Reasons to be cheerful about pensions panic

Contributions to the pension fund have collapsed, according to the ONS. (Photo: PA)

Stock market cynics who claim that the herd always buys at the top and sells at the bottom will take comfort from the latest pension sales figures from the Office for National Statistics.

They show that contributions to retirement funds – most people’s biggest exposure to the stock market – collapsed by nearly a tenth or £2bn last year, as the credit crisis pushed down share prices. The statistics in the ONS Pension Trends survey are based on HM Revenue & Customs tax receipts and reliefs, so give a better picture of what is really happening in the market than any fund managers’ gloss on events.

While it might bring cheer to cynics – and contrarians who will see mass pessimism as a sign that the bottom of this market cycle cannot be far away – the ONS report makes dismal reading. Any fool can opt out of saving but it is more difficult to opt out of growing old.

Of course, share prices may fall next week, next month or next year. But for most people – who are not retiring next week, next month or next year – depressed global stock markets may present a buying opportunity. It is a paradox of stock markets that, unlike most other markets, falling prices make most people less willing to buy.

By contrast, rising share prices make most people more eager to invest. Buying high and selling low is the opposite of the way to make a profit. While nobody has a crystal ball to tell which way share prices will go next, many studies have shown that time invested in the stock market is more likely to produce results than trying to time the market.

For example, HSBC's decade-long study shows that time invested in emerging markets – rather than attempting to time when to buy or sell – is the strategy most likely to produce results. Over the last 10 years or so, investors who bought and held funds which matched the Morgan Stanley Countries Index (MSCI) global emerging markets index enjoyed average annual returns of just over 15pc.

By contrast, if they missed just the best 10 days in the last decade then their annual return fell by more than a third to 8.5pc. If they were out of the market on the 20 days when share prices rose most – equivalent to just two days per year – then their annual return over the decade plunged by two thirds to less than 5pc.

More people are living longer and so it makes sense to save more in tax shelters, such as pensions; not less. Humans are herd creatures and it takes determination to buy when others sell but those tempted to follow the anonymous doom-mongers of cyberspace might do better to consider the words and actions of one of the world’s most successful investors. Warren Buffett of Berkshire Hathaway is buying with both hands at present because, as he famously advised: “Be fearful when others are greedy and be greedy when others are fearful.”