When watching television or reading newspapers it is difficult to avoid the credit crunch. The stock market is bounding up and down on a weekly basis. Property prices are tumbling, down by nearly 11% over the last year, apparently with more falls to come. Inflation is also steaming higher with necessities such as food, fuel and power particularly affected. Given that background it is no surprise that recent Standard Life research(2) shows many investors are spooked by the current turmoil in share markets.
The research shows that consumer opinion has changed dramatically over the last year or two. In July 2006, faith in property was unsurpassed with nearly 70% of people saying it was a good time to invest in bricks and mortar. That has plummeted to less than 30% today. There is a similar lack of confidence around investing in stocks and shares with over half believing it is a bad time to buy equities.
These opinions will drive consumer behaviour, and safer haven options are likely to become more attractive. Often our first instinct is to invest money when markets are high and all seems well, and to sell when markets are depressed. The research highlights this, confirming cash savings accounts as the only investment category, which is more attractive to consumers compared to three months ago.
In some contracts, such as self invested personal pensions (SIPPs) there may be a straightforward short-term solution. As each SIPP has its own bank account, people can leave some of their pension savings on deposit if they decide this is the best bet, even if only temporarily. This can be especially helpful during periods of volatility in the stock markets. In addition, there are fixed rate accounts available, currently offering between 5.5% and 6% over a term of six months or one year.
In today's volatile markets it's difficult to judge when to invest. People are concerned with protecting what they have built up so far but they don't want to miss out if markets rise. So some providers are introducing new avenues which offer a combination of growth potential and protection for client's investments.
These funds track a particular index, such as the FTSE 100 and, importantly, people have a guarantee that their initial investment will be returned at the end of the term. Growth is linked to the appropriate index and there is often a cap on the maximum return.
This style of investment used to be available only over relatively long time periods.
However, now one and two year options exist, allowing clients and their advisers to invest in equities with no downside risk, and without locking in over a long period.
Equity markets have delivered returns exceeding ten per cent in 14 out of the last 20 years, and let's hope they do so again over the next year. But it is difficult to persuade clients to invest in equities given current market conditions. With volatility comes uncertainty, uncertainty leads to anxiety and that is why safer haven investments are so important.
Some commentators expect the fallout from the credit crunch to last another 18 months or more, so the option to protect capital, while not missing out on any market bounce, is one that I'm sure many investors will cherish. These options provide a good reason to get back in touch with customers to discuss their investment choices. And they give advisers the opportunity to demonstrate the real value an adviser can add.
1. Halifax house price index, August 2008
2. Standard Life Savings & Investment Index - Wave 13, August 2008
The forces at play in investment - most obviously, regulatory change, uncertain markets and shifting demographics - are as strong today as they were when Professional Adviser launched its sister magazine Multi-Asset Review in 2017.
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