Will the cracks in China affect you?

On Monday, frantic stockbrokers in China were staring at screens of green figures (green in China means falling prices). The resulting slump in global markets could affect us all to some extent – but not necessarily in a bad way.

We should be used to stock market slumps by now – they happen regularly enough, after all, and in every single historical example, markets have gone on to recover, sometimes quickly and sometimes very slowly, but always regaining their value in the end. However, in the shorter term a sharp dip like the one this week can cause alarm around the world. So, should you be worried?

The facts

China’s stock market has seen a huge slump in the past couple of days, and this caused the FTSE to fall 5 per cent on Monday, down 15 per cent from its all-time peak in April. What happens in China will inevitably affect world markets to some extent, but what impact could this have on your own finances? Here are the implications of the fall, both negative and (potentially) positive.

Reasons to be concerned

1. You have investments in the stock market you want to cash in
   If you have stocks and shares you want to cash in soon, then these will probably have lost some value. Unless you need the money urgently, it’s probably a better idea to wait a while for them to recover their value. Talk to your financial adviser about what you should do.
2. You’re close to retirement age
   If you have a money purchase (defined contribution) pension, its value will be closely linked to the stock market. This means it’s probably not a good time to cash it in to buy an annuity. Try to leave it invested for as long as you can and use other income if possible.
3. You’re retired and already in a drawdown scheme
   This is probably the biggest reason to be concerned. You may have planned your drawdown scheme based on an expected rate of growth in equities, which may no longer be as strong as you’d hoped. Talk to your financial adviser urgently to ensure you’re not drawing on too much of your fund, which could erode your capital.

Reasons to be cheerful

1. You’ve got a mortgage or hope to get one.
   The stock market slump could be good news, as it makes it less likely that interest rates will rise in the near future. This is great news for anyone looking to secure a mortgage, or anyone who has one on a variable rate.
2. You have a portfolio invested in smaller and non-mining companies, and/or in bonds.
   These companies have been less badly affected by the slump in China, so in relative terms are now outperforming the market as a whole. Bonds are also likely to fare better as equities struggle.
3. You’re planning to start investing, or to begin saving into a pension
   For new investors and pension savers, a market slump can be seen as an opportunity. There is the potential for significant long term gains for those who invest when the market is at a low point. Talk to your financial adviser about using the slump to your strategic advantage – but be aware that market volatility may persist for some time, so don’t go in expecting to make a quick killing.

How serious is it?

It bears repeating that stock market crashes are nothing unusual – many have happened in the past, and they are part of the natural volatility of equities markets and their need to periodically correct themselves. It’s true that the ‘great fall of China’ may cause a slowdown in the global economy, but that’s another story. Longer-term investors should be able to ride out the storm, but if you’re concerned about how this may affect your pension imminently, then talk to your financial adviser.