personal finance

How to guard against the next financial meltdown


While you should always take predictions of disaster with a pinch of salt, it also pays to be prepared.

After one of the longest bull runs in history, a market slowdown has to come at some point. All you can do is prepare for the worst, while hoping for the best.

The trade wars of Donald Trump (pictured), Brexit uncertainty, Italy dumping the euro and the emerging market crisis could all trigger disaster.

Perhaps the biggest threat comes from the US Federal Reserve, which is steadily hiking interest rates.

AJ Bell investment director Russ Mould said the danger is that the Fed overdoes it: “This is the most likely candidate for a fresh tumble in markets.”

Alternatively, the economy could be sunk by a so-called “Black Swan” event, something so unexpected that nobody saw it coming.

Whatever the cause, you need to be ready. 

PROTECT YOUR PENSION If stock markets crash, any income you get from the state pension or an annuity will remain secure.

However, other retirement savings could be in the firing line. Worryingly, thanks to pension freedom reforms in 2015, retired people are more vulnerable than before.

That is because more are shunning annuities, which pay a set income for life, and leaving their pots invested via income drawdown instead. Andrew Tully, pensions technical director at Canada Life, warned that these retirement savings values could plunge in a crash: “It is harder to draw a decent level of income from a depleted pot.”

Pension freedoms are popular, but have yet to be tested in a market crash.

Money

Brexit uncertainty, Italy dumping the euro and the emerging market crisis could all trigger disaster (Image: GETTY)

Guy Stephens, technical investment director at advisers Rowan Dartington, urged caution: “We are advising clients against being too eager to buy sectors with strong momentum, such as US technology stocks.”

After years of strong growth, Facebook, Apple, Amazon, Netflix and Google-owner Alphabet are trading at expensive valuations that could quickly reverse.

Meanwhile, so-called defensive stocks, such as tobacco companies, utilities and telecoms, have fallen out of favour, but could enjoy a revival, Stephens said. He advised against dumping all your investment funds because nobody knows when the crash will come: “It may not happen for three years, during which time the markets could rise 20 per cent, so resist the temptation to lock yourself out altogether.”

Check your portfolio has the right balance between risk and reward. “Consider switching some money from stocks and shares into less volatile investments such as bonds,” he added. 

DEBT BURDEN Britain is drowning in debt after a decade of rock bottom interest rates.

We collectively owed £1.6 trillion at the end of July, an extra £884 per adult than a year before.

Money box

The old saying still applies: better safe than sorry (Image: GETTY)

At the same time, savings levels are languishing near all-time lows as we set aside just 4.3 per cent of our income after tax. Shaun Church, director at mortgage broker Private Finance, suggested homeowners consider switching to a fixed rate deal to protect against further interest rate rises: “Borrowers on a standard variable rate mortgage could save more than £2,500 a year by switching.”

Debt among young people is at an all-time high as 70 per cent regularly borrow to pay everyday bills, according to new research from Neyber.

Head of employee wellbeing Heidi Allan said: “Before you take on any debts make sure you fully understand the terms and conditions, what you will need to repay and whether you can really afford the credit.”

EVERYDAY WORRY Britons are falling behind on their everyday bills to the tune of £18.9 billion, according to Citizens Advice.

 

Sarah Coles, personal fi nance analyst at Hargreaves Lansdown, said now is the time to take charge: “Calculate what you have coming in and going out every month, so you know the scale of the problem.

Online budget calculators can help.” If worried, focus on paying down your most expensive or pressing debts first, before moving on to the next most urgent.

Coles added: “If this feels overwhelming, charities like Citizens Advice and Stepchange can help.”

The global economy may still avoid a meltdown, but the old saying still applies: better safe than sorry.



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