Retirement Planning

The Impact of Market Volatility on Target Retirement Funds

The Impact of Market Volatility on Target Retirement Funds

The Impact of Market Volatility on Target Retirement Funds

Let’s start with an interesting, if not concerning, fact about pensions and target retirement funds. A recent survey showed that 19% of savers have never checked the value of their pension. Did that surprise you?

You need to know the value of your pension fund to make it easier to plan. Your pension assets should be one of the subjects discussed in your regular review with your financial adviser. This then brings us to the question: When looking at your target retirement funds, what is the impact of short, medium, and long-term market volatility?


Understanding target retirement funds

Whether you start contributing to your pension in your 20s, 30s or even later, it’s crucial to have a target retirement fund in mind to finance your lifestyle in later years. In reality, this target will change regularly as you react to changing life circumstances, the cost of living and your long-term plans.

Historically, there has been a stereotypical trend for the risk profile associated with pension assets:-

  • A greater focus on growth stocks in the early days
  • Switching to a more balanced approach in midlife
  • Then, onto a more conservative approach as you near retirement

This is essentially a mix of growth, income, and balanced investment strategies. However, with the extended life expectancy in the UK and the recent increase in the cost of living, pension funds now need to last significantly longer.


Market volatility and long-term investments

Firstly, history does not indicate what will happen in the future, but it can give us an interesting angle on market volatility and returns. While the strategy for your pension assets will change over time, it’s essential to keep a long-term time horizon on your approach to investment. 

To put this into perspective, a JPMorgan analysis of the US S&P 500 index over the 20 years to December 2019 saw an average annual index return of just over 6%. This compares to the average investor return of around 2.5%, where they will likely have traded individual companies and funds and reacted to changing economic scenarios. The data suggest that a long-term investment approach, even remaining invested during challenging times, more than doubled the average return.

This is based on historical data and useful for illustration purposes but by no means a forecast of future performance.


Strategies to mitigate the impact of volatility

When considering pension fund investments with a target retirement fund in mind, it’s essential to retain a balanced and diversified approach. Whether investing directly in individual companies, equity funds, or tracker funds under a self-managed or discretionary management arrangement, it’s crucial to monitor the performance of your funds regularly. Diversification is the key, the best means of helping to mitigate risks and maximise your long-term returns.

It may seem a little bizarre, but the best approach is not to consistently outperform the market, as this will include enhanced volatility and risk, but to aim for a consistent middle-ground performance. This will give you the best opportunity to provide a degree of relative protection for your pension assets and the potential for long-term growth.

During your regular investment reviews, it’s important to examine the recent performance of your pension assets in isolation and then as part of your wider finances. This may impact your approach to risk/reward in the short, medium, and longer term.



Unfortunately, you often find that those funds that have outperformed in the short term tend to face a period of underperformance at some point. This is a direct consequence of the risk/reward ratio, which is at odds with a more balanced investment approach. When reviewing your target retirement funds, you must appreciate the benefits of compound returns on relatively steady, even modest, average annual investment returns – it can certainly add up!

Whichever way you look at it, the only way to outperform the market average is to take on an enhanced degree of risk, which is as likely to lead to underperformance as it is outperformance. If you would like to discuss the pros and cons of diversification, as well as the benefits of a long-term approach to pension fund assets, be sure to contact us.