Spooked stock markets - should you care?
Here’s a quick recap as to why:
- Stock markets the world over have plummeted – the FTSE 100 index is down 20% compared its peak last April.
- Oil is now cheaper than the (figurative) barrel that encases it.
- China’s growth (and by proxy, global growth) has been lower than expected, and many fear that this is set to continue as the country tries to shift to a consumer- rather than export-driven economy.
- Herd behaviour: once it’s established that stock markets are falling, they often fall with even more vigour – it’s a self-fulfilling prophecy. Nothing excites people more than panic.
- The World Economic Forum 2016 – or Davos – has so far appeared to be a bit of a pity party. Considering the power of the people attending, this can have an adverse affect on market sentiment.
- Matters certainly weren’t helped after RBS told its clients through a note to ‘sell everything’ in terms that, upon reading, sound more like the synopsis for Stephen King’s post-apocalyptic horror novel The Stand rather than sensible advice.
But the question is: should you be worried?
First, let’s get the easy stuff out of the way: if you have money invested in the stock markets and you’re years away from needing it – no, you don’t need to worry – at least, not at this point. If things continue to worsen we could see another crash as in 2008 – in which case jobs will be at risk. But we appear to be some way off that and it may be comforting to think that, unless capitalism itself is destroyed, which seems unlikely, markets will eventually bounce back. In which case, if you were brave enough to actually buy more shares during this turbulent period… you could be laughing.
Rebecca O’Keeffe, head of investment at Interactive Investor, says: “Over 75% of our investors are hanging on to their existing investments and 37% now believe the time has come to begin adding to their holdings. While concerns about China, global growth, the oil price and even US politics may all add to the fear factor, the current sell-off has taken stocks to historically very attractive valuation levels. At some point the market is going to turn and history may well view this as a golden buying opportunity.”
A more pointed question could be: are you about to enjoy, or are you in, retirement?
If your money is tied up in investments and you’re going to need to access it soon, things are a little more difficult to navigate.
Pension funds are generally highly exposed to stock markets. So, at the moment, your pension (provided you’re not on a final salary scheme) is worth less than it was just a couple of weeks ago. Clearly, this presents some problems if you’re about to withdraw money.
However, pension funds are relatively diversified, so it’s doubtful that yours will have dropped as much as the FTSE, which is heavily weighted towards sectors that are doing badly right now. Your pension will most probably have some holdings in cash, some in bonds etc., which are holding their value for the moment (and in terms of cash, will do so until inflation starts to go up).
So, the message is to not panic. If you can, wait until share prices recover if you must sell, but if you just don’t have it in you to deal with all this volatility, it might be an idea to slowly rebalance your portfolio towards less riskier holdings, such as corporate bonds.
One thing that may be tempting to do but we believe that you absolutely shouldn’t is to take advantage of the pension freedoms and take out big lump sums of cash.
For one, if you withdraw, you are selling your shares for 20% less than you know they have the potential to be worth. So only draw what you absolutely need for essentials.
Second, if you erode your working capital by significant amounts, further losses of value in the stock markets will be compounded and, perhaps more importantly, eventual share price recovery stunted.
Ms O’Keeffe says: “Pension investors need to make sure that they are not put off contributing to their pension by the market turmoil, as higher rate taxpayers should actively be looking to take advantage of the current rates of tax relief available now, before it potentially disappears in the forthcoming budget.
“Brave investors may actually benefit twice by looking to top up their pension now, securing higher rate tax relief on the one hand and potentially benefitting from future share price appreciation when the markets do turnaround from their current low levels.”
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.