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Why you should worry about the stock market highs

stock market highsShare prices are through the roof, which has to be good, right? Actually, that’s debatable. In fact, I’d argue it’s wrong. That’s because when share prices rise fast and quickly, as they’ve been doing recently, it tends to signal that a fall is somewhere on the horizon.

Why is this relevant to skinted minted mums? Many SMMs I know take precious little interest in the movements of the FTSE 100 index. But they should because it’s a reflection of the health of those 100 companies where in fact most of their pensions savings are likely invested. When the Footsie, as it’s nicknamed, goes down, so does their spending power in retirement.

Even if you don’t have a stockmarket pension, you won’t be immune. A falling stockmarket can also indicate an economy in trouble. The usual medicine to kickstart growth is to reduce interest rates. While this is great for mortgage borrowers, it’s completely rubbish for cash savers as anyone with a miserly rate at the bank or building society knows.

So I’m watching the relentless climb of share prices across the world and getting anxious. Sure Trump’s tax changes will help American companies and British firms selling overseas are getting a boost from a weakened sterling. These however are short-term changes that may not last. It’s not like we are making better things more cheaply which would be a more solid base for the current unadulterated enthusiasm.

Pulling all our money out seems like the safe option but it isn’t the solution. Not even the experts can accurately pinpoint when stock markets will peak. Selling out now could mean you miss out on two or three years of growth before that happens.

My prediction is that we will soon bust through the 8,000 level on the Footsie (it’s about 7,700 now) before it turns down. But obviously you don’t want to lose everything in a meltdown. It’s a dilemma.

My answer is two-fold. First, have cash available. Experts say you should have enough to cover your normal expenditure for three to six months as an emergency fund anyway. If the worst happens, you have savings to fall back on and can avoid forced selling into a falling market.

Second, don’t invest big lump sums. Start (or maintain) a regular savings plan with a fixed amount every month. These start from as little as £25 a month with Hargreaves Lansdown, £50 a month with Fidelity and actually £1 with Virgin although the annual costs of their funds are higher than most.

The fact that the amount is fixed means you end up buying less shares when they are expensive and more when they are cheap. That’s an effective investment strategy without you even having to think about it!

Of course what goes up does come down, but the reverse is also true. Stock markets do recover over time. Investing little, often and for as long as possible is the key to enjoying the rewards of shares without getting burned.

For the SMM beginner’s guide to investing, click here.


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Sunday, 21 April 2019