Should I be anxious about investing now?
Well, what a first quarter to 2022!
Those of us who thought that 2022 might be a year with less shocks after years of Covid have been proved wrong.
Rising levels of inflation, interest rates and cost of living are certainly enough to stoke fears. This is without the Ukraine crisis and lockdowns in China to combat further increasing Covid infection numbers. What happened to Brexit ay?
All of this has led to another period of extreme volatility and nervousness in financial markets with most major world indices down in the first quarter.
Since the start of the year, we have seen the rise in ‘value’ stocks, such as financials and given the FTSE 100 composition, which amongst other sectors is made up of financials and consumer staples. These areas have performed well given rising interest rates to try and combat inflation against the backdrop the Ukraine crisis, economic sanctions against Russia and the effect this has had on supply chains and the subsequent rise in fuel and energy prices.
Compare this to the performance of the S&P500 whose composition is weighted towards more ‘growth’ stocks such as Technology and Health care making up approximately 41.4% of the index currently (source: Finasko). In the market conditions as seen since the start of the year, these stocks typically do not fare well in such conditions alongside the rally in ‘value’ stocks.
What should I be doing?
For many, the current climate is enough to park their money on the side-line in cash and wait for more certainty and some buoyancy in financial markets. However, with such high levels of inflation, you will have to accept that these funds in real terms, will likely fall. Even with recent rises in interest rates by the Bank of England, these have not really trickled down to consumers and therefore, to try and get a higher rate of interest on your savings, it is likely that you will have to ‘lock’ these funds up in fixed rate accounts.
Further, times when markets fall can for some present a very real opportunity to invest and try and ride the wave back up should markets return to previous levels and go further.
But before deciding either way, starting with a long-term financial plan is the key to making a clear and informed decision.
The clearest and easiest way to do this is to start from the ground up with a checklist similar to the below:
- Do you have an idea of what your monthly finances look like?
- Do you have debts such as credit cards or loans?
- Do you have accessible funds to cover 6-12 months’ worth of living costs?
- Do you have existing savings or investments? Maybe in the forms of an ISA or a pension.
- Do you have costs that need to be met in the next 5 years? Such as buying a new car or having work done on the house for example.
You will also need to consider the level of risk you are willing to accept with your funds. Typically, the more risk you take, the higher the potential returns or the loss of funds may be.
Once you have this information, you will be able to make a decision on whether investing will help you achieve your medium- and longer-term goals. Speaking to a financial planner/adviser will help you to make a fully informed decision.
Should I be investing now?
Whilst no one has a crystal ball and can predict the future, in times like these and dependent on your circumstances, the answer may be yes.
Given current interest rates and rising inflation, now more than ever in recent years, it may make sense to invest to try and achieve potentially higher returns than offered by cash.
It is worth noting that currently the Financial Services Compensation Scheme is only eligible on cash deposits up to £85,000 per person, so holding high sums of cash in excess of this carries its own risks. Such low rates of interest now and the effect that inflation will have in eroding away at cash returns, which is something often overlooked by individuals as published in our ‘Planning for your future: Financial clarity in uncertain times’ report will mean that tying funds up in cash is essentially locking in a loss in real terms.
Whilst investing also has its own risks, if the investment is made for the medium to long term (at least 5 years) and you do not require the money, history tells us that you may likely make a return higher than cash and inflation. Given what we have seen in markets since the start of the year and over the long term, ensuring that your funds are diversified not only from a global perspective, but from a sector perspective too, will ensure that even in times like these, you will have the opportunity to benefit from rises in different markets even when others fall.
The content of this article is for information only and does not constitute formal financial advice.
This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
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