The past week has seen stock markets around the world fall dramatically. The FTSE 100 fell by 9%, wiping over £50 billion off the UK’s largest companies, while stock markets in the US and Asia have experienced a rapid decline. Many consumers, especially those approaching retirement, may be affected by this.
The root cause of the issue is a loss of confidence in the financial markets due to the debt crisis in the Eurozone and the US debt limit debacle, and the subsequent downgrade of the debt of the US government.
Why are the debts of countries affecting the stock market?
The wider economy is very influential on share prices. If economic conditions are good and investors have confidence in companies’ ability to grow, the demand for shares increases. This market sentiment and investor demand for shares can increase the price. The greater that demand outweighs supply, the higher the share price can go.
Of course, if the economic climate is not good, investors may not be so confident in the prospects of a company. Therefore, the share price can fall, even if the company is performing well. If countries have to enact deep spending cuts to reduce their debts, this will affect consumers, who will in turn have less to spend with companies, thus reducing profits.
In Europe, there is also the risk that an individual country, or group of countries, defaulting on its debt may damage the banking system.
How will I be affected by the recent stock market crash?
If you are saving for retirement through either a personal pension or contributing to a money-purchase company pension, a lot of your money will be invested in the stock market, as investing in shares gives your money the greatest opportunity for growth.
Those approaching retirement are most likely to be affected – if your pension pot has decreased in value, you’ll have less time for it to recover so you’ll need to check where your money is invested. If you are about to transfer your pension into an annuity, then shop around and exercise what is known as the Open Market Option to get the best annuity rate.
Those who have quite some time until they retire should feel confident that their money will recover over the longer term, and regular contributions (through pound cost averaging) mean that although your money is exposed to the crash now, you’ll also be buying lower-priced shares that will rise in value in the future.
If you’re a member of a final-salary pension scheme with your employer (or former employer) you have less to worry about – the pension you’ll receive is based on how much you earned pre-retirement, rather than the performance of your pension pot. However, falling share prices could prove expensive for some employers as they may have to increase their contributions to company pension schemes in order to fill the gap.
Interest rates still remain at a record low, meaning that most of the rates on offer to savers aren’t even beating inflation. An increase in interest rates could have a damaging affect on the UK’s economy, as businesses will have to repay debt at higher rates, consequently leading to less growth and profit.
The recent crash may well delay an interest rate rise even further to ensure that the British economy can continue to expand and companies, and the price of their shares, have a chance of growing.
Which? only includes banks in its Best Rate savings accounts that are full members of the UK’s Financial Services Compensation Scheme (FSCS). You should stick to banks which are fully covered by the FSCS and make sure that your deposit and any interest you will earn are within the limit of the scheme, currently £85,000.
If you have savings over £85,000, spread them around different banking institutions and make sure that each of these banks is separately authorised by the FSA so that your money is protected.
Though low interest rates are not good news for savers, it does spell good news for mortgage borrowers. Five year swap rates are now below 2%, so those looking to take out a mortgage can expect some competitive fixed rate mortgage deals in the coming weeks.
Top tips to survive the recent market crash
- Resist the urge to sell – investments are for the long-term, and by selling shares when they have dropped in value turns a paper loss into a real loss. If you don’t need the money right away, remain invested and try to wait for the markets to recover.
- Markets can recover quickly – in March 2009, the FTSE 100 fell to 3,350 but within a year had recovered to 5,500. In fact, despite the recent falls the FTSE All Share is still around the same level it was a year ago, although is likely to remain volatile in the coming weeks.
- Diversify your investments – diversification, or spreading your money around different assets, helps you spread risk. Though share prices have been affected, other assets like bonds, property and commodities may not have been. By investing in other assets, you can cushion any losses that might occur in one sector.
- This might be an opportunity to invest – with share prices and interest rates low, this might be an opportunity to invest and receive the upside from a market recovery. Seek financial advice before you consider investing.
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