As the poor UK consumer (and I use the word advisedly) stands amid the tempest of the UK economy in summer 2008, I look at what we should all be doing now. In my main piece this week I look at the fabled safe havens for your cash … and try to take the long view. And which investments will emerge stronger from this storm.
I always think optimism is the best approach but there’s a difference between optimism and wishful thinking. I must have spoken to half a dozen people (mainly estate agents) over the last month who’ve said ‘I wish journalists would stop talking up this so called credit crunch‘. Optimism? That’s more like a child sticking his fingers in his ears and talking loudly so he can’t hear you telling him it’s time for bed. Denial in other words. So let’s remove our digits, look coolly at where we stand with our money, and how we can prepare to survive the downturn.
First the bad news. We’re being hit by a horrible combination of economic blows.
Number one: there’s excessive debt in the form of credit. Loans, overdr afts, credit card balances - Mr and Mrs UK have been living beyond their means for a decade, and that was always going to have to stop sometime. The credit crunch hasn’t changed this, it’s merely been the catalyst that’s sent many of us over the edge.
Number two: collapsing house prices you know all about. It’s real and contrary to what you might read, it’s been happening for years. Ask any property investor in London, and they’ll tell you that prices began stalling a few years ago now … that’s why a lot of smart investors stopped buying around 2003. Unfortunately a lot of us have used easy credit to buy property at inflated prices. Not so bad if it’s a house you’re going to live in for years to come … pretty awful if you saw it as a solid, capital growth investment.
Which leads us to number three, the turning off of credit. The catalyst for the big turnoff was a rise in defaults on US ’sub prime’ mortgages. This tipped a panic in the markets about the number of these high risk mortgages on the banks’ mortgage books.
Lots of grief for the banks here, but you don’t really care about that. The problem for the consumer is that confidence falls and the banks stop lending each other money. Which means they stop lending you money. So it’s hard to remortgage, and when you do, rates have soared.
So to the horror of Number Four. Inflation. Just as the mortgage on our overpriced house goes through the roof, the price of our groceries and our petrol soars. It’s partly down to increased demand from China, India and the rest. And that’s largely because their economies have grown strong on exports. Exports of all the stuff WE’RE buying with that credit and equity release. And it’s also down to traders piling into oil and commodities because other stocks look so weak. The global economy is all connected you see.
Oh, and the final whammy … inflation is eating away at your savings. Enough bad news? I thought so. But it’s never unreservedly bad. What you need to do now is look at how you protect what you have, and put investments in place that will emerge stronger. First the safe bets:
Reduce your spending: do a household budget now, and cut any you don’t need. A day spent doing this could save you hundreds a year.
Cash: It’s a tricky one, because inflation is the silent killer, eating away at your cash reserves. You need a savings account that exceeds inflation at least, so we’re talking tying up your money in a long notice account. Halifax’s Regular Savings Account is offering a whopping 10% just now - keep searching the web for best deals.
Bonds: they don’t offer spectacular returns, but they’re designed to give solid long term protection as markets and currencies wobble.
Next the medium risk:
Gold: the classic defensive buy down the ages. I’m not suggesting you go out and buy an ingot of the stuff, but there are exchange traded funds or ETFs that let investors buy into this market collectively … rather like the investment funds you might own.
Stocks and shares: they’ve dropped and they’ll probably fall further, but DON’T try to time your purchases unless you’re an expert. Dripfeed money into a shares ISA, as much as you can each month up to your £7200 yearly limit.
This fixed spend means you buy fewer shares when they’re expensive, but more when they’re cheap (like now). It reduces the risk of buying overpriced stocks, and means you buy more with potential to grow. It’s called pound-cost averaging.
Finally, the most risky:
Property: If you’re a potential first time buyer, frustrated by ever rising property prices, then step back … for once the market is on your side.
Be grateful you DON’T own a rapidly depreciating asset. If you can, start squirreling away cash for the bargains that will emerge in the next months. My bet would be those overpriced city centre developments on the books of the big UK builders - you know, the ones who are laying off staff and ceasing building. I wouldn’t think of buying during 2008 though. I’ll be looking at some likely developments in the weeks to come.
Value shares: a lot of share traders would say there is value in shares right across the board now. It might not be a brilliant time to buy Bradford and Bingley, but some of the bigger and more solid banks, such as Barclays, have seen their share prices halve in a year. They will still be around in a decade and their share price will be right up their again.
Related: All about ETFs, Halifax, ISAs
Tags: Safe havens for cash, Value shares, Stocks and shares, property investing, Halifax, Bonds, Gold, credit crunch, credit, safe cash havens, safe havens for cash, recession proof savings, personal financial advice
