset some of the negative returns.

If you are hoping to retire soon then now might be the time to take stock - is there any room for flexibility with your plans? It's also worth remembering that you're unlikely to need all of your pension pot when you do retire, and if you do need to take some money out, the rest can stay invested and potentially benefit from future growth if markets do recover. If you're unsure what do to with your pension then we would recommend speaking to a financial adviser. 

Annual returns from different asset classes

The table below shows annual returns to the end of April from different asset classes over recent years.

(Click image to enlarge)

Key

If you think it looks like a ‘patchwork quilt’ then you’re not mistaken – this shows us that a single asset class is never the best performer for long, and the fortunes of a particular asset class can quickly change. Not only that, but it’s clear that some asset classes are riskier than others and the range of returns can vary significantly. In contrast, the returns from mixed assets vary less.

Greater diversification

For many people, spreading pension investments across these asset classes can be a sensible approach in order to smooth the ups and downs and reduce unnecessary risk. Our Governed Range is designed to do that for you. Each portfolio provides an asset allocation depending on your objective, attitude to risk and time to retirement. And our governance means we have a formal review process to ensure that the portfolios continue to perform as we would expect.

As the uncertain situation continues to unfold, you can feel assured that our investment experts are continuously monitoring the markets, keeping a close eye on your pension investments and making any changes we feel necessary in response to market events.

How our governance benefits you

  • You can be comfortable with the level of risk you’re taking when you invest
  • As time passes your investments will be automatically updated to maintain the asset allocation in line with this level of risk.
  • You can review the outcome of our governance meetings on our website every quarter.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.