Want to be a great investor? Your workplace pension can teach you a thing or two
When it comes to our workplace pensions, most of us really have no idea how they work.
And while I’d encourage everybody to pay a bit more attention to them, the fact we don’t naturally have much involvement with them can teach us a thing or two about great investing behaviour that we could apply to other types of investment.
3 things a workplace pension naturally makes us do
1) Invest for the long term
A workplace pension is designed to be a long-term investment.
And if there’s one golden rule with investing, it’s that you should be in it for the long haul.
Ideally, a minimum investment term would be around 5 years. The longer, the better. This is because you benefit from periods of stock market growth, plus have time to ride out any dips in the market.
Think about your working life…with auto-enrolment, you could have a workplace pension for 40+ years. That’s a long time in the world of investing.
Because you can’t access your pension until later in life, it forces you to be a long-term investor.
The longer you invest for, the potential for higher growth. It’s that simple.
2) Pound Cost Averaging
This is a fancy way of saying that you invest on a regular basis.
Your workplace pension is a prime example of this.
Every month, a percentage of your salary is put into your pension, along with contributions from your employer.
It happens automatically for as long as you choose to be opted into your workplace pension. This removes the emotions from investing because you’ll be investing into your pension no matter what state the market is in.
Some months, your pension contributions will buy investments at a high price, other months at a low price. So effectively regular contributions capture average returns of the market, as the price at which you buy is smoothed out across the months.
Why is this good investment behaviour?
It all comes down to the concept of timing the market.
This means chucking all your money into an investment when you think it’s at its cheapest, to then hope you benefit from a rise in value.
In theory, it’s possible to time the market. But in practice, it’s almost impossible to do and puts a lot of you pressure on you with the added risk you take.
Pound cost averaging is proven to be an emotionally and time effective way to grow your investments.
3) Allow your investments to do their thing
The world of investing is made out to be more complicated than it really is.
We’re all lead to believe we need to have our eyes on the prize, know lots about the stock market and spend time checking our investments.
This is far from true for many everyday investors. Wolf of Wall Street, this ain’t.
I’m willing to bet (my mortgage) that you have no idea what your workplace pension is invested in. In fact, you probably don’t even realise it contains stock market investments.
I bet you probably don’t even know how to check your workplace pension. Although I do think you should think of workplace pensions like bank accounts, to a certain extent.
The point is, with a workplace pension, your ignorance is unknowingly allowing the investments in your pension to do their thing.
By not checking in on it constantly, you save yourself the time and stress of wondering if your pension is growing as well as it should be, wondering if you should be meddling with your investments or panicking if they’re losing value in a market slump.
When it comes to investments, sometimes ignorance really is bliss.
It can be beneficial to assess just what your pension is invested in. The majority of workplace pensions will invest your contributions into so-called ‘default funds’. For younger employees starting out, you could look at taking more risk with your pension investments as you have time on your side.
On the flip side, if you’re approaching retirement – within 5-10 years - taking a more active approach can help ensure your pension is in tip top shape ready for when you want to start withdrawing money from it.
There are 3 key behaviours that make a great investor
Investing with a long-term mindset
Using pound cost averaging to buy investments
Minimal interaction with your investments
If you’ve got a workplace pension, you’re most likely already all these things. So, if you’re thinking about other investments, say a ISA or general investment account, think about applying behaviours to all these investments to make the most of your investing journey.
Your future self will thank you for it.