July 07th, 2022

3 positive ways to weather the current financial uncertainty

As you will have seen from the headlines, it’s been an uncertain few months in the global economy.

You won’t have missed the news that the Office for National Statistics (ONS) reports that inflation hit a 40-year high in the year to May 2022, reaching 9.1%.

Soaring fuel, food, and energy prices brought about by a post-Covid surge in demand and the war in Ukraine are having a knock-on effect on households across the country.

This uncertainty has also led to rising interest rates, stock market volatility, and the possibility of a recession.

If you’re concerned about your wealth at this time, read on for a look at what’s happening in markets, and for some tips to deal with the current uncertainty.

Your market update

2022 has been a tough year for stock markets around the world. The table below shows the performance of some of the world’s leading stock indices in the year to the end of June 2022.

Source: JP Morgan

As you can see, markets have fallen across the world, with US shares particularly hard hit.

As inflation soars, central banks have responded by raising interest rates. Indeed, the Bank of England has raised the base rate five times since December 2021 to their current level of 1.25%.

The prospect of interest rates rising further, coupled with concerns about reduced consumer spending and the outlook for growth have further hurt equity valuations. Additionally, recession fears have risen, due to the squeeze on consumers from higher prices and higher borrowing costs as the central banks seek to fight inflation.

It’s clearly been an uncertain time and more volatility is likely over the next few months, as the war in Ukraine shows no sign of an end. So, what can you do to weather the current storm?

1. Don’t assume that cash is a safe haven

When times are tough, it’s easy to understand why it might seem safer to leave your money in the bank for now. You might think that, as interest rates are rising, cash is the safest place to be.

However, consider this. As of 4 July 2022, Moneyfacts say that the best easy access savings account pays 1.4%. So, if you’d invested £10,000 a year ago at this rate, you’d have £10,140 now.

The ONS say inflation in the year to May 2022 was 9.1%. So, goods and services that cost you £10,000 a year ago cost £10,910 now.

Leaving your money in “safe” cash has essentially meant it has lost value in real terms. You can’t buy the same goods and services with it today that you could a year ago.

2. Investing typically outperforms cash in the long term

At times like these, it’s worth remembering the words of renowned investor, Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful”.

What Buffett means is that the best times to invest are often when everyone is fearful and prices are falling. Conversely, the best time to take risk off the table is when prices have risen and everyone is most bullish.

Of course, it’s impossible to predict when the top and bottom of the market will be. It’s likely that, if you invest in a falling market, you will at first sustain some losses that will test your nerve. Conversely, if you take profits you will often see prices rise further after you have sold.

However, with a long enough time horizon, you should expect to see positive results.

The table below compares the returns of investing in the UK stock market (as represented by the FTSE All-Share Index) with dividends reinvested and the returns of investing in cash deposits with interest reinvested, from the beginning of 2010 to 31 March 2022.

Source: FE fundinfo. Data as at 31 March 2022. Past performance is not a guide to future returns.

It’s also worth considering what would have happened if you’d invested in the stock market precisely at the worst time – for example, the eve of the financial crisis in October 2007.

In the following seventeen months, you would have suffered a loss of 46% and would have rued not leaving your money in the bank.

However, by January 2013 the value of that investment in UK equities had not only recovered completely but had also overtaken what would have been earned in cash deposits.

And, to the end of March 2022, that same investment made at the peak of the market in 2007 would have delivered a gain of 104% whereas cash in the bank would have provided a cumulative return of just 16%.

3. You’re investing for the long term – so be patient

Imagine that the value of your home had fallen by 10% since the start of this year.

What would you do? Would you immediately panic and sell it, locking in a loss? Or, would you sit tight and wait for property prices to bounce back before you sell?

Of course, you’ll likely be patient and wait for the market to recover.

It doesn’t mean that you won’t be nervous or concerned in the meantime. The theory of “loss aversion” tells us that we feel the pain of a loss twice as strongly as we feel the pleasure of a gain.

However, it’s always worth remembering that you are typically investing with a long time frame, and that your financial plan is designed to consider periods of market volatility.

While cash may seem like the safe place to be now, soaring inflation means your savings are almost certainly losing their real-term value.

Get in touch

We understand that you may have concerns or questions about the current economic uncertainty. If you’d like to speak to us, or to review your financial plan, email enquiries@prosserknowles.co.uk or click here to request a call back from one of our advisers.

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