Storm ahead? Here’s how to prepare for a financial crisis

Every 10 years or so a financial crisis hits global markets – and it’s 10 years since the last one. This week the IMF warned that not only are the storm clouds of the next global financial crisis gathering, but also that the world financial system is unprepared for another downturn.

Will your pension be wrecked? The value of your house plummet? Will your industry be hit by a wave of redundancies? The bad news is that even the big investment houses, which traditionally talk up markets in the hope that you will invest, are pessimistic about 2019.

Edward Bonham Carter, vice-chairman of Jupiter Asset Management (and yes, he has a famous sister), this week warned that “the party is coming to an end”.

Over the last decade central banks have fuelled a boom in share values and property prices by slashing interest rates and pumping the financial system with virtually free money, called “quantitative easing”. Now, debt levels are worse than ever, just as the US-China trade war continues, and the Brexit saga staggers on.

“Remove the crutches that have supported global growth for a decade, throw in a trade war between the world’s two largest economies, add a dash of wage inflation and a side dish of Brexit and you have a recipe that may prove rather unpalatable to global markets in 2019,” says Bonham Carter.

Many investment managers grimly warn about overvaluations in financial markets. “The US equity market has never been more expensive compared with other regions,” says Nick Mustoe, chief investment officer at Invesco. Just six tech stocks – Facebook, Amazon, Apple, Netflix, Microsoft and Google – are responsible for two-thirds of global stock market returns so far this year. “In my view that isn’t sustainable,” says Mustoe.

So where does this leave the average punter on the street? Here’s what you can do now to protect yourself – if you share the view that 2019 is going to be a bigger turkey than Christmas.

Batten down your pension fund

If you have a stock market-based pension scheme at work, most allow you to shift your investments around between shares and bonds – and put the whole lot into cash deposits should you wish. Just ask your pensions or HR department.

If you are young, this is probably foolish; you won’t be drawing the money for 30 years or so, and trying to “time” markets is phenomenally risky.

If you are older, the equation is very different: at 60 years old, if your pension fund takes a bath, you haven’t got time to make the money back. So you might want to “de-risk” by shifting more heavily into bonds and cash, and away from equities.

If you are middle-aged, your pension fund is probably about 60% in shares and 35%-40% in bonds. By all means tilt your fund towards bonds and cash to protect yourself, but you will need to remember to shift it back into shares when you think the outlook is better. Most people fail to do this, and lose out as market movements – both up and down – are typically quite sudden.

James Daley of consumer research agency Fairer Finance says: “It doesn’t tend to make sense to try to anticipate month-by-month movements in the market and the economy. Most investors will have their money in a balanced portfolio, which reduces risk by spreading your savings across stocks, bonds and other asset classes.”

Build up your rainy-day fund

Losing your job is the biggest risk from a financial crisis.

“If you don’t already have an emergency savings safety net, now is the time to focus on building one. It’s sensible to have three to six months’ worth of expenses in an easy access account so that if the worst was to happen, you don’t run out of cash while you get back on your feet,” says Sarah Coles of Hargreaves Lansdown.

Protect yourself from crashes

The lesson from the last crash is that banks, even the very biggest, can fail. Currently, the UK’s Financial Services Compensation Scheme will protect the first £85,000 you hold with each financial institution (excluding NS&I, which is backed 100% by the government). But several banks are members of the same institution, so if, for example, you have money in Lloyds, Halifax and Bank of Scotland, it will all be held by the Lloyds Banking Group, with just one £85,000 protection, so spread your savings around.

Bargain hard on house prices, and rearrange the mortgage

The latest report from Britain’s surveyors and house valuers this week was its gloomiest in years. You certainly don’t want to pay fancy prices under these conditions, so bargain hard. The biggest property website, Rightmove, is forecasting that prices will be flat across the UK in 2019, and fall by 2% in London.

What to do with your mortgage is tougher. The chances of interest rates rising amid a fresh financial crisis is unlikely. Equally, rates are still so low everywhere that big cuts are unlikely, too. Five-year deals are looking very attractive (starting at 1.96% from Yorkshire building society) and give you total certainty on monthly repayments.

Shorting the market

If you are convinced that the stock market is going to crater over the coming year, you can “short” it and produce a profit by using exchange-traded funds (ETFs). But really you are moving into pure gambling territory (and your company pension fund manager won’t permit it).

For example, the Legal & General FTSE 100 Super Short Strategy Daily 2X inversely replicates the index, so pays out twice the size of a fall. If the FTSE 100 falls 4%, you make 8%. ETFs can be bought at most online trading platforms once you have set up an account. But as investment manager Fidelity warns: “In a short sale, losses can accumulate far beyond an investor’s original expectations.”