How to grin... and bear it
So how do you keep your finances safe in a jittery market, asks Kate Hughes. Well for starters, say the experts, be careful where you invest and diversify if necessary
On a number of occasions in the past few weeks, the FTSE 100 has been in bear market territory, more than 20% off its February peak. For millions of savers, borrowers and investors, the market volatility continues to reap havoc with their personal finances.
As usual, final salary pension schemes are the best place to be. The average final salary scheme is around 50% invested in equities, but while the scheme's underlying assets will have taken a beating, the guarantee of a specific level of income regardless of market returns means this is a problem for employers and trustees, rather than individuals.
However, a typical defined contribution pension is 75% invested in equities, and although those retiring in 20 years have little cause for concern, the closer to retirement you are the harder you'll be hit, warns Laith Khalaf, a pensions analyst at Hargreaves Lansdown.
“Pension investors should seek to reduce risk as they approach retirement so they do not experience big swings in the value of their pension fund just as they are about to draw on it,” he says. “Annuity rates had already started to slide downwards in response to falling gilt yields as investors sought safety, and further falls could now ensue.”
For those faced with crystallising their losses in a low-rate annuity, the alternative income drawdown approach to retirement funding may offer a last-minute reprieve with savers leaving the majority of their pension pot in place and drawing down cash as required. However, the risk with this approach is that markets continue to fall, fail to recover in time, and retirees run out of cash.
With markets around the world lurching by 15% in a matter of days, the short-term effect on private portfolios values makes for difficult reading — and savers have been investing heavily. Around 3% of household disposable income was invested in retail investment funds in 2010 according to the Investment Management Association. ISA sales for the last tax year were £3.7bn, the highest for nine years.
“Banking crises take a long time to resolve,” warns Adrian Lowcock, senior investment adviser at Bestinvest. “We can expect several years of low growth and contained inflation. Unfortunately, there's no reliable way to predict whether markets have yet found a base, but in our opinion equities are decent value.”
Mr Lowcock advises: “Take a hard look at your asset allocation to ensure your portfolio is adequately diversified, that there are no ‘wasted' risks, and that the fund managers employed are the best of their breed. The focus should be on those areas that have proven they can weather market downturns. Ensuring you minimise losses to taxation and charges is also vital, as is the need to block out the short-term noise. Stay focused on your long-term financial objectives.”
Mortgages and housing
With the turmoil in the economy pushing back the timing of an interest rate rise into next year, money market rates have been falling, slashing the cost of fixed-rate mortgages in particular. The latest stock market uncertainty will make rock bottom five-year fixed rates even more attractive, says Melanie Bien, of mortgage broker Private Finance.
“There is unlikely to be a recovery in the housing market anytime soon, however,” she warns. “The problems will be exacerbated if countries such as Italy and Spain default on their loan repayments to UK banks. This would mean less money available for banks to lend here — homeowners about to re-mortgage should do so sooner rather than later to take advantage of the deals available.”
The latest house price survey from the Royal Institute of Chartered Surveyors (RICS) shows prices in July were, on average, at their lowest since June 2009, as values continue to slip and estate agents report an average of just 14.2 sales per quarter.
As major investors, Britain's banks are heavily exposed to fluctuations and a sustained downturn would have a significant impact on their margins.
Savers already suffering from the effects of low interest rates may see better products removed from the market in a bid to save money. Keep a close watch on how much your money is earning, and move it between accounts, if necessary, to maximise the return.