There's nothing like a market crash to ruin a perfect day

Fiscal View If, as you have been approaching retirement, you have sensibly reduced your exposure to equities, then you will have much less to worry about.

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I write this column from the sanctity of a village perché in Provence where I have come to enjoy some quiet time with my wife. Without the company of my teenage son, we no longer have to engage in surfing, skiing, sailing, horse-riding, bungee-jumping, etc. Instead, the most strenuous activity of the day is a morning stroll to the boulangerie, and the most mentally stretching activity is to decide whether to attend the village, puppet-assisted performance of a Stravinsky masterpiece or to go farther afield to a nearby village where La Bohème is being attempted, mercifully, without the use of puppets. All this sublime serenity came to an abrupt end, however, when the financial markets plummeted. Back to work.

The FTSE100 index, representing the share value of the United Kingdom's largest companies, has just completed its worst five-day performance since 2008, wiping £150 billion (Dh900bn) off company values. As I write this, the index stands at 5247, almost 14 per cent off its peak value of 6091 just a short time ago. Investors are responding to the failure of the European Central Bank to take charge of the debt crisis and to stop the recent crisis over Greece, Portugal and Ireland extending to the much larger economies of Spain and Italy. Stock markets in Europe have responded in a similar manner.

At an individual company level, the position is even worse, especially in the oil and gas sector where demand for its output is directly related to economic growth, and in the banking sector where there is a large exposure to the sovereign debt of European countries. Shares in Royal Bank of Scotland, the UK state-controlled bank, were briefly suspended after falling 20 per cent in a single day to a two-year low of 26 pence.

What does all this mean for the average investor? Well, if you are due to retire in the next year or so and have all your money tied up in the stock market, either directly through shares or indirectly through managed funds, then you are in serious trouble. If you want to maintain your retirement lifestyle at your previously planned level, then you will now have to continue working for a couple more years to recover from this economic crisis. If, on the other hand, as you have been approaching retirement, you have sensibly reduced your exposure to equities, in favour of bonds and other fixed-interest assets, then you will have much less to worry about.

No investor, no matter what he is planning for, whether it be retirement in 20 years or saving for a house deposit in two years, should ever be in a position where he is forced into having to sell his equity holdings at low prices to achieve his objectives. Equities are the best asset class for long-term growth but, as recent events have demonstrated, they are volatile and unsuitable for short-term investment purposes.

If you are lucky enough to be one of the chosen few who are entitled to an index-linked, final-salary pension scheme, then you will have little to worry about since your defined-benefit pension is not directly related to the performance of stock markets. However, there is an indirect relationship since the underlying pension assets will be invested in stock markets and, if they do not perform, then the company will have to make up the difference by diverting money that would otherwise have gone to shareholders. If you suspect that your company's shareholders are getting fed up of subsiding your pension pot, then you should consider transferring out of the company scheme before this happens.

None of this applies to UK public-sector pensions, since these schemes are funded by the long-suffering taxpayers who can always be relied upon to fund the unrealistic pension needs of public-sector employees. It's a bit like Greece except that German taxpayers are being asked to do the funding because the Greek taxpayers cannot afford it.

If you are a long-term investor, now is a perfect opportunity to add to your equity holdings. Equities, in general, will always outperform other asset classes in the long term and, with prices currently as low as they are, you are unlikely to get a better opportunity to buy.

If you are a short-term investor, then you need to stay in cash. With the recent failure of Lehman Brothers and Icelandic Bank, and near-failure of Northern Rock and Allied Irish Bank, storing cash safely is not as easy as you might think. However, the UK government has raised the level at which it will guarantee bank deposits in UK banks to £85,000 (Dh511,000) per person or £170,000 for a joint account. Guarantees are, of course, only as good as the quality of the guarantor. Until recently, the United States and UK governments were the guarantors of choice since neither of them had ever defaulted on a loan in several centuries. However we have recently seen the US government come within a day of failing to service its debt. These are difficult times indeed for safeguarding your hard earned cash.

Bill Davey is a Wealth Manager at Mondial-Financial Partners, Dubai. For further information on any of the above, please contact him directly at