Don't panic about your investments despite 'doomsaying' trend: Sarah Coles
When I was in my 20s, on my way home every night, I’d pass a man with a megaphone, confidently advising commuters to repent sharpish because the end of the world was nigh. I can’t imagine he’s still doing it now, 30 years later, but if he is, I wonder if his confidence in his conviction is dimming.
He might take some consolation from the fact he's not alone in fearing for the future, because doomsaying is making a comeback in the financial world.
This has been particularly notable in the world of investment, where warnings are coming from far more reliable sources than the character with the megaphone. Earlier this month the Bank of England and the International Monetary Fund both warned about the valuations of tech giants linked to the AI revolution. They drew comparisons to the sky-high valuations dot com companies reached before the bubble burst in the year 2000, and warned that the risk of a sharp correction has risen.
You can see signs of wariness among professional investors when you look at the gold market. Gold tends to rise when investors are worried about the future, and it has been on its biggest rally since the 1970s, to a record high of more than $4,000 an ounce.
These worries need to be tempered by the fact that while valuations look stretched for tech companies, that’s not necessarily the case elsewhere in the market. So, while there may be a correction to come, there’s no absolute guarantee it will take hold of the wider market.
If you’re worried about investment risk, the key is not to panic. It’s sensible to revisit your portfolio, so you know exactly what you hold and how concentrated it is. You also need to consider whether your holdings suit your needs. If your circumstances have changed, you can rebalance, so your asset mix is right for you. However, if you’re happy you’re in the right assets for the long term, the most sensible answer is very often to do nothing.
The value of your investments will rise and fall, and in some cases, they will do so very quickly, which can feel unsettling. However, timing the market is notoriously difficult, and even the professionals will struggle to get it right. It’s why the most sensible approach is to aim for time in the markets – holding the right assets and remaining invested for 5-10 years or more. That will give you time to ride out the short-term ups and downs and take advantage of long-term growth.
If you have a pension, you have investments, so even people who don’t feel they are affected by this should take a closer look. The good news is that most pensions will be invested in the default fund, which will cover a mix of assets. They will also usually do what’s known as ‘lifestyling’, where they gradually move into less risky assets as you approach retirement. It means checking your holdings could ease any worries.
It also makes sense to hold more cash when you’re approaching retirement, to protect yourself from market corrections. While you’re working, you should aim for an emergency fund to cover 3-6 months’ worth of essentials, and when you’ve retired, this rises to 1-3 years’ worth. This is clearly a huge sum of cash, and you won’t get there overnight, but having a solid emergency fund to fall back on means you can avoid drawing too much from your pension when tougher times roll around.
Once you’ve explored your investments, it pays to consider your finances more broadly, because there has been more doomsaying around this too as weaknesses have emerged. The jobs market has continued to struggle, inflation has remained above the Bank of England target, so life is getting more expensive, and the housing market is showing signs of stagnating. Meanwhile, there’s the looming threat of more tax in the Budget. Taken together, it easy to see while people are feeling less confident about the future.
It’s important to keep things in perspective. Inflation is still a fraction of the runaway price rises during the cost-of-living crisis, while unemployment is still relatively low by historic standards. Interest rates have come down, cutting the cost of debt, and not every job is at risk. However, while it’s vital not to panic, it makes sense to revisit your position, to build your resilience to withstand whatever the future holds.
When you build an emergency savings safety net. If you have cash to cover less than three months’ worth of essential expenses, it’s a good idea to go back to your budget and see if you can free money up to save. If you have between three and six months’ worth, you may have settled on a sum based on your circumstances – such as whether your job is at risk, how many people are relying on your income, and your state of health. When any of these things change, it’s worth assessing whether you need to hold cash to cover a longer period.
At the same time, if you have short-term expensive debts, you need to pay them some attention. It can be a good idea to pay down your debts, starting with those with the highest interest rate first. It’s worth setting up a direct debit for this, so it happens without you having to remember to do the right thing each month
Building your short-term resilience is vital, but it’s essential not to use this as an excuse never to build for the future. It makes sense to prioritise debt repayments, but it’s also a good idea to be building for the longer term alongside this through things like pensions.
Underpinning your ability to do all this is a robust monthly budget. Nobody likes putting these together, and sticking to them can feel like an uphill struggle. However, it’s the best way for you to identify your spending patterns, the costs you can cut and the goals you can aim for. Just having an idea of what you’re aiming for is useful.
If this feels a bit like doom-prepping, it’s worth bearing in mind it’s perfectly possible your concerns won’t come to anything. While there are all sorts of uncertainties around at the moment, it’s vital never to make decisions on the assumption either that a crisis is imminent or that life will be perfect forever. Don’t get carried away worrying about the future, instead take steps to protect your finances that you’ll be thankful for, regardless of what’s around the corner.
Triple lock data out
There was some good news lurking in the labour market data out this week, because the average wage rise for May-July was revised up from 4.7% to 4.8%. Given that this is the wage figure used in the triple lock, that’s good news for retirees.
The triple lock rises with whatever is highest out of 2.5%, inflation, or wages. It looks highly likely that this wage figure will apply. Those on the full new state pension could be on course for £241.30 per week, rather than £241.05 estimated last month, while those on the full basic state pension will see their weekly payment rise to £184.90, rather than £184.75. It’s not a dramatic change, but it’s not going to hurt.