Market volatility questions and answers

Almost all asset classes see fluctuations in their prices over time. But while price swings are a common phenomenon in most asset classes they are most prominent in the stock market.

These upward and downward movements in price are known as volatility, which is defined as "a measure of the frequency and severity of price movement in a given market".

It is important to understand that volatility is part and parcel of investing. It isn't the only factor to consider when thinking about investment risk or an inherently negative factor.

In simple terms, volatility can be caused by:

• Unexpected earnings results
• Economic data
• Company leadership announcements
• Political announcements
• Interest rate changes
• Market sentiment
• Other events (economic, geopolitical, etc.)

We as humans tend to experience the pain of loss more acutely than the upside gains. This anticipation of risk can impact short-term decision making in markets.

Volatility in the financial markets can be unnerving for some investors and does present some challenges.

Uncertainty in markets can cause fear, which can lead investors to make decisions they may otherwise not make.

Higher volatility also means anticipating a wider range of possible final portfolio values when trying to plan for long-term goals like retirement, which can affect future planning.

That said, higher volatility typically means greater potential investment returns over the long- term. In the short-term, higher volatility can represent sudden falls and rises in portfolio values. History provides perspective and shows volatility is just the price investors pay for stock longer-term returns

 

Your policy is invested (for example in stocks or shares, bonds, property or other types of investments), which means that its value depends on the value of those assets. When investment markets are volatile, you may see the value of your policy’s investment fluctuate, possibly including some fairly significant falls as well as rises. While market volatility can cause your policy value to fluctuate up or down it is not the only factor you should consider if your policy value has fallen. Some other factors may be taxes, such as exit tax, income withdrawals or imputed distribution and other charges related to your policy.

In the short term, you may see your policy's value fluctuate, including possibly some significant falls in value. This can be unnerving, but it's important to understand that volatility is part and parcel of investing over the long term.

When it comes to investing, over the long-term (usually more than ten years) markets have risen in value. Historically, investors who've held onto their investments during periods of volatility are likely to have seen their values increase.

Remember though that past performance isn't a reliable guide to future performance. The value of all investments can go down as well as up and may be worth less than was paid in.

If you need to access the money from your policy fairly soon, for example, because you're close to your retirement date or you're already taking money from your policy, see questions

I'm about to retire – what does that mean for my pension?

I'm currently taking money out of my approved retirement fund (ARF) to live on – what impact will market volatility have on my remaining pension?

The type of fund you're invested in will  have an impact on how it performs during periods of market volatility.

You can find out more about how they are managed in the fund factsheets and fund updates on Fund Centre

If you're in an actively managed fund, the fund manager can be more selective regarding what underlying investments that they choose to buy, sell, or hold on to with the aim of outperforming an investment benchmark index or target return. The impact of market volatility could vary widely depending on the investment strategy/objective of the fund manager

If you're in a passive fund (sometimes called a tracker or index-tracking fund), the value of your investment will track the index it's linked to (for example, the S&P 500 Index or MSCI World Index). This means it will follow any ups and downs in value that the index brings. Remember, you cannot invest directly in an index, and it's not possible to match the exact composition of stocks and shares in an index all of the time.

In most cases, you, together with your financial adviser, will have decided where your policy is invested. If you want to make some changes to your policy, please talk to your financial adviser. Standard Life cannot give you advice but we can give you information, illustrations, answer any technical questions you may have, and carry out your instructions. If you don't have a financial adviser, you can find one at www.financialbroker.ie. There is likely to be a cost for getting advice. Consider also the indirect cost of not getting and following professional advice.

Before you do anything, you might want to consider your long-term needs, and if moving into other investments will help meet these needs.

In addition, its important to know that  if you move out of your existing investments after markets have fallen, you could lock-in any investment losses and miss out on any recovery  which could have reduced  or even reversed the impacts of any losses on your policy.

If you want to make some changes to your policy's investments, please talk to your financial adviser.

Most investment options have some sort of risk rating, which can help you decide if the level of risk is right for you:

If you have a Standard Life policy, you can find these ratings (called volatility ratings) on our Fund Centre

Before you move into other investments, there are some things you might want to be aware of:

• all investments carry some level of risk
• you might want to consider your long-term needs and if moving into lower-risk investments will help meet these needs it's important to remember that lower-risk funds have less potential for growth than higher-risk funds
• you might want to assess your attitude to investment risk before you move into different investments. Oxford Risk's risk questionnaire can help you

When your money is invested, you can't avoid the impact of market volatility entirely. But here are some things for you to consider which might help lessen the impact. Remember that this isn't advice, and the value of all investments can go down as well as up.

Try to think long-term

When it comes to investing over the long-term (usually more than ten years) markets have risen in value. Historically, investors who've held onto their investments during periods of volatility are likely to have seen their values increase longer-term returns

Remember that past performance isn't a reliable guide to future performance. The value of all investments can go down as well as up.

If you need to access the money from your policy fairly soon, for example, because you're close to your retirement date or you're already taking money from your policy, see questions

• I'm about to retire – what does that mean for my pension?
• I'm currently taking money out of my approved retirement fund (ARF) to live on – what impact will market volatility have on my remaining pension?

Some investors can be unnerved when they see the value of their  investments fall, but it's important to try not to make a knee-jerk reaction. Consider how your investments have done over at least five years in line with their aims, rather than concentrating on short-term ups and downs. You can find information about a fund's aim and its performance in the fund factsheets, which you can download on our Fund Centre

Again, it's important to remember that past performance isn't a reliable guide to future performance. The value of all investments can go down as well as up.

The importance of diversification

This means spreading your money across different types of investments and geographical locations. If you're only investing in one or two of these, then you could be exposing yourself to quite a degree of risk.

Diversifying across investments and countries can help smooth out the returns you get. This is because different types of investments tend to go up and down in value at different times and are affected in different ways by factors such as economics, interest rates, politics, conflicts and even the weather.

There are options available which do this for you – visit our MyFolio webpage for more information.

Consider how much risk you're willing and able to take

Generally, higher-risk investments will tend to be more affected by market volatility, and you're likely to see bigger and more frequent fluctuations in value. However, they also have the potential for higher returns over the longer term.

If you're uncomfortable with seeing large changes in the value of your policy, you might want to consider lower-risk investment options in the longer term. Most investment options have some sort of risk rating to give you an indication of how much risk they take.

If you're unsure about your attitude to risk, Oxford Risk's risk questionnaire can help you.

As well as considering how much risk you're comfortable with, you should think about how much risk you're able to take with your money when investing – basically how much money you can afford to lose.

If you're not sure what action to take, or whether the investment options you're in are right for you, we recommend you talk to your financial adviser. If you don't have a financial adviser, you can find one at www.financialbroker.ie. There is likely to be a cost for getting advice. Consider also the indirect cost of not getting and following professional advice.

 

If you're still some years from retirement, your investments should have time to recover from any short-term losses. If you've been saving into your pension for some time, you may have had some previous experience of heightened market volatility.

When it comes to investing, over the long-term (usually more than ten years) markets have risen in value. Historically, investors who've held onto their investments during periods of volatility are likely to have seen their values increase longer-term returns

Remember that past performance isn't a reliable guide to future performance. The value of all investments can go down as well as up and may be worth less than was paid in.

If you're close to retirement and plan on taking a fixed or variable income (sometimes referred to as drawdown) or one or more lump sums from your pension, you may want to review your plan if market volatility has had a negative impact on the value of your investments.

Talking to the right people about your concerns can help you make informed decisions. A good adviser will understand your financial position and help you identify your goals. They'll prepare a financial plan that's unique to you and one that will change as your needs change. If you have a financial adviser, talk to them about how you're feeling and get some peace of mind before making any decisions. If you don't have a financial adviser, you can find one at www.financialbroker.ie. There is likely to be a cost for getting advice. Consider also the indirect cost of not getting and following professional advice.

This depends on where you're invested. We can't give advice, but here are some things you might want to be aware of

• If you're in lower-risk options, you're less likely to be affected significantly by market volatility than if you're in higher-risk options. However, you may miss out on future growth opportunities.
• If you have a mix of lower risk and higher risk investments, taking money out of the lower-risk investment could give your higher-risk investments more opportunity to grow in value when markets recover.
• If you're taking a regular set amount from your ARF and continue to take this amount when markets are falling, your money could run out sooner than you expect it to. This is because it will have less opportunity to recover any losses.
• If you move out of your existing investments after markets have fallen, you could miss out on any recovery in those markets which could lessen or even reverse the impact of any losses. However, if and when markets do start to recover, you may want to think about the types of investments you're in.

Remember that the value of all investments can go down as well as up and may be worth less than was paid in.

Talking to the right people about your concerns can help you make informed decisions. A good adviser will understand how your ARF fits into your retirement plans and can help you make investment decisions. They'll prepare a financial plan that’s unique to you and one that will change as your needs change.

If you don't have a financial adviser, you can find one through Financial Broker at www.financialbroker.ie. There is likely to be a cost for getting advice. Consider also the indirect cost of not getting and following professional advice.

You can choose to set up a guaranteed income for life (an annuity) with some or all of your ARF. There are some things to be aware of before you decide to do this.

The amount of income you'll get if you decide to set up an annuity will depend on a number of things, including your age, where you live, your health and lifestyle, the size of your pension, the type of annuity you choose and annuity rates at the time you set it up.

You don't have to set up your guaranteed income for life with us. Options and annuity rates may vary between providers, so you could get a better guaranteed income for life somewhere else.

Once you've set up a guaranteed income for life, you won't be able to change providers, cash it in or add different options.

You can find more information about setting up a guaranteed income for life and your other options on our post-retirement webpage.

You can find more information about the investment options offered by Standard Life on our Fund Centre

We're not able to give you advice on what you should do. So if you're not sure what action to take, we recommend talking to your financial adviser. If you don't have a financial adviser, you can find one at www.financialbroker.ie. There is likely to be a cost for getting advice. Consider also the indirect cost of not getting and following professional advice.