Market volatility and your investments

In recent years, the Greek government has borrowed heavily and spent freely, building up huge amounts of debt. In return for financial support from the European Union (EU) and International Monetary Fund to help the country out of this crisis, Greece has promised to introduce stringent measures, including raising taxes and reining in public spending. However, these measures have proved extremely unpopular with the Greek people, with nationwide strikes and even riots.

The crisis in Greece has also raised fears about the public finances of a number of other countries which are members of the euro, notably Portugal, Spain and Italy, as well as the impact on the European banking sector. In an attempt to prevent the crisis from spreading, EU finance ministers have agreed a package of loan guarantees and emergency funding. Governments across Europe have also been taking drastic measures to tackle their own debts and deficits.

As widely predicted, the UK election resulted in no one single party winning an outright majority. After five days of negotiations, on 11 May a Conservative-Liberal Democrat coalition was announced and David Cameron was sworn in as Prime Minister. The new government said it was committed to reduce the UK’s budget deficit and on 22 June held an emergency budget. The key points of this budget were:

• VAT to rise from 17.5% to 20% from 4 January 2011.
• Capital gains tax to rise immediately from 18% to 28% for higher rate taxpayers.
• Various state benefits frozen or reduced.
• Public sector pay frozen for those earning more than £21,000.
• Public sector borrowing to be reduced substantially over the next five years, with the aim of bringing the budget deficit ‘in balance’ by 2015/16.
• Budget cuts of around 25% across government departments over the next four years.

On 20 April 2010, an explosion on a BP-contracted oil drilling rig in the Gulf of Mexico killed 11 workers. As well as the human tragedy, the oil spilling into the sea has had a major impact on wildlife and local industries. BP has agreed to pay $20 billion into a clean-up and compensation fund, although that figure could rise over the coming months and years.

As a result of the uncertainty over the eventual total cost of the spill to BP, its share price has fallen considerably since mid April. BP has also announced that it’s scrapping its quarterly dividends to shareholders in 2010, the first time it has suspended a dividend payment since the Second World War. In addition, the main ratings agencies, Standard & Poor’s, Moody’s and Fitch, have all downgraded BP’s credit rating, meaning they’re less confident about the company’s ability to repay its debt.

Global markets have seen considerable movement over recent weeks and months particularly due to fears about the impact of the Greek debt crisis and the possibility of other countries in the euro suffering similar problems. In the UK, the prospect and then the reality of a coalition government, and the BP oil crisis have also led to nervousness among investors.

It’s impossible to second-guess what will happen in markets over coming weeks and months, although it’s clear that they don’t like uncertainty. Worldwide markets want to see evidence that governments with large budget deficits are taking necessary steps to tackle these.

In terms of the impact on your own investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting Unbiased, the website run by IFA Promotion Ltd, which is responsible for promoting financial advice in the UK.

Everyone’s circumstances are different. We aren’t able to give you advice on whether it’s appropriate for you to cash in or move your investments. However, it’s generally accepted that keeping investments for the medium to long term (at least five to 10 years) can help average out the highs and lows of the markets. Inevitably at some point during a long-term investment period markets may decline or experience volatility. Naturally, you may feel this presents a financial risk and be tempted to move your money or cash in your investments. However, although this may stop further losses in the short term, you may be missing the potential for growth over the long term.

One way in which you can help reduce the impact of volatile markets is to ensure that your investments are spread across different asset classes (for example shares, bonds, property and cash) and different regions (for example the UK, Europe excluding the UK, North America, Emerging Markets and Asia).

For more information about investing across different asset classes, take a look at our An introduction to diversification in multi-asset funds guide (pdf 287kb).

Before making any changes to your investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting Unbiased, the website run by IFA Promotion Ltd, who is responsible for promoting financial advice in the UK.