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There's Rarely a Reason to Lock in a Loss

Editor's Views: Recession fears mean many investors might want to take precautions, but that doesn't mean locking in a loss. And do you really want to work to age 75?

Holly Black 23 August, 2019 | 9:30AM

editor

Do you still want to be working when you’re 75 years old? Perhaps the more pertinent question is: will you be physically or mentally able to do so?

Pension Proposals

This week the Centre for Social Justice proposed a dramatic hike in the state pension age, which would see such later life working become the norm. At the current rate of increase, retirement age will reach 68 by 2039. The CSJ made the bold suggestion that the age should be raised to 75 by 2035.

There are credible reasons behind this, of course. We’re all living longer and somehow need to fund retirements that are likely to last 30 years or more. If you work for 50 years, say from age 20 to 70, and spend 25 years in retirement then every four weeks of salary you earn in your working years actually needs to last six weeks of your life. That’s a pretty startling thought, when many people are struggling to make ends meet. 

But is making people work longer really the answer? Compound interest is surely a far more powerful tool:

If you invest £100 a month into a pension for those 50 years, increasing your contributions in line with inflation each year, and your money grows at 5% a year, by the time you reach retirement you would have a pot of more than £373,000. Start at £150 a month, and that pot is worth just shy of £560,000 after 50 years. That's got to get you at least a few years more in retirement. 

While auto-enrolment has undoubtedly helped to get people saving for the future, there is still so much work to be done on getting people to engage with this type of investing and understanding exactly how life-changing it can be.

If someone had showed me those sums when I first started out in the workplace, I would probably have upped my pension contributions from the bare minimum. Even more powerful would be a tool showing how much earlier you would be able to retire comfortably by making such contributions.

Don't Lock in a Loss

Would you accept a loss just to keep your money safe? It’s a dilemma Morningstar Investment Management chief investment officer Dan Kemp and I discussed this week.

It sounds like a pretty terrible deal, doesn’t it? The entire point of investing is to ensure your money grows. Accepting a guaranteed loss is the very opposite of that.

Yet, so worried are many investors, that it is precisely what they are willing to do. Brexit, trade wars, slowing economic growth – there are many reasons to be concerned but, arguably, no reason to lock in to a loss.

Times of uncertainty are a time to take stock, sure, even to add some protection into your portfolio. This week we highlighted a number of defensive funds that could prove steady in volatile times. But if we truly are heading for a recession, then continuing to invest and ensure your money is working hard and growing becomes even more important than it usually is.

Those who are concerned about the outlook might diversify, may take some money out of the market and keep it in cash, or could consider alternative assets which are less linked to the stock market, such as infrastructure and renewable energy. There are a number of steps investors can take if they’re nervous – but locking in a loss should rarely be one of them.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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