Investing during a cost of living crisis

The thought of investing your cash only to see the value of your account drop is enough to make anyone feel nervous. But even in the current cost of living crisis, keep in mind that the economy is cyclical, and history tells us that the stock market, when it falls, will likely bounce back.

Investing always involves risk, but there are strategies you can use to reduce the chance that you’ll get back less than you put in. The golden rule is to think of investment as a long-term strategy and keep contributing to your accounts when you can, especially when it comes to your pension.

In this guide, discover some key things to bear in mind if you’re starting your investing journey, or continuing to invest.

What is the cost of living crisis?

The term ‘cost of living crisis’ was coined in 2021 to describe the economic situation in the aftermath of the COVID-19 pandemic.

Several factors—including component shortages, rising energy costs, difficulties with imports and transportation after Brexit, and the war in Ukraine have contributed to increased inflation levels. That meant the cost of goods went up much faster than people’s wages and many people have faced a real-term pay cut.

Put simply, since the end of 2021, most people in the UK have had to spend more of their paychecks to cover their essential outgoings, which leaves them with less disposable income for luxuries and savings.

The Consumer Price Index — a method used to measure how much the price of everyday products, like milk and fruit has risen — showed that the price of everyday products was 10.7% higher at the end of 2022 than in the previous year. However, wages in the public sector only rose by 2.7% across the same period. And although private-sector wages saw a much bigger increase (6.9%), it was still not enough to keep pace with inflation.

And since the UK economy may still be at risk of a recession, it could be a while before we return to the standard of living that we had before the cost of living crisis began.

Should I try to save or invest during challenging economic times?

When the stock market gains value, the value of investments generally goes up too. Over the past 15 years, during periods of economic growth, investing in stocks and shares ISAs would have outperformed a regular savings account, where interest rates have been low.

During challenging economic times, on the other hand, the value of the stock market is on a downward trend. It’s not uncommon for investors to invest money and see the value of their investment drop soon afterwards.

But while it might not feel like it, that doesn’t mean that this is the wrong time to invest. In fact, there are several reasons why continuing to pay into investment accounts regularly during these times might be better for your finances in the long run.

1. Savings accounts and inflation

Even when inflation is at a normal level of about 2%, a savings account with an interest rate any lower than that is making a loss in real terms. As of 11th of April, 2023, the inflation rate is 10.4%.

In recent times, some savings accounts have increased their rates to between 3-4%. When inflation is hovering around 10%, even though these accounts are offering 'good' savings rates, they are effectively losing 6-7% of their value each year. When thinking about whether to save or invest, it's important to remember that while inflation may eat away at your cash in real terms... in other words, you can buy less with the money you have saved — the initial amount you deposited will not go down. With investing, your money can lose value so it's important to understand the risk you are taking. You are effectively accepting more risk for the chance of getting more returns in the long run.

While stock market investments might not be performing as well as we’d like at the moment, it’s not the case that a savings account or an envelope of cash is a better bet if you want to see your money grow in the long term.

2. You might make more money in the long term

Continuing to invest, even in small amounts, can mean that you are buying stocks regularly when the market is up and continuing to buy when it is down, protecting yourself from investing large sums of money during big market fluctuations.

For example, if you had £2,000 to invest when the market was strong, you might be able to buy 20 shares in a company whose shares are valued at £100 each. If you bought during a downturn when the shares were valued at 20% less, you’d be able to buy 25 shares with the same amount of money.

If the market stabilised later and the shares returned to their previous value of £100 each then your initial £2,000 would be worth £2,500.

3. Pension savings take time

Most direct contribution personal pensions and workplace pensions are invested in funds, so they’re also tied to stock prices. This is the reason that the value of your pension can go up and down.

But whatever the economic outlook, you will need a pension fund in the future. It pays to keep saving regularly even if your pension pot isn’t growing as fast as you’d like. And the later you start saving, the more of your paycheck you’ll have to save in the future to meet your pension goals.

Paying into a defined benefit pension also helps you to take advantage of employer contributions, which are free contributions to your retirement. You will also receive tax relief from the government every time you contribute to your pension (if you’re eligible). This is the government’s way of incentivising you to keep paying into your pension consistently.

Workplace pension contributions breakdown - 8% of your total salary (min) = 4% Employee + 3% Employer + 1% Tax relief

If you are finding your mortgage payments, bills or other costs are eating into the money that you would usually put aside for investing, it may be worth prioritising your pension above everything else. Your pension is one of the few investments where you get effectively ‘free’ money from the government and your employer, so even if you have to cut back on the percentage of your salary you set aside for contributions each month, it’s not advised to fully stop your contributions, as this won’t save money in the long run.

Preparing to invest during a cost of living crisis

While stopping your investments isn’t always the best strategy in a cost of living crisis, you also need to protect yourself from as much risk as you can.

1. Safeguard your emergency savings

It’s wise to have enough money in an instant-access savings account to cover 3–6 months of expenses. Once you’ve saved that much, you can think about starting to divert the money you have to invest using an investment account.

This means that, if something unexpected happens and you need to access your money quickly, you’ll have some money readily available.

3-6 months living expenses - rent/mortgage, bills, food, other expenses

2. Only invest what you’re comfortable investing

If the thought of seeing the total in your account drop from month to month is too stressful, it’s okay to find another way to save for now. Ideally, you should make sure that you keep up with your pension payments, but now might not be the right time to open a new investment account if you are already under financial strain.

To help to manage anxiety around the stock market, it’s helpful to avoid checking the value of your investment account every day. You should focus on the overall trend, and not on the smaller fluctuations in the numbers. If you do feel comfortable investing after your pension contributions, it could be worth exploring opening a Stocks & Shares ISA, which allows you to invest up to £20,000 each year, without paying capital gains tax on any gains you make.

3. Think about your financial goals

If you can invest for at least five years (and ideally 7–10), you’ll be able to ride out most of the peaks and troughs in the stock market and have a better chance of seeing a good return.

But if you know that you’ll need the money sooner—for example, if you’re saving for a wedding, a new car, or a house deposit—it can make more sense to open a savings account that’s better suited to short-term savings.

In these cases, an instant access savings account or an ISA where you lock the money away for between 1 and 3 years to enjoy a higher interest rate is a better way to meet your savings goals.

Investing with CIRCA5000

CIRCA5000’s pension and investment accounts invest your money in funds comprising companies that tackle the most pressing social and environmental issues facing the planet, including climate change, biodiversity, water quality, education, health, and equality. As these funds are focused on ‘structural trends’ — meaning they are part of a shift in the way the world operates and part of ‘themes’ that are underpinning wider economic growth. For example, ‘Clean Energy’, is at the heart of fighting climate change and at the top of the global agenda.

You can find out more about where your money would be invested and the positive impact it could make here.

And impact investments aren’t just about your conscience. They can perform well and give measurable results at the same time as they contribute to a sustainable future.

How should I invest during a cost of living crisis?

Once you’ve resolved to ride out the storm and continue to make investments during challenging times, you can also plan to minimise the risk to your investment.

1. Invest regularly in smaller amounts

This way, you’ll lose less if your investment immediately loses value, but still enjoy the future benefits of buying stocks at a low price. This is sometimes called ‘pound-cost averaging’. The idea is that by consistently investing, you buy the ‘highs’ and the ‘lows’ of the market, which averages out.

This is a far better option than either day trading (where you buy and sell stocks on the same day) or waiting until you think the market has hit rock bottom and investing all your money then. At the end of the day, even the top financial professionals in the world struggle to time the market, so it makes sense to avoid trying to do the same.

2. Aim for a mix of stocks and bonds

The funds you invest in can be made up of stocks, bonds, or a mix of the two.

Stocks tend to grow more in value, but they can also lose more. Bonds tend to be a safer bet but can struggle during periods when interest rates are rising rapidly as they did in 2022. However, in 2023, bonds are now generally offering more attractive interest rates for investors.

A good investment strategy can be to have a diverse portfolio and aim for a mix of 60% stocks and 40% bonds. This way, if part of your portfolio (say, in education or tech) loses value, another part (say, in green energy or government bonds), then this will balance the returns in your portfolio, helping you to ride out the ups and downs.

3. Don’t panic sell when stocks are down

If you sell immediately when your stocks go down in value, you might cut your losses, but you also lock yourself into those losses forever. If you try to hold on to the stocks and the company weathers the current financial crisis, the price should come back up.

For example, consider the last major economic crisis faced by the UK: the ‘Great Recession’ from 2007–2009.

If you had invested £1,000 in the stock market in January 2007 before the crash, you would have lost 33.3% of your investment by January 2009. But if you had kept the remaining £660 in your account until today, you would have been firmly back in the black in 2016, and the investment would have gained around 22% of its value by today.

In fact, you’d now have £1,220, despite the Great Recession, the COVID-19 pandemic, and the cost of living crisis.

4. Consider combining old workplace pensions

If you would like to continue to try and get the most out of your investments, but don’t necessarily want to open a new investment account, combining your old workplace pensions could be a good step forward. Some of the benefits of combining old workplace pensions include getting your fees under control and managing your pension in one place. You can read more about the pros and cons of combining your pensions here.

Recap: Investing during challenging economic times is still a good idea

It can be disheartening to watch the money in your investment account or pension shrinking during the cost of living crisis.

But if you’re secure enough financially to cover emergency expenses and you know you can keep your money invested for 5–10 years, history tells us holding onto your investments through a period of economic downturn can still be the best way to see your money grow.

Plus, when you’re investing sustainably, you know that your money is being invested in long-term structural trends and contributing to a better future for everyone.

Learn more about your options for impact investment today. Or, if you’re ready to see your pension make a positive impact, contact us today to transfer, consolidate, or set up your personal pension.

When you invest, your capital is at risk. You should carefully consider whether opening a CIRCA5000 pension, investment account or transferring your old pensions is right for you. Please note that tax rules and reliefs depend on your personal circumstances and may change. CIRCA5000 does not provide any financial or tax advice, and you are responsible for your own tax reliefs/payments. This article does not represent financial advice. Your investments and the income from them can go down as well as up. It is sensible to seek independent financial advice if your pension is worth £30,000 or more.

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Important information - Investments can go down in value as well as up, so you can get back less than you invest. The information on this page isn't investment advice. If you're not sure if an investment is right for you, please seek advice. Tax rules can change and depend on individual circumstances.