August is usually quiet on the world’s stock markets, not this year! The graph to the left shows just how volatile the FTSE 100 has been in the past month or so.
So, as savers and investors, what has the last few weeks taught us? We thought we would take a rather tongue in cheek look at some lessons learned.
1. The financial crisis is not over
The days of the credit crunch and the official recession seem a long way away, but their effects can still be felt everywhere we look.
Interest rates are at all time lows and inflation is rising, forcing people to take more risk with their savings and investments to get anything like an attractive return. Many people have only recently felt confident enough to re-enter the stock market only to be hit with the volatility / falls / correction / slump / crash * (delete as appropriate) of the past few weeks.
The effects of the financial crisis which started four years ago in 2007 are still with us, and will be for a long time to come.
2. We can’t control everything
The volatility of the past few weeks has been caused by nervousness that the developed economies can successfully address their debt problems without impacting on economic growth, and conversely that we can have sufficient growth to help repay the increasing levels of debt. Talk about a vicious circle!
We saw worries in the Eurozone that the diseases of debt restructure and default might spread from Ireland and Greece to Italy, and Spain, even Belgium were included and there was an unfounded rumour that France would lose its AAA credit rating.
The US clearly suffered a downgrade by one of the agencies, although it appears that this had as much to do with the length of negotiations between the political parties as it did fears that the US would actually default.
Nevertheless, these events do support the general point that all of this is outside the average investor’s control. We just have to accept that from time to time nasty things will happen which we cannot control.
3. Use your head not your heart
When the stock market is seemingly in freefall it is hard not to panic and run for the hills, cashing your investment in as you go, for the seemingly safe haven of Cash. If you have these feelings, stop for a moment and think.
Firstly, you will be cashing in after the horse has bolted; your investment has probably already fallen in value by the time you decide to take any action.
Secondly, take a slightly different example, over the past few years house prices have dropped significantly, with every new survey that is produced showing prices falling, do you immediately run to the estate agent and put your home or maybe an investment property on the market?
No, thought not. The reason? Apart from the fact that we may be talking about the roof over your head! Presumably you think house prices will recover and that it is worth holding on and waiting for the recovery.
Well the same is often true of equity investments, over time they generally recover. The graph to the right shows the FTSE 100 since the start of 1986, every fall is met with a rise, yes you might have to wait and yes it will be painful but plan your investments with your head and not your heart and you will be rewarded.
4. If you need money make sure it’s in cash
We believe this is probably the biggest lesson to be learnt from the recent crisis, obviously too late to do anything about it now but one to remember for the future.
If you are needing access to your capital in the short term, say up to the next two or three years, then consider moving this money to safer assets to protect it from the sorts of events we have seen in the past week.
We deal with many clients wanting to retire and this often means that an Annuity is purchased, which most of us will know provides a guaranteed income for the rest of the person’s life. Any pension Annuity calculator will show you that Annuity rates are falling, combine that with a lower fund value because you have been invested in equities right up to the day you want to buy your Annuity, and you have been hit by a double whammy which will affect your pension income for the rest of your life.
In the years leading up to needing access to capital, in this case converting your pension to an Annuity, spend time planning so that any future fall in stock market values will not affect you.
Yes, you might lose a bit of growth, but the reverse might be true, you might avoid a significant fall in the value of your pension, and remember point 2, you generally can’t control it.
5. Don’t walk away from a sale
The recent fall in stock market values could be viewed by some as a buying opportunity, you will get more units or shares for your money now in many cases that you would have done a few weeks ago.
This is not the same as trying to time the market, just trying to take advantage of recent events.
In almost every other aspect of life we are drawn to sales, why else do we see huge queues on retail parks on Boxing Day, or a long line of cars outside a petrol station on Budget day? But with money it seems different, the markets fall and people run for the hills or stuff pound notes into their mattress, surely when prices drop it might be a good time to think about investing?
Clearly the usual caveats apply, the investment has to be right for you, match your attitude to risk and you have to be prepared to accept the falls as well as the rises, but if you can buy when prices are depressed, surely better to do this than buy at the top of the market.
6. Focus on tax and charges
At a time when returns are volatile, and as far as Cash is concerned poor, it’s important to focus on the other two components which make up your overall return, namely tax and charges, both of which can reduce the return you get.
Starting with tax; it might sound obvious but we never cease to be amazed by the number of people who do not maximise their tax efficient savings options, whether this is using an ISA allowance, moving money between spouses, or looking at some National Savings products to name a few. We often see people whose affairs could be arranged more tax efficiently, are you sure no tweaks could be made to yours to make them more tax efficient?
Secondly, charges; this is harder but as a rule of thumb it pays to review the costs of investing from time to time. Make sure you feel as though you are getting value for money and look at whether you can invest elsewhere and reduce the amount taken in charges. Of course charges should only be part of the decision as to where you invest; performance and risk are two other major considerations.
As they say on the adverts: every little helps!
The last few weeks has reminded us that as investors we need to accept that we can’t control everything and that volatility is a feature of our market at the moment and probably here to stay for some significant time to come.
As an investor you should try as hard as possible to invest with your head and not your heart.
We believe though that the most important lesson to be learnt after the turmoil of the last few weeks is to plan. If you are going to remain in equities right up to the day you need access to your investments, then be prepared that you might have to accept a nasty shock if events conspire against you.
Better perhaps to plan and move to safer assets in the time leading up to when you need the money.