What does a stockmarket fall of 36% mean?

It means your savings need to be organised before it happens

On 16th October 1987, the stock market in the UK fell 14%. By mid-November it was down 36%. It is for this reason you should keep reading.

The share price falls were across the board and good companies fell with the less successful. It was an arbitrary general fall in the FTSE 100 index. It seemed like a very risky time to be investing.

One of these falling shares was M & S. Yet to me it was ridiculous that M & S had been devalued by 36% when the business was in good shape and with prospects for ongoing growth.

I saw an opportunity to invest in the FTSE 100 index as I felt sure the better companies would be re-valued to reflect their sales and prospects. I knew that this was an opportunity to invest in my future, (not to try to make a quick buck).

Some of my clients also put part of their savings in the FTSE 100 index. Many did not. By August 1989 the index had recovered all of its lost ground. By 17th November 1997, it had gone up by 100% and is now 378% higher than it was in October 1987.

“Investing is the intersection of economics and psychology”
Seth Klarman – portfolio manager and billionaire

This is what I learned from those people who did not invest and which I now use to help people look after their savings. I now understand why those other people did not invest. The reason they didn’t is that I had not discussed, in detail, on a one to one basis, the following –

• Their Attitude to Risk
• The timeframe of their investments
• Their capacity for loss

I arguably let those people down as their savings did less well than the people who did invest.

Having learned a lesson from the experience my clients now benefit from this insight.

It is important not to take too much risk, which I understand. But it is also important to take at least some risk, if your circumstances allow it.

It is important to avoid taking no risks. Indeed, I often hear people say “I want to be Cautious” or “It needs to be safe” and they have left money in the bank earning very little and certainly not keeping up with inflation.

If you think putting money in the bank is low risk, you could be right.

However, taking no risk/low risk can be the biggest risk of all and in the worst case an absolute certainty that your money will not keep up with inflation in the long term and you might not enjoy the retirement you had planned.

The risk of not keeping up with inflation, with not building up your savings, is you end up with a pot too small to provide a sustainable income in retirement. But with the right advice and the correct level of risk for you and your circumstances your sustainable income in retirement is much more likely.

What does this mean in practice and why trust me? Here is the outcome that clients get from the correct risk profile:

• Bank accounts – needed to manage day-by-day spending and, separately, for an emergency fund for those unexpected bills
• Always manage the tax aspect of your savings
• Balancing flexibility with longer-term savings
• Separate savings pot for different purposes. Why? If you wish to assist children with buying their house(s) and also want to manage your savings to provide an income in retirement, these aims are different and can therefore benefit from different risk approaches. Helping the children is a one-off event (per child) and is likely to come before your need for retirement income. The need for income in retirement can span 30 or 40 years, from when you stop work to when you pass away
• In each saving pot, we make sure you have a globally diversified portfolio set of assets
• Sometimes premium bonds are used for an emergency fund
• Update your risk profile annually because your circumstances and requirements may change. If so, this may suggest an update to your savings pots which can keep you on track

Here’s why you should trust yourself. Inflation will go up and down but the world’s demographic is changing. Fewer workers mean higher wages and lower state pensions. These things point to higher inflation in the future. Getting the risk balance right on your savings is not a “nice to do”, it is essential. You need to trust that, with the right support, you can improve the likelihood of healthy savings.

If yes, arrange a call with me using my online system to book a time that is convenient for you.

It is an opportunity to get a better outcome from your savings, provide for your family, and help give yourself a sustainable income in retirement. Undoubtedly, you will be more relaxed too knowing that you have the right risk profile for your savings and that it is updated annually.