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 Even a few hundred pounds withdrawn now could mean missing out on annualised returns in years to come.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.
While it is clear that the market is a place for those seeking to grow their money over the long term, recent research has found that only 13 per cent of people plan to ‘buy the dip’ and increase the amount of money they have in the market in the coming months.
Almost double that (24 per cent) said that they will instead choose to increase how much they have in their normal savings account, which for most people will be offering minimal returns.
More concerningly, around 17 per cent of people do not think inflation will affect them at all – a clear misstep for anyone wanting to avoid savings attrition.
For those who are already invested, buying the dip with a view to holding for a period of five years or more could put them in a position to take advantage of market growth once it begins to rebound.
For those unsure about what to do with their money to beat inflation and manage the highs and lows of the markets, with-profits funds could be a consideration. This type of multi-asset fund uses a mechanism to smooth the ups and downs of market volatility to more evenly distribute returns generated during peaks and troughs.
Over the long-term, investors should see meaningful growth on their money, while being cushioned from any dramatic falls in the market.
What next?
For most investors with money in the markets, this will now be a waiting game.
Evidence suggests that markets recover over time, so many will be holding their nerve and having their patience tested.
Marc O’Sullivan is head of investments at Wesleyan
