They say that when China sneezes, the rest of the world catches a cold. So when China suffered the financial equivalent of a massive heart attack at the beginning of the week, the world’s financial markets duly went into full-scale panic mode. But what does this mean for your investments?
Black Monday, as it was quickly dubbed, was the day when the myth of China’s invincibility crumbled. By the time trading was done, stocks were down 8.5% the biggest single day loss in eight years.
The reverberations were felt all around the world. The Nikkei fell by over 4% and the Dow opened more than 1,000 points down. Oil hit a six and a half-year low as commodities took a tumble. Approximately 73.74bn was wiped off the FTSE Index. China reacted by cutting interest rates in an attempt to boost the economy but to no avail. Stocks continued to fall as investors got rid of anything that had any connection with China.
The question is: how worried should we be and how will this affect your own investments? Investors panicked around the world because their confidence in the underlying health of the international economy was shaken. A slowdown in one of the largest consumer economies in the world could be a signal of bad times ahead for the rest of us.
But it’s not all doom and gloom. Around the world the general prognosis for the world economy is pretty good. In the UK, growth is predicted to be 2.8% in 2015. Against all predictions, the Greek economy did not collapse, but was recently reported to have shown some growth. China itself may no longer be delivering double digit growth, but for an economy of its size, growth is still healthy. In April to June it reported 7% growth and while its figures are often greeted with scepticism, its overall economic condition is a long way from collapse.
So, the short answer is that there is no need for anyone in the UK to panic. Daily values may fall, but in the long term you shouldn’t feel the effects as long as you follow the basic rules of diversification within the portfolio – namely don’t over expose yourself to any single market, and don’t invest in only equities (stocks and shares). As long as you have bonds and cash within the portfolio these should cushion the blow.
The crash may also have been alarming, but it is nothing truly out of the ordinary. Stock markets are cyclical with crashes such as these happening every seven to ten years. There have been big falls on the stock market before and there will be again. As long as you keep your head, the long term value of your investments should hold.
In summary, then, the message is this: don’t panic. Although it’s easy to be swept up in the hysteria, as long as you stay true to basic common sense principles such as diversification, you should be fine.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM CAN FALL AS WELL AS RISE. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
With interest rates offering little to get savers excited, now may be a good time to look at other options.
If you are a first time investor, you may be feeling nervous about taking the plunge. That’s fine; there are a range of low risk investments to help you take your first steps into investing.
Here are some tips to get you started.
You’ll Still Need Some Cash (So Make It Work As Hard As It Can)
Having cash to hand acts as a buffer against life’s ups and downs. How much cash you need to keep depends on your situation. Some people like to keep a couple of months’ salary.
That being so, it’s a good idea to make your cash savings work as hard as they can.
From Autumn this year, ISAs (Individual Savings Accounts) will become more flexible. You will be allowed to withdraw and replace money as you wish.
The only condition is that the net contributions stay within the ISA limit for any given year. This means that all or part of your ISA allowance can essentially be used as a standard savings account. It will have the benefit of allowing you to receive interest on your savings without paying tax.
Look At Government-Backed Schemes
Every now and again, governments introduce schemes to encourage saving and/or investing.
At the moment, first-time buyers building a deposit for a house might like to look at the “Help To Buy ISA”. This scheme is due to start in autumn this year. In short, for every £200 saved, the government will add £50, up to a maximum of £3000.
The government also recently ran a “Pensioner Bonds” scheme for over 65s. This is currently closed, but given its huge popularity, it is entirely possible that it will open again.
It’s always worth keeping an eye open for government-backed schemes as they may offer special benefits.
Make Your Investments Match Your Needs
There is a huge range of investment products available.
Instead of thinking in terms of “good” and “bad”, think in terms of “appropriate” or “inappropriate”. In order to decide whether or not an investment is appropriate, you will need to start by taking stock of your current situation.
In particular, you will need to be realistic as to whether you should start investing right now at all. If you have high-interest debts, you may be better to spend any spare cash you have, on paying them down first.
Once you are ready to start investing, you will need to think about your short-, medium- and long-term goals. You will also need to be realistic about your attitude to risk.
You may have heard the expression “the value of an investment can go down as well as up”. This is true. It is also true that some investments carry more risk than others. Some people are happy to accept higher risk for the possibility of higher reward. Other people prefer to take a safer line in their investment strategy.
Of course it is perfectly possible to divide your investment funds between investments with different levels of risk.
Diversification And Dividends – The Two Pillars Of Investment
You’ve probably heard the saying “don’t put all your eggs in one basket”. That often holds true for investments. Putting all your money into high-risk investments creates the risk of losing it all.
By contrast, putting it all into lower-risk investments means you can miss out on some great returns.
By having a mixture of investments of different degrees of risk, you can have the best of both worlds.
Also remember that investments can be for growth or income or a mixture of both. Many listed companies pay dividends to shareholders. These can be reinvested for more growth or used as income.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.