In part one of a two-day series, Kristy Dorsey speaks to experts on their strategies for navigating volatile financial markets

 

Russia’s invasion of Ukraine has upended markets and fanned the flames of inflation that were already kindling as the world began to emerge from the Covid pandemic. This is fuelling a cost-of-living crisis that has many people alarmed for their financial future, but experts are urging calm to avoid potentially damaging knee-jerk reactions.

Jeffrey Deans, managing director of Glasgow-based financial advisor Save & Invest, says market volatility is a problem for professional traders that should not impact heavily on “proper” investors. Second-guessing the short-term winners and losers from unpredictable global events is an extremely tricky business, so for those with a sufficiently diverse range of investments, the best course of action usually is to sit tight.

“Every individual needs to remain calm if they are an investor,” said Mr Deans. “As Warren Buffett says, the market is a device for transferring wealth from the impatient to the patient.”

A key driver of inflation prior to the Ukraine war was rising oil and energy prices, with the imposition of sanctions against Russia sparking supply fears and a further spike in prices.

READ MORE: Cost of living crisis becoming 'acute', Scottish thinktank warns

“Added to this, tanks are rolling over fields that would otherwise be set to start growing food,” says John Moore, senior investment manager at Brewin Dolphin. “So regardless of how the conflict develops, you should expect to see volatility and uncertainty around price and supply of oil and food.

“However, it is worthwhile remembering that capitalism is self-correcting – high prices can moderate demand, change or increase demand for alternatives, and incentivise changes in production elsewhere or encourage new producers.”

One way or another, though, investors will need to take some risk with their savings as inflation – which some are predicting could peak at more than eight per cent – rapidly erodes the value of cash holdings.

Steven Cameron, pensions director at Aegon, said people often think that “risk-averse” refers to those who invest to avoid losing money, often by holding savings in cash. This may avoid peril in the short term, but over a longer horizon it could jeopardise the purchasing power of those investments.

READ MORE: Food boss warns Ukraine war could see double-digit inflation

Those already drawing income from their pensions or investments should consider using their cash holdings first, he said, as money withdrawn from investments during a downturn can not recoup value when markets recover. If it is possible to tap into other financial resources, then it might be wise to suspend drawing an income while markets are particularly volatile.

“However, cash does serve a purpose,” Mr Cameron added. “In terms of building up financial resilience, it’s good financial practice to have cash savings equivalent to three months of your expenses on hand, and many people feel more comfortable having six or more months available.”

The danger of savings being eroded by inflation has not been lost on the UK’s pensions regulator, which prior to the war was already introducing new rules to remind consumers that some exposure to non-cash investment risk is sensible when trying to meet long-term objectives.

READ MORE: Ukraine invasion could send UK inflation even higher, expert warns

“An example of this regulatory intervention is that pension providers are now required to issue cash warnings to consumers moving into drawdown where they hold half their pension pot in cash or cash-like assets, as well as issuing ongoing annual cash warnings,” said Lee Halpin, head of technical services at @sipp. “The ultimate policy objective [is] that holding cash should be an active decision, rather than as a result of inertia.

“Similar rules are also proposed for non-workplace pension in accumulation, albeit with a lower threshold of 25%, so clearly the regulator sees over-exposure to cash holdings within pensions as a present risk to good consumer outcomes and has acted accordingly. This risk will have only heightened with recent inflationary pressures.”

Mr Moore at Brewin Dolphin said although many people will believe they must take a lot of investment risk to beat the current rate of inflation, the reality is that a fairly balanced portfolio across a variety of assets should be enough to mitigate the corrosive effects of higher prices.

Day two tomorrow: Markets toil as European conflict continues