Recent events have highlighted once again how volatile the markets can be.
The unfolding tragedy taking place in Europe has caused commodity prices to jump and sent some stocks plummeting with accelerating sell-offs. Modest investors in the market will have seen their assets drop in value. Those with bigger stakes will be feeling the sting.
Alongside the market turmoil is rampant inflation. Prices are rising more quickly than they have for 30 years, outpacing wage growth and putting more pressure on already stretched household budgets. The phrase ‘cost of living crisis’ is likely to be with us for some time yet.
Combined, market volatility and inflation are setting a course for a challenging journey ahead. But what should people do to better manage their money through this period and generate more growth from savings?
Hold steady
Investment strategies change all the time, and those with their money in the markets may be seeking to change their portfolio. Tweaks to avoid or divest investments in Russia or Russian-backed businesses will be on the cards for many – a moral decision to uphold environmental, social and governance values and a sensible financial play.
For others, the option to move investments into lower risk assets, to hedge against any potential losses, will look appealing. While on the face of it this could avoid any further falls in fund values, it does mean that it could take much longer to recoup any losses as and when the markets recover.
The phrase ‘time in the market, not timing the market’ springs to mind here. History shows that after sharp shocks in markets the subsequent recoveries have outweighed the losses, over time. The 2008-09 recession will stick out in many memories as one such period.
Next, let’s take inflation. Those faced with surging living costs may be looking at ways to free up capital tied up in stocks to cover day-to-day living costs. Increases in interest rates mean those on variable mortgage rates, or those having to fix onto new deals, could see their monthly bills soar by hundreds of pounds.
But taking money out of the market to cover short-term costs could be short-sighted. Even a few hundred pounds withdrawn now could mean missing out on annualised returns in years to come.
In short, for those that have their money in the market, now is the time to be patient and hold steady. History shows us that investment decisions are best taken with a long-term view in mind.
Looking back to look ahead
Take £10,000 invested in a with-profits fund 10 years ago, for example. That same sum would now be worth just over £18,000. That is despite it having been invested during events that caused market volatility including the Covid-19 pandemic and Brexit.
The same £10,000 held in a cash savings account over the same period that tracked the Bank of England base rate would now be worth £10,446.
