Stock markets have plummeted as traders fear a potential recession in the US. Weaker than expected jobs and manufacturing figures in the US have raised concerns the Federal Reserve has left it too late to begin cutting interest rates without damaging the world’s largest economy, raising bets on a potential emergency rate cut.
Daniela Hathorn, senior market analyst at Capital.com, said: “A lot of it comes from faith that the Federal Reserve has gone a little bit too far with its monetary policy in terms of keeping rates restrictive for too long.
“That negative sentiment has spilled over into other markets.”
Tokyo’s Nikkei 225 index closed down 12.4pc and suffered its biggest ever points loss overnight, recording its worst percentage fall since the fateful Black Monday trading session in October 1987.
However, while the market turmoil has spread, its impact has been less significant elsewhere, with the FTSE 100 down 2.5pc in early trading, in line with European markets. Across the Atlantic, the S&P 500 was down 2.6pc in pre-market trading.
The last time markets saw such a uniform fall was on the eve of Covid-19 global lockdown in March 2020. Drops were so significant that the New York Stock Exchange suspended trading at several instances during the affected days, although today’s falls are unlikely to cause a repeat emergence of such “circuit-breakers”.
However, the Covid-19 market collapse was a unique event from which markets rebounded quicker than any other downturn in history, making that bear market unreliable as a roadmap for today’s.
So what can you do to protect your money? Telegraph Money takes a look at how to shield your pension and investments, while making the most of a potential opportunity.
What to do during the sell-off
Stay invested
If you have a reasonable time horizon and well-diversified portfolio, the last thing you should do when the market crashes is panic sell with the herd.
This crystallises losses, and risks selling at the bottom of the market. You will then have to buy back in at a higher price later on and it could significantly impact your investment returns.
Investors in thematic – sector or industry focused – funds lost more than two thirds of their total returns because of poorly timed buys and sells, according to a report from financial research house Morningstar.
As such, most investors would achieve better outcomes by being less reactive and adopting a more patient buy-and-hold approach.
Ed Monk, associate director at Fidelity International, explained: “Sharp falls for markets are never easy to handle but making hasty decisions with your investment can often compound the problem. Short-term losses are part of investing and cannot be avoided completely – it’s how you handle them that counts.”
Ask whether any decision you make fits with your long-term strategy and goals, or if it’s simply to satisfy yourself emotionally in the short term. While it is prudent to remain informed, prise yourself away from 24-hour news coverage.
Remember why you bought a share or fund in the first place. Has that reason fundamentally changed? Has the ability of a company to sell its product or service been damaged?
The answer, in most cases, will be no.
Buy
However, being patient doesn’t necessarily mean standing still. There can be opportunities during sell-offs.
For existing investments, if the investment thesis remains but share or unit prices have fallen, take the opportunity to buy more.
This is also the time to deploy your buy list, to snap up desirable assets at discounted prices.
Just as timing the start of a crash is practically impossible, so too is timing the bottom.
Instead of buying all at once, spread your investments over time to average out the price you pay. Most investment shops offer a regular investment service to do this automatically.
When share prices fall en masse due to panic sellers dumping their stock, businesses with desirable attributes, such as steady earnings growth and a history of reliably growing payouts, tend to be unfairly devalued.
Keeping a list of target shares or funds to buy in these types of events will help you take advantage and give you more security in your choices.
What should you do with your pension?
The first thing to remember is that if you are at least 10 years away from retirement it is unlikely this market movement will impact your pension – there is time for it to recover. However, if you are worried, it may be worth speaking to a financial adviser about how your pension fund is invested and whether there are any changes you can make to boost the recovery, or even benefit from the downturn.
Becky O’Connor, director of Public Affairs at PensionBee, said: “While no one likes to see the value of their retirement savings fall, if you’re many years away from retirement, remember that it’s normal for pensions to fluctuate in value.
“Historically, pensions have always recovered and continued to grow, much like the stock market itself. Interestingly, downturns can be an opportune time to contribute more to your pension, as your contributions can purchase more units at lower prices, making it a cost-effective strategy.”
If you have less time before you stop working you may have more protection than you think as your or your adviser should have moved your investments out of equities and into safer assets such as bonds.
O’Connor said: “If you’re nearing retirement and are concerned about your pension, investing in a plan tailored for those approaching retirement can help mitigate the risk of losing value.
“When markets are down, it might be tempting to withdraw your investments, thinking your money is safer outside the market. However, the more you withdraw, the less you’ll have invested to benefit from a market recovery. Withdrawing during a downturn locks in your losses, whereas waiting for the market to rebound allows your investments the opportunity to recover and grow again.”
Monk added: “Markets have been enjoying a strong year of gains – the MSCI World Index is about 14pc above where it was a year ago. The current falls are unwinding some of that. Ideally your retirement savings will be invested in a way that suits how you want to use your retirement money in the future – and this may include de-risking away from shares as you get closer to your retirement date.
“This is often done automatically within workplace pension funds, meaning you have higher allocations to cash and bonds which can offset losses in stock markets.”
What to do if you are retired
If you are already retired, whether or not you need to take any action depends on what type of pension you have.
Defined benefit pension or annuity: The good news is that if you have a defined benefit pension or annuity you are guaranteed a set income regardless of wider market movements. So sit back and relax.
Drawdown scheme: Drawdown schemes are at risk from falling prices but a good adviser should have investment strategies ready to minimise the losses, according to advice site Unbiased.
Pension expert William Burrows advises a ‘three bucket’ approach.
“A good drawdown plan should include three key elements: cash for a few years of income, a growth fund, and a core portfolio that is diverse and errs on the side of caution,” he said.
“Plans with sufficient money in low risk assets should weather the storm, but those which are overweight in equities will take some time to recover.”
