From a Pension and Investment perspective we seem to be facing a lot of varied problems at the moment. Political pandemonium at home and abroad, rising Inflation, rising interest rates, war in Europe, supply chain disruptions, labour shortages, unions raising strike threat levels, an energy crisis and continued Asian Covid-19 lockdowns.
These all go some way to creating uncertainty about what will happen over the next few months.
Ever since the stock markets started back in the 1600’s there have been plenty of economic disasters, wars, trade disputes, recessions, supply shortages, inflation, rising interest rates, and many, many other factors resulting in share price crashes. Yet, historically the stock market has a perfect track record for making full recoveries from crashes. The question is always how long will a recovery take to happen.
No one knows when the current stock market decline will end. But we do know that it will eventually and that it is likely to continue to grow to new highs over the longer term when it does.
On the other hand we can’t say lets sit this out until it goes back up again because we are all sitting on losses so for most people the right thing to do with their existing pension or investment is to do nothing because we cannot possibly know when the markets will go back up again and when they do go up it usually happens so quickly that you would miss the upswing and be left wondering when to put money back in again for fear of another drop and double losses.
However, those with new monies sitting in banks accounts over and above a generous emergency fund, which will effectively be losing money due to inflation, should not be putting large amounts into their pensions or investments in the shorter term. If time allows, dividing the money up into something like 18 segments and spreading this money into pensions or investments monthly and therefore taking an average price buying low if markets continue to lose as a hedge against further market turmoil.
Most asset prices have collapsed in recent months, especially in high-growth sectors like technology. But that does not mean that the underlying businesses themselves are compromised. In fact, there is a chance that we are entering a good buying opportunity period if you have the will and the audacity to take it.
The main issue, as usual with falling stock markets is uncertainty, this causes volatility which is what we are seeing now. The markets are up and down on a daily basis, much more so that one would consider this normal.
Over the course of 6 months this has seen a downward trend across most assets. Meaning assets invested 6 months ago are some 8% on average less that they were then and that includes low risk strategies as the lower risk elements of portfolios – the bonds – are affected by inflation and interest rates too.
Periods of stock market volatility are always temporary because at some point the uncertainty will become clearer and then the markets will move back up again. The main uncertainty is how long it will take to get back to where we were before all this started.
It seems likely that interest rates will continue to rise for a while, this makes company and personal debt more expensive but helps reduce money in the economy, bringing inflation down.
Conflict in Ukraine has disrupted supply chains and sanctions on Russia and its oil and gas have caused goods and energy prices to soar putting further pressure on the ability of consumers to spend, leading to an economic slowdown.
All of this could lead to a recession or in fact we may already be in recession, because it is difficult to tell where we are in a cycle and whether things will get much worse before they get better or whether we have already seen the worst.
The truth is we don’t know and no-one else does either. We know that diversification has always been the steadiest route to investing and we should keep faith in this strategy because it will prove to be right thing to do in the coming months.
A main rule of investing is to invest money that you do not need in the shorter term. No investor wants to find themselves being forced to sell when prices are low, so work out what your emergency fund should really be and invest for the longer term.