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What has coronavirus taught us about investing and why should employers take note?

What key investment principles have been reinforced by the events of this year and what part can employers play in helping their workforce navigate the world of investing?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.

2020 will go down in history as a year like no other. From nationwide lockdowns to vaccine breakthroughs, we’ve witnessed an unbroken stream of breaking news.

Global stock markets are not insulated from the pandemic and neither are pension investments. Financial markets are a famous barometer for worldwide events and as employees are exposed to the markets through their workplace pensions, instilling good investing behaviour is crucial.

The economic impact of the pandemic is expected to be with us for some time, but there is good news. There are tried and tested ways to help your employees develop market resilience.

So, what key investment principles have been reinforced by the events of this year? After all, market volatility isn’t a 2020 phenomenon. And, what part can employers play in helping their workforce navigate the world of investing?

Taking a long-term view

It seems strange to think that a UK general election and a new US president are not the most noteworthy events for markets over the last 12 months. Uncertainty and unpredictability are an innate part of investing, but this is where the advantages of regular investment via pension contributions can really flourish.

Making contributions via regular pension payments naturally lends itself to a phenomenon known as ‘pound cost averaging'. This is where an investor drip-feeds contributions into the stock market. This can average out the price of investments during turbulent markets. Contributions made at regular intervals will buy more units or shares when prices go down, and this can smooth out returns in the long term. It should be remembered that as markets rise, fewer units of the same investment are purchased for the same contribution.

Encouraging employees to take a long-term view for their pension is vital. By playing catch-up to recover a shortfall in retirement savings, employees could find themselves in a risky position. They may feel they need to make lump sum contributions later in life, without the time to smooth out volatility through regular investments.

As an employer, you can help by providing resources to allow members to get to grips with their investments whilst there is time to make a difference. A little know-how can go a long way in increasing awareness and improving good investment behaviour.

The role of a default investment

We should recognise that not everyone has the time or inclination to hand-pick their own investments. Diversification is a mainstay of good investing and a diversified portfolio can help shelter against a volatile market. But, deciding exactly where to invest may feel like a barrier to entry for some. This is where default investment funds can help.

A diverse default investment fund helps even the most unengaged pension members invest without the need to make day-to-day investment decisions. It can remove the worry of keeping a constant watch on hard-earned savings.

If a particular asset class experiences a short-term decline, other assets in the fund may experience gains. This is the idea that underpins a diverse portfolio. In a favourable scenario, there should always be something working well, even when markets are volatile. This balanced approach is woven into the fabric of many funds that are used as the default option for pension schemes.

But what about members that want to take a more hands-on approach?

One size doesn’t have to fit all

Default funds are selected with an average pension member in mind. But it’s clear that everyone’s investment goals are different and are likely to change over time, particularly as they approach retirement.

If you consider the people you work with, some will be many years away from retirement – for others, it might be just around the corner. Some people are more comfortable with taking greater risk in the hope of a greater reward. Others will be more cautious. Whatever an investor’s situation, choosing the right investments can make a big difference over time.

The days of providers offering limited investment options are numbered. A broad range of investment choice allows members to align their investments to their own goals, build a diverse portfolio and give themselves the best chance of saving for a comfortable retirement. As an employer you can ask yourself, does your pension offer the choice and flexibility of investment that members require?

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Financial education in the workplace

For many, this year has put their finances under the microscope. There is a preconception that pensions are complex, but this can be dispelled with the right approach. The best time to get to grips with workplace pensions is when there is time to take action to improve the financial prospects of employees for their later life. Making use of available support can help define the right actions to take.

If an employee is considering changing their pension contributions, thinking about taking a more hands-on approach or even planning for retirement, these decisions are not made in isolation. They are affected by a very personal sense of financial security. This can be strengthened through expert guidance and education.

Our new Financial Wellbeing at Work service could help your employees make more positive personal finance decisions. Hear from our financial wellbeing specialists below.

Learn more about HL Financial Wellbeing at Work

It’s easier to prevent bad habits than it is to break them, and with a bit of planning and some practical help, you can empower your workforce to make decisions about their pensions and investments with confidence.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.

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