Investing and pensions: what can you do about the UK financial crisis?

TLast week’s financial turmoil caused by the mini-budget has damaged the pensions, Isa and investments of millions of ordinary British households. How has this affected your money and what, if anything, can you do about it?

The strike against Isas and stocks

A few individual stocks have really slumped over the past year, and many have continued to tumble post-budget. Ocado, the online grocery retailer, is down 71% for the year. Persimmon the home builder is down 55%, M&S down 49%. However, BP is up 28% and Shell is up 36%.

Bad luck if you put your Isa money in a pension fund. They are sold as prudent, safe investments. But those invested in UK gilts – the bonds issued by the UK government – fell about 12% in just two days after Kwasi Kwarteng’s mini-budget and have not recovered since.

The FTSE 250 index, which is made up of mid-sized companies (retailers, builders, etc.), has fared far worse than the FTSE 100. It has fallen 8% since budget and is down nearly 30% since its September peak last year.

The most popular fund in the UK for retail investors is Fundsmith Equity, which has around £24bn under management. Investors are down about 1% over the past two weeks, and if you invested a year ago, you’re down 9%. But it’s still up 72% over the past five years. Few will want to opt out.

A trader works as screens display market data in London, UK
Many stocks dived after the mini-budget. Photo: Simon Dawson/Reuters

What does that mean for your pension?

Typically, pension funds are more stable than the stock market because they have a mix of stocks, bonds, and real estate. But since the bonds are doing so badly, they too have been hit. For example, Legal & General’s standard pension fund, which was set up on behalf of many British employers, has lost about a tenth of its value in the last six months.

You don’t have to worry if you have a near-salary pension where what you get depends on your income. But they are now mainly limited to the public sector.

The good news

yes there is something The proportion of your pension fund invested in UK stocks and bonds is well below what it was a generation ago. Microsoft, Apple, Nestlé and Samsung are likely to figure higher in your retirement than most UK companies.

Wall Street has also fallen, but as the dollar has risen against the pound so far the impact has been minimal for us. As Bestinvest’s Jason Hollands points out, the S&P 500 index of US giants is down only about 3.8% in sterling terms since the start of the year.

The big UK FTSE 100 companies – like BP and Shell – make most of their money outside the UK. They report their profits in dollars, which can be a gold mine in sterling terms.

What you can do now

Doing nothing is not a bad option. In late February 2020, as the coronavirus pandemic hit, the FTSE 100 plummeted from 7,450 to 5,190 in a matter of days – a 30% loss. But in January 2021 it was over 7,400 again. If you are young you should be able to survive the slingshots and darts of outrageous luck in the markets over the longer term.

The mantra of Britain’s most successful wealth manager, Fundsmith’s Terry Smith, is “buy good companies, don’t overpay, don’t do anything.”

Put more into your retirement

This almost always makes sense if you have cash to spare, as it gives you 20-40% tax breaks. With your contributions today, you buy shares much cheaper than a year ago. Ask your company whether there is a suitable voluntary additional contribution scheme.

A British five pound, ten pound, twenty pound and fifty pound notes with one pound coins
Do you have money left over to put into your retirement? Photo: Dominic Lipinski/PA

Turn it into cash

Most occupational pension schemes allow employees to split their money between bonds, stocks and cash. If you really think we’re headed for Armageddon you could invest quite a bit in cash, but you’re lucky enough to earn more than 0.5% interest on your annuity and if the market moves back up, you will lose you massively.

buy gold

Normally a safe haven in turbulent times, gold has actually fallen. In dollar terms, it currently stands at $1,651 an ounce, down almost 20% since March this year. But in sterling terms it’s around £1,505 an ounce, roughly flat over the same period. That tells you how far sterling has fallen rather than how gold is viewed in world markets.

A pile of gold bars
Have you thought of gold? Photo: Petr Josek Snr/Reuters

What if I want to make money fast?

The FTSE 250 index is cheap by recent standards if you tend to punt. In Europe, Spain’s Ibex 35 index of its largest companies has also fallen sharply — about 30% from where it was in 2018.

Many of the US tech stocks have fallen massively: Netflix and Facebook are down about 60% this year, while Amazon and Google are down about 25-30%. You’ll laugh when they rebound – but not when sterling also bounces back, erasing much of your gain.

How to invest

Would you like to buy shares or funds online? Read this guide from the Guardian.

Prices and figures are correct at the time of writing on Thursday 29th September.

#Investing #pensions #financial #crisis

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