The stock-market turbulence that has characterised 2016 so far shows no sign of ending. After a dire January, February has thus far offered no respite and last week, the FTSE-100 index of leading UK shares dipped below 5,600 points. Contrast this with 12 months ago, when it was valued at over 6,800 points and edging towards its record closing high.
Causes of the latest slump
The latest slump has been blamed variously on worries over Chinese growth, the low oil price, and concerns that Western economies might be slipping back towards recession. Negative sentiment has held sway for several months, but it now appears to be taking a serious toll in terms of confidence.
Investors who were told last autumn that all they needed to do was to "ride out" the volatility can be forgiven for asking just how long these sharp ups and downs will go on for.
A bumpy start for pension drawdown schemes
A turbulent market is rarely good news for the average investor, but the latest problems come at a particularly bad time given the new pension freedoms that were introduced last April. The rule changes mean that far more people are leaving their savings invested in the markets in the hope that they will continue to grow as well as provide a regular income throughout retirement.
On paper this sounds like a reasonable idea: stocks and shares should offer greater returns than annuities, say, and help protect against inflation as well. But even cautious equity investors are likely to have seen the value of their holdings fall considerably over the past 12 months, raising serious questions about whether their private pensions will run out before they do. Certainly, many of those who signed up for drawdown schemes in the wake of last April’s reforms will not have expected to have been greeted with such a bumpy ride.
Diversification, diversification, diversification
What the markets have illustrated, however, is the benefit of not putting all your eggs in one basket. Of course, given that the length of the typical retirement is now around 20 years, it makes sense to keep some money in shares in order, hopefully, to provide growth over the longer term.
But that doesn’t mean there is no role for other holdings. Cash has traditionally been favoured by risk-averse retirees, but rates have been miserly for several years now – and the latest economic concerns mean that the next change in the Bank of England base rate is more likely to be down than up. In terms of financial return, there is very little difference now between putting money in a deposit account and sticking it under the mattress.
What’s the alternative?
As more and more people are realising, it now pays to seek out an alternative home for your cash such as peer-to-peer lending. Here, for a little more risk than you would face on a savings account, you can get returns that are considerably healthier.
No one is suggesting cashing in stock-market holdings straight away – as well as crystallising any current losses, this would probably have serious tax implications. But the ongoing problems on the markets should give many people, especially those in retirement, reason to question their current financial strategy.
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