Inflation is back – should you be worried?
Inflation has been off the agenda for investors for years, but prices are rising again – and it could have implications for your finances.
Inflation has been low by historical standards for much of the past decade, with price growth falling particularly sharply over the past three years. Never the easiest factor to track when it comes to your finances – a situation not helped by the amount of measures for inflation which exist – inflation has nonetheless been muted for the past few years. Using the Government’s preferred method of calculating inflation – known as CPIH – we can see that inflation has been below its official target of 2% since July 2019.
What is CPIH
CPIH stands for The Consumer Prices Index including Owner Occupiers’ Housing and covers the cost of a list of everyday items consumers buy or use, including housing costs. Between July 2019, when it stood at 2%, CPIH has plunged as low as 0.5% in the depths of the pandemic last August, before recovering as the economy unlocked. It currently stands at 1% as of March, with the reading for April due out later this month. Clearly this is some way off the Bank of England’s own target of 2%, but the important thing to remember with inflation is the trajectory, not the absolute number. This was alluded to at the latest Bank of England meeting when Andrew Bailey, the governor of the Bank and head of the committee which monitors inflation, said inflation could be “a bit bumpy this year.”
Indeed, the central projection from the Bank is that, as the vaccine programme continues and the economy unlocks more, it should mean the CPIH figure jumps above 2% towards the end of this year. There is also the ever-present risk that it goes higher than forecast, with factors such as rising commodity prices and demand for goods and services also having the potential to exceed forecasts and push up the overall inflation number.
Should you worry about rising inflation?
Inflation is bad for some of your investments, in particular cash. The value of cash is eroded over time by inflation, so a pound today buys you substantially less than it did 20 years ago, for example. For investors sitting on large amounts of cash, rising inflation is problematic at this point in time because interest rates – and therefore the interest the bank pays you for leaving your money in cash – are at record lows. The Bank of England was forced to cut rates to 0.1% in the UK last year in response to the pandemic, and it has yet to raise them from this level. With inflation currently at 1%, it means the value of any cash you may have in the bank is being eroded every year, unless it is in a bank account paying more than 1%.
For investments too, rising inflation has implications. Some investments, like commodities such as oil, can protect portfolios from rising inflation, as they often rise in tandem. Investments such as bonds, on the other hand, suffer because they pay holders a fixed amount of interest every year, and if inflation rises it can often leave these bonds paying an income that is below the inflation rate.
What can you do about it?
As with all investments, including cash, investors should regularly review their holdings. If inflation is rising, there are a number of options to counter its damaging effects on your wealth, including investing in equities, commodities, and some inflation-linked investments which track the inflation rate.
However, as always, if you have any concerns or queries the best course of action is to get in touch with your adviser.
A quarter of a million over 55s get caught out by this pension tax trap each year – don’t be one of them
The little-known Money Purchase Annual Allowance is catching out thousands of pension savers each year. Here are a few ways to prevent yourself from falling into the trap.
A little-known pensions rule catches out thousands of savers every year, and has potentially become more prevalent because of the pandemic, according to new data. Some 5,000 over 55s are stung every week by a little-known pensions rule called the Money Purchase Annual Allowance (MPAA), data from retirement firm Just Group has shown. The Money Purchase Annual Allowance (MPAA) is a specific rule which can be accidentally triggered by savers, cutting the amount they can save in to pensions tax-free under their annual allowance. The figures from Just Group suggest some 260,000 people are being caught out by the rule every year.
What is the Money Purchase Annual Allowance?
The Money Purchase Annual Allowance (MPAA) is a rule which defines how much you can deposit into a pension each year and still receive tax relief on those contributions. The normal limit is £40,000 and is defined by the amount you contribute into a Defined Contribution (DC) pension, including employer contributions. With Defined Benefit (DB) pensions – also known as final salary pensions – this is defined as the amount by which it increases in value each year. However, the MPAA - which is triggered by a particular set of circumstances - can cut an individual’s annual allowance from £40,000 to £4,000.
Those triggers include:
- Taking an entire pension pot as a lump sum or starting to take ad-hoc lump sums from a pension pot
- Putting pension pot money into a flexi-access drawdown scheme and taking an income
- Buying an investment-linked or flexible annuity where income could drop
- Having a pre-April 2015 capped drawdown plan and taking payments that exceed the cap
The rule is in place so that no one can benefit from having a pension income while still feeding new cash into a pension pot and taking the benefit of tax relief. While the rule is a feature of the system rather than a failure, the contention is that some over 55s who may not have otherwise triggered the MPAA during normal times, have been inadvertently hit by it during the coronavirus crisis. For instance – someone aged 55 may have been in full-time employment and still contributing to their pension regularly, with no intention of drawing money out of the pension because they still had a salary. Thanks to the economic crisis caused by the pandemic, they may have since needed to access extra cash as an emergency, or even lost their employment, and with it, regular pension contributions.
Even if the MPAA is triggered under these circumstances the person is treated as if they’re now living on their pension income. They are then unable to return to making regular contributions up to £40,000, even if they don’t intend on using their pension for an income and still want to put more in.
What is the best way to avoid MPAA?
The good news is, there are some steps you can take to avoid being penalised inadvertently.
- Have a rainy day fund. Many people have been forced to trigger the allowance because they’ve needed short-term cash during a crisis. Having a solid rainy-day fund in cash savings would prevent this.
- Don’t take more than the 25% tax-free lump sum from your pension. You can take up to 25% from your pension tax-free, so if you don’t go over this, it won’t trigger the MPAA
- Take from smaller pension pots first. Any pension pot you have under £10,000 will be exempt from MPAA if you make a withdrawal. However, you can only do this in a maximum of three non-occupational pots.
Once you retire and begin to rely more on your pension the MPAA may become unavoidable. But if you’re no longer earning a salary or contributing new cash routinely to a pot, this shouldn’t be a huge issue. The trick is to be careful around the time when you are looking to use some pension funds if you are still earning from a salary and trying to save and benefit from tax relief.
If you’re interested in discussing the MPAA more, or want to know anything else about your pension, don’t hesitate to get in touch with your adviser.
Top tips for getting the most out of your money online
There is no question that money is going digital, with the pandemic speeding the switch away from cash. But how can you make your money go further in a digital world? Here are some ideas to help you stay safe and get the most out of your money online.
Internet usage has surged during the pandemic, from online food shopping to banking and much more. Among older age groups in particular, Age UK has found many who may not have used online services before are now doing so, with one in four (24%) pensioners using the internet more in 2020 than the year before. But like all things, there are pros and cons, especially when it comes to handling your finances online. While using the internet can be very easy and efficient, it also opens up risks to things like scammers and making inadvertent mistakes. Luckily, there are some steps we can all take to stay safe online, and to get the most out of the internet for our hard-earned money.
Take advantage of online tools
When it comes to taking out financial products such as loans or credit cards, the internet is your friend. Gone are the days of nervy conversations with credit card companies and accidental marks on your credit file. Instead, there is now a plethora of online tools that perform so-called ‘soft checks’ that will help you understand whether you are eligible for certain products based on your credit history. There are several to choose from, but in particular we like MoneySavingExpert’s as it is a trustworthy financial brand.
Keep an eye on your credit history
Speaking of credit histories, keeping yours in check is also vital. It is no secret that often, the big credit checking firms like Experian and Equifax make mistakes on individual’s’ credit files. It could be that your address is listed slightly wrong, or information such as the electoral register is missing. Unfortunately, this can have a significant impact on your credit history. Therefore, it is important to keep an eye on it – while some services charge for you to see your history on a regular basis, others, such as ClearScore or CreditKarma, give you free monthly access to your report.
Use comparison sites
Price comparison sites sometimes have a mixed reputation but for the most part they are extremely useful ways to hunt down the best deals online. From mobile phone contracts to insurance, you can find the cheapest deals possible on these websites. The trick is to not necessarily buy the very cheapest product on offer though. The cheapest deals will often come with caveats, but if you read the small print and weigh up the benefits of new policies, comparison sites can make shopping around very efficient. We’d recommend looking on the comparison site, then comparing directly with the providers that get listed – sometimes even better deals can emerge, and then you have a comparative price to think about too. Good comparison sites we like include Moneysupermarket, uSwitch and GoCompare.
If in doubt, step away
Financial scams are a big problem with the internet these days. All it takes is for you to click the wrong link or reply to the wrong email and the losses could be devastating. Therefore, the safest way to navigate the internet can be to step away from the offer or deal you’ve just seen and then try the old-fashioned way by calling up a provider if you want to know more. If you’re contacted by someone who seems to be from a reputable company out of the blue, tell them you’d rather discuss what they want to speak about at a different time. If you are the one making contact rather than them, you can make sure you are in control of the conversation. The message more broadly is to always have your guard up. The internet has given us all access to an array of options and choice has never been greater, but unscrupulous people are a fact of life.
Struggling to make ends meet? Here are seven ways you can rein in your outgoings
Around 10.7 million Brits have “low financial resilience”, according to the Financial Conduct Authority (FCA). That means nearly one in five UK adults would struggle financially if their income dropped by £50 a month or they were hit with an unexpected bill. The best way to give yourself some more breathing space is to give your finances a spring clean.
Here are a few ways you can shrink your outgoings and lower your stress levels.
Track your spending
It may sound obvious, but understanding where your money goes every month is a good first step in trying to limit your outgoings. You’ll be surprised how little things add up. If your bank doesn’t offer detailed spending breakdowns, go through recent current account and credit card statements to see what you’re spending your money on. Make a note of these in a spreadsheet and track your spending on a monthly basis to keep on top of finances. Once you’ve done that, it’s a good idea to create a budget and to set spending limits for things like food shopping, leisure, holidays and other items.
Always go shopping with a list
Supermarkets are experts at making us spend money on things we hadn’t planned on buying or have no real need for. To avoid being lured into spending money you don’t have, make a shopping list before you go to the supermarket and stick to it.
Make meals at home
Everyone likes the odd takeaway treat or going out for meals with family and friends, but it can take its toll on your wallet if you indulge too often. Instead, why not try making your restaurant favourites at home? The internet is awash with free recipe ideas catering for beginner cooks, all the way to seasoned pros.
Cancel unused subscriptions
Many of us have unused subscriptions or memberships that we don’t really need, whether it be Netflix, Amazon Prime or a monthly recurring pass to the gym. If you don’t use it, why not cancel it? It’s amazing how much money you can save over the course of a year by doing so. You can always restart your subscription further down the line if you want to.
Switch energy/broadband providers
Nearly one in four of us have never switched energy company, according to Moneysupermarket, meaning millions of Brits are overpaying for gas and electricity. The comparison website claims the average Brit could save £250 off their annual energy bills by switching to a lower cost provider. At the very least, it’s worth a look.
Consolidate your debts
If you have lots of loans and credit card payments going out each month, it might be worth consolidating your debts. Personal loan rates are very low at the moment, so there’s a good chance you could save some money by paying them off with a lump sum which you then repay in one payment. By having one repayment, instead of multiple, it’s also easier to keep tabs on your finances.
Remortgage
Mortgage rates have tumbled in recent years, meaning there is a very good chance you could save money by remortgaging. However, before you go ahead, check if you’ll have to pay any penalties for breaking your current agreement.
Should you invest in an IPO? Lessons from the Deliveroo stock market launch
Should you invest in companies through IPOs? Deliveroo’s recent stock market flop is a perfect example why it may be best to steer clear.
The market for Initial Public Offerings (IPOs) has been strong in recent times, with particularly well-known company names entering the fray. But is it worth ‘getting in at the ground floor’ of a company’s stock market listing?
As the most recent high-profile example, Deliveroo’s IPO can be a valuable lesson for investors. Its IPO took place on 31 March and quickly went down as one of the ‘worst’ IPOs in stock market history – with the share price losing over 30% from its initial starting point of £3.90 per share.
Deliveroo’s stock market launch got off to a shaky start with a price that many investors seemed unwilling to pay. This is why the price kept lowering before it even launched on the market – not a good sign.
It also came under pressure from a chorus of fund managers who declared their unwillingness to participate in the IPO – citing concerns about how it treats its workers, the fact it’s unprofitable and questioning the sustainability of its business model.
The saga has quickly become the posterchild of failed IPOs in recent times – but is far from the only example of a failed share offering launch. Other firms such as Uber – a competitor to Deliveroo in the food delivery space – have had spectacular failed launches too.
This is not to say all IPOs are failures – far from it. Recent listings such as The Hut Group have been relatively successful. Another interesting example is that of home workout equipment firm Peloton – which on its stock market debut saw its price crumble quickly.
The firm has however performed admirably since, thanks in particular to the coronavirus crisis which has led to demand from homeworkers desperate to exercise in their living rooms.
This is the essential quandary for any long-term investor considering participating in an IPO – doing so is something of a gamble. If you’re convinced of the investment case for the company then you should be willing to back it over a long-term horizon.
In the short term the price could fall significantly and lose the investor a lot of money though. Those investors without the stomach for short-term falls will sell and crystalise their losses. For every Peloton or Hut Group there are also plenty of Deliveroos or Ubers.
A such there are a few lessons from the Deliveroo IPO and others that investors should heed:
- Which IPO is right for you? Some company listings such as Deliveroo’s receive large amounts of media attention – but that doesn’t mean they are the best ones to go for.
- Are there clear signals that the IPO might have issues? Deliveroo’s IPO for instance received widespread negative attention before it even listed, with the price lowering repeatedly – a bad sign from the get-go.
- Read the detail. Companies looking to list have to offer investors a prospectus. As was the case with WeWork IPOs can unravel quickly when this document is proven to be written on shaky ground.
- Take a critical view. Deliveroo was given significant criticism of its work practices which led to fund managers declaring themselves uninterested. If someone else is trying to spin a different picture, ask why that might be.
- Wait and see. Investing right at the outset might seem exciting, but waiting for the market to make its value judgement of the share price might leave you with a cheaper entry point to ownership
If you don’t have the time to dedicate to research on a company IPO, you may want to stick to investing through a mix of funds and other diversified asset classes. Investing this way outsources the work of assessing the best investment options for a generally small fee.
Even if you own a fund that has invested in Deliveroo this will be done as one part of a larger range of company stocks that ensure you’re not overly exposed in one place. Investing for most people should focus on long-term diversified growth using a range of products that ensure successful wealth growth – with no gambles whatsoever.
If you’d like to discuss your investments or have any questions from subjects raised in this article don’t hesitate to get in touch with your financial adviser.
Is the UK the best place to put your money over the next decade?
With the economy rebounding and the vaccine roll-out gathering pace, experts are tipping the UK as an increasingly attractive place for investors to put their cash.
The UK has been unloved by investors ever since the Brexit referendum in 2016. But sentiment towards UK shares is changing as the economy begins to emerge from the pandemic. US fund manager GMO believes the UK will be the best developed world destination for investors in the next seven years, with British ‘value’ stocks of particular interest. Value stocks are companies that trade at share price levels noticeably below their fundamental factors such as dividend levels, earnings or sales.
Why? Firstly, GMO believes UK shares are undervalued. And secondly, it believes shares in other developed markets are overvalued to the point where investors may no longer be willing to pay the premium attached to them.
The S&P 500, for instance, reached an all-time high over 4,000 points on Thursday, 1 April. The UK’s investment case has also been bolstered by the fact its economy is bouncing back strongly from the pandemic.
An International Monetary Fund report on future economic growth release on 6 April said the UK was set to outstrip all other developed economies in 2022 – growing by 5.3% this year and 5.1% next year, higher than the US and EU. This would be the strongest annual GDP growth for the UK since 1988. The IMF says this predicted bumper bounce back from the coronavirus crisis is largely down to the Government’s spending blitz to support the economy and prevent long-term scarring. But there are other factors that make the UK an attractive destination for investors too. For example, one of the big drags on the UK’s collective share prices has been Brexit for the past half decade.
It would appear the country is putting this issue firmly behind itself as it has agreed a long-term deal with the EU at the end of 2020 and has already put pen to paper on other trade deals around the world. In the wake of Brexit’s finalisation, the UK is also trying to position itself as a future leader for tech company listings and attracting other new business to its valuable financial hubs. The Chancellor Rishi Sunak is looking at reforms to listing rules to make it easier for fast growing companies to float on the London Stock Exchange. The net effect of this, if successful, is that the UK could play host to some of the most attractive growing companies to invest in in the future.
There are however counter arguments to GMO’s position on UK markets. The FTSE 100 and 250 have performed admirably when considered over 12 months, but still sits relatively low compared to historic averages - it may be that the value drag caused by Brexit has become permanent.
It would require a significant bull run – and for the shine to come off other major nations’ markets -for it to outperform in growth terms. It is also an argument that GMO are not the first to make – for some time UK-focused fund managers have pronounced it to be the most-undervalued market in the world. The upswing has yet to materialise.
The make-up of the index is also an issue. It is not geared toward ‘growth’ in quite the same way, with many firms stronger in terms of dividend income rather than exponential growth. This is partly why Rishi Sunak wants to change the constituents of the FTSE with more tech, but how easy it would be to unseat the incumbents is unclear.
Of course, nothing is certain. While the aforementioned factors all play into a positive outlook for the UK, there are always going to be bumps along the road.
If you’d like to discuss your investment options in the UK or anywhere else more, don’t hesitate to get in touch with your adviser.
Tax Day 2021: inheritance tax changes and tax-as-you-go self-employment on the cards
Tax Day 2021 was hyped up for big changes to the tax system, but instead households were given small tweaks.
Households were braced for a series of tax hikes on so-called ‘Tax Day’ earlier this month – but their finances were left largely untouched. After Chancellor Rishi Sunak’s Budget on 3 March led with a raft of allowance changes, the rumour mill began churning once again as the Treasury announced its intention to publish tax-related measures on 23 March.
What was announced?
The most concrete announcement from the Treasury related to the reporting of estates for inheritance tax (IHT). Currently all estates have to file paperwork to HMRC whether or not they fall above or below the thresholds for paying IHT. The Treasury has scrapped this requirement for estates that sit below the £325,000 threshold to pay. The Treasury says as a result 90% of estates will no longer have to fill out IHT forms but in practice this is a little unclear as it hasn’t explicitly said what the requirement will be to fill one out. With plans to be implemented by 1 January 2022, households will have to wait and see for more detail.
The taxation of trusts was also raised in the update. The Government has been looking at how trusts work for tax purposes with a view to potentially cracking down on some of the methods used to avoid paying more tax from estates. It has however decided to back away from making any changes thanks to what it sees as a lack of ‘desire for comprehensive reform’. While less often used as a means to avoid tax these days, trusts do have some IHT advantages. Individuals can set up trusts worth up to £325,000 every seven years as a means to avoid paying any IHT on that amount of their overall estate without incurring a 20% charge.
Elsewhere, inquiries into changing the way self-employed people pay tax and a closer look at tax avoidance schemes have been announced. While neither of these offer concrete policies, both indicate a direction of travel in government when it comes to obtaining people’s tax in future.
If you would like to discuss any of the themes in this article don’t hesitate to get in touch with your adviser.
How to spot and protect yourself from investment scams
Financial scams are at record highs. Here’s how to know the signs and protect yourself from a scammer.
The number of investors duped by fraudsters into handing over money for fictional investments skyrocketed by nearly a third (32%) last year, new figures reveal. In a bombshell report on financial fraud in the UK, trade body UK Finance reveals nearly 9,000 victims lost more than £135 million to investment scams last year. Not only are investment scams an increasing problem, but also, they can be devastating for the victims. According to Action Fraud, the UK’s fraud reporting service, victims of investment fraud lose more than £45,000 each on average.
Below we set out what investment scams are and how you can avoid falling for them.
What is an investment scam?
An investment scam is where a fraudster tricks a victim into transferring them money to pay for an investment opportunity that doesn’t exist. Typically, scammers try to persuade you to invest in property, fine wine, crypto currencies or any other asset, usually with the promise of sky-high returns. Once the victim makes a transfer, the scammers run off with the cash and the victim never hears from them again.
How do they trick people out of their money?
Fraudsters use incredibly sophisticated and elaborate methods in order to trick investors out of their cash. To seem legitimate, scammers often steal the identities of genuine, reputable companies, which is known as ‘cloning’. That way, victims think they are dealing with the genuine firm. Criminals tend to target their victims by cold calling and using high-pressure sales tactics to persuade them to part with their cash. Crooks also use a technique called ‘spoofing’ during phone calls which makes the number they are dialing from seem genuine - as if it were from your bank - when it isn’t. It’s also not unusual to see scammers use social media, email or even letters to hook their victims. In most cases, the crooks will try to force the victim into action by claiming there is only a small window to invest before the opportunity disappears.
How to avoid becoming a victim
- Reject unsolicited approaches
The most effective way to guard yourself against investment scams is to avoid all unsolicited calls and emails encouraging you to invest your money. Put simply, if you get a call out of the blue, hang up; and if someone emails you, delete it and don’t click on any of the links.
- Do some digging
If you are approached by a firm you are familiar with – say, your ISA or pension provider – check it is really them before parting with your cash. For example, you can call their customer service line to find out if the offer is legitimate. However, if you are emailed an offer, don’t call the number in that email – it might be fake. Search for the number instead on the company’s website.
- Use ScamSmart
If you think an investment or pension opportunity could be a scam, use the Financial Conduct Authority’s ScamSmart test. After just a few short questions, the test will tell you whether or not you’re at risk of being defrauded.
- Report it
If you think you’ve spotted a scam, report it so others don’t fall for it. You can do that by calling Action Fraud on 0300 123 2040 or by using its online reporting tool.
NS&I Green Savings Bonds: what are they and will they offer a good return?
The Chancellor’s Spring Budget unveiled a new savings scheme from the Government’s National Savings & Investments (NS&I) arm, focusing on ‘green bonds’.
Green bonds are a new form of investment issued by governments and companies which aim to use the proceeds to improve the environment. This can manifest in a broad range of ways – from investing in clean energy facilities to helping carbon-intensive companies reduce the levels of pollution they create. As with government bonds, if you invest in these you agree to effectively lend the government money for a set period of time, in exchange for an interest payment. At the time of writing, detail is still fairly scant on what kinds of green bonds will be available, how much they would pay in interest, or how long you might have to stow your money away for. But there were hints in the detail of the Treasury’s announcements that suggest these bonds may be more competitive than current dismal rates.
Dire savings market
The savings market has been in decline, in terms of rates on offer, for years. But this dire situation has been accelerated by the coronavirus crisis, seeing many savings accounts now paying as little as 0.1% interest. NS&I’s products are no different. In the second half of 2020 the Government-backed savings provider slashed its own rates to all-time lows. This was ostensibly done to discourage households to hoard their cash and encourage spending to help the economy and is not a new concept during crises.
Sovereign green bonds
The new green bonds are being introduced here, and by other governments, to support what is being called the ‘green recovery’ and includes the recent announcement of green sovereign bonds, also confirmed in the Budget. These bonds will be sold to investors as ethical, environmentally focused investments. But the Government, not content with offering such assets to professional investors, also wants consumers to have an option to put their savings towards meaningful green initiatives. The consumer-focused NS&I bonds will be 100% government guaranteed, but there is little detail as to whether they will offer a meaningfully better rate than normal non-green NS&I accounts. The Treasury has said, however, that these deposits will sit outside the normal remit of NS&I deposits, which could imply a different set of goals in terms of how much it tries to attract.
Alternatives
Speculation is rife over what rates will be offered. That being said, it is highly unlikely the bonds will pay significantly more than the current NS&I savings products, especially when the Government is providing 100% guarantees and the rest of the savings market is so poor.
There is no concrete timeline for these accounts to launch either, with NS&I sticking to a “coming soon” position for now. In the meantime, if you’re keen to invest your savings with the planet’s greater good in mind, there are a range of alternative ways to do so.
Please get in touch with your financial adviser to discuss the options for ethical investing.
Reddit, GameStop and the new retail investment army – why chasing ‘trends’ is best avoided
January saw one of the most widely covered stories for years in financial markets after a group of online retail investors clubbed together to, in their own words, “take on the hedge funds”.
The story goes like this: A retail investor and some like-minded fellow traders got chatting on popular internet chat forum Reddit, and noticed that a number of hedge funds were betting on the price of a retail business’ shares falling (a process known as “shorting”).
The retailer in question, GameStop, is a little-known business outside the US. The firm has been suffering the same as many retailers in the pandemic, with a huge reduction in customers in its stores.
The traders, fuelled as much by boredom as anything else, decided to start buying up as many shares as they could in GameStop, in one of the very few incidences ever of co-ordinated retail investor behaviour.
As the shares started to soar, more and more people flocked to join them but, crucially, the vast majority of them held on to their shares rather than sold them as the price started to rocket.
On the other side of the equation - the hedge funds that had bet on the company’s shares falling -started to lose millions of pounds as GameStop’s share price rose more than 800% in a week.
GameStop was not the only company under the microscope, with other businesses, and even commodities shorted by the assortment of hedge funds then targeted by this same army of retail investors, with similar outcomes.
Did the retail investors win?
The saga continues. Following the huge rise in share prices of these businesses, regulators stepped in to monitor the situation. The ability of retail investors to actually trade the shares via popular US platforms such as Robinhood was then curtailed as the firms halted trading of GameStop and its peers for a time.
The outcome of this was swift. From its peak price, GameStop shares crashed back down to earth, losing around 80% of their value.
However, whilst that sounds like the end of the story, a week or more on the situation is not yet resolved. Trading restrictions have been lifted on a number of platforms, and while share prices are back near where they began, there are some renewed signs of activity as traders locked out of the market are allowed back in.
Lessons learned
The big lesson here is about trends and hype. It can be tempting to jump on the bandwagon when it comes to investing, buying something because it is soaring in the hope of making a quick return.
However, the whole event flies in the face of long-term wealth building. The actual true valuations of these businesses have not been contemplated by the retail investor army buying up shares – everyone was simply jumping on the bandwagon to push the price higher.
There are examples of this time and again across markets, and more often than not the end result is the same.
The best way to approach investing is to have a clear plan, make sure your investments are aligned with your end goals, and to avoid making short-term decisions.
Your money is typically invested for the long term, and your investment approach should reflect this. Otherwise, you can end up like those unwitting buyers of GameStop shares just before they collapsed.