Page last updated at 10:34 GMT, Friday, 10 October 2008 11:34 UK

What do market moves mean for you

By Kevin Peachey
Personal finance reporter, BBC News

Wall Street trader
Traders are not the only ones worried about the falls

For many people the operation of stock markets across the world will be quite a mystery.

But the fluctuations of share prices affect all of us - often in a more direct way than consumers realise.

At the start of trading on Friday the FTSE 100 share index plunged about 10%, falling below 4,000 points for the first time in five years.

There were also falls across the world - in France, Germany, Australia, Hong Kong, Singapore and Russia, as well as in Tokyo and on Wall Street.

BBC News has spoken with a number of experts to explain the effects on us all.

Surely all those yelling traders have nothing to do with me?

Wrong. Their actions will affect your pension, your child's nest-egg, your investments and probably the value of your home.

Unsettling as it is, the world is not going back to living in mudhuts
Financial adviser Jason Butler

"The nature of capitalism is affecting everyone in their living room to a stunning degree at the moment," says Dane Halling, of Arcturus Investments.

His financial advice firm is named after the third brightest star in the sky. Many might be looking to the heavens to guide them at the moment because future moves in the markets are very difficult to predict.

But we shouldn't panic, according to Jason Butler, of Bloomsbury Financial Planning.

"Unsettling as it is, the world is not going back to living in mud huts," he says.

How might I be affected in the short-term?

The "ripple effect" of a downturn in the market has an effect on house prices, says Mr Halling.

As well as traders becoming less wealthy and so less likely to buy homes, the shrinking possibility of borrowing and less job security also slows down the housing market.

In recent years, employees might have been paid bonuses in shares. People might have held onto shares handed out to customers when building societies demutualised in the late 1990s.

Any share-based investments such as shares ISAs or endowment policies will have been cut in value. There are worries for people who use endowment policies to pay off their mortgage.

But trying to cash them in early will cost you money.

It is always worth remembering that investments are very different from savings in a bank account - they can go down in value as well as up, especially in the short-term.

Perhaps most affected by this latest slump are those who are set to retire soon.

Ok, so what about pensions?

Some 60% of an average pension fund is invested in shares.

People with personal pensions and on the cusp of retirement will be pulling money out of the stock market in order to buy an annuity - your income in retirement.

Tom McPhail, head of pensions research at Hargreaves Lansdown, says that those buying an annuity now will have an annual sum until death that is 15% less than it would have been a month ago.

This could lead people to delay their retirement.

The latest you can leave it to buy an annuity is the age of 75. The government says it may consider a temporary suspension of this deadline so people of that age can wait for their funds to recover.

Others have pensions in a final salary scheme. They are safe because their employer covers the risk.

But over the long-term, if the markets continue to struggle, employers may be quicker to close down these schemes to new members.

Any other long-term effects?

Children born in the UK after September 2002 have a nest-egg being saved for them in Child Trust Funds.

These funds, which began operating in April 2005, will now probably be worth less than they were if they haven't been topped up by parents.

But youngsters cannot get their hands on them until they are 18, and so by then they may have grown in value.

Is that the same with all investments?

Financial advisers always say that investments should be for the long term even though, as Dane Halling says "we do not know what is on the other side of the valley".

Most people's funds are spread across a series of stocks in order to protect them if one plunges further than others.

Jason Butler says that people can "rebalance" where these funds are invested, but ultimately they will recover if investments are left for a number of years.

He points to the experiences of the late 1970s. If somebody invested 100 in shares on the London Stock Exchange in 1973, it would have only been worth 34 by the end of 1974.

But around four years later it would have been back in positive territory and by 1982, it would have been worth 300.

"It is the fool who jumps," says Mr Butler.


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