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Should I Stop Contributing To My Pension Fund In Tough Times?

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Contributor:
Mary Holm
Mary Holm

Question:

I am 61 and in a private pension fund. Over the past two years I have lost more than I put in.

Should I cease my contributions and place those in a savings account till the times get better and then put them back in the pension fund?

Answer:

Your plan sounds so easy, but it is virtually impossible because you are trying to time the markets.

The fact that your account balance has gone down suggests your fund holds quite a lot of shares and/or property.

And nobody knows when those markets will turn back up again.

As superb share investor Warren Buffett, one of the world's richest people, said in a recent letter to his shareholders, he's certain "the economy will be in a shambles throughout 2009 - and, for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall".

Shares may have done their dive already.

What's more, the market might rise for a period, only to slump again.

And if you wait until it has risen over quite a long period, you will have missed out on the upturn.

It's far better - as well as easier - to just keep contributing, regardless of what the markets are doing. That way, you'll get the good with the bad.

What's more, if you put the same amount in regularly, you'll buy more units in the fund when prices are low than when they are high, so your average price will be lower than the market average price.

For example, if you contribute $100 a month when units cost $10, you'll get 10 units.

But when the unit price rises to $20, your $100 will buy only five units.

The average of $10 and $20 is $15. But you got 15 units for $200, so your average price is only $13.33. It's a bonus from regular investing - sometimes called dollar cost averaging.

If you stick with your fund, over 10 years or more you can be pretty confident you'll do well - provided, of course, the fund doesn't charge ridiculously high fees.

There's another issue to consider at your age, though. If you are planning to spend the money within less than 10 years, you may be in too risky a fund.

There's always a fair chance that a fund with considerable share and/or property investments will fall over a few years.

If that applies to you, I suggest you switch your new contributions into a lower-risk fund, and gradually move the rest of your money into that fund. You might, for example, move a quarter now and a quarter over each of the next three years.

If your fund doesn't have a lower risk option, consider moving to one that does.

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