Survival is more important than profit

Protect your money until the world market repercussions settle, but beware of bolting into gold, for you could embark on a false trail

I have long argued that it would take a totally unpredictable cataclysmic event to break world markets. In the event, it has taken two events, of different quality and effect. The first was the end of the dot.com boom, which has driven markets on the downward path for the past 18 months. Last Tuesday, the second and possibly conclusive event happened.

I have long argued that it would take a totally unpredictable cataclysmic event to break world markets. In the event, it has taken two events, of different quality and effect. The first was the end of the dot.com boom, which has driven markets on the downward path for the past 18 months. Last Tuesday, the second and possibly conclusive event happened.

The spectacular terrorist attacks on the Pentagon and World Trade Centre has frightened the rest of the world, and stock markets have reacted accordingly. The fragile skin of confidence needed to sustain share prices has been broken, despite the recovery later in the week, and it will take some time to repair. This will affect nearly every corner of the business world, but among its most prominent victims will be personal finance.

Trying to make the best of your money suddenly seems slightly irrelevant when thousands of people have been so callously killed, and that mood is bound to pervade investors, fund managers, professional advisers, banks and everyone involved with taking care of savings. But life goes on and decisions have to be made, as our main front page article says.

Survival will become more important than profit, protecting money more important than maximising it. Anyone inclined to put money into the stock market may, after Tuesday, wince and think again. Multiplied several million times over, that adds up to a huge drag on asset values.

While most immediately pending house purchases will continue, it will be difficult to measure the intangible effect of decisions not to go out touring estate agents' windows and visiting prospective properties. That could, in turn, encourage would-be sellers to cut prices, conceivably bringing the boom in UK house prices to a sliding halt. And, apart from the feelgood effect of rising house prices, every transaction brings a burst of economic activity, from repairs to decorations and furniture. The ripple effect could quickly spread.

It would be wrong to oversimplify this process, and at this stage there is still good reason to hope that people will shrug off Tuesday's shock and keep spending. Some might argue that in such a highly emotional atmosphere is almost a duty to do so, to prevent us talking ourselves into recession.

The stark knowledge that Tuesday's atrocities could slice 287 points off the FTSE-100 index is a frightening exchange rate, and now that we know maniacs are willing and able to crash planes into public buildings, there will for a long time be the fear of repetition.

This has already prompted the expected bolt into gold and other hopefully safer stores of value. Beware of this trend: it is a false trail. If enough people pile into gold, the price will surely continue to rise, for supply is limited, although the Bank of England sold 20 tons of it on Wednesday as part of its 12-month project to modernise our reserves by placing a total of 600 tons on the market.

But buyers can rapidly turn into sellers, and unless you are one of the first to the exit a large slice of your savings could be destroyed. Interest rates may come down as the authorities stimulate the economy, so variable-rate deposits such as bank accounts are likely to become even worse value.

To put some money into gilt-edged stock makes more sense. Treasury 8.5 per cent 2005 has a running yield of 7.45 per cent at the present price of £114, but you have to remember to sell before it is redeemed or you will receive only £100 per unit. Even then the total yield would still be 4.8 per cent, which may look a good rate in a year. And there will still be plenty of good company shares to buy, as long as you concentrate on well-known names in low-risk industries. It may sound trite, but we will all have to eat, so J Sainsbury, Tesco, Unilever and Associated British Foods should continue to prosper and therefore be suitable components of a tax-free individual savings account. Keep an eye on them, though: as Marconi and Marks & Spencer have shown, even in apparently normal times management can take its eye off the ball.

* Despite its problems over recent years, I hear changes are in the air at M&S Financial Services, the personal finance arm which for 13 years has marketed middle-of-the-road products aimed at its typical middle-of-the-road customer.

In the next few months the chairman, Robert Colvill, and David Towell the chief executive, are to retire. This may prove to be an opportune moment to update a pretty conservative approach, led in the early days by a fear at the highest level of damaging M&S by letting customers down.

Cynics will say that is no longer an obstacle, but M&S is probably doing its financial customers a disservice by not offering anything in savings beyond three growth funds and one aimed at high income. A European, emerging markets or, despite last Tuesday, a US fund would hardly be kicking over the traces. Car loans and a reasonably innovative house insurance policy have appeared lately, so the mood is clearly right for striking out into fresh ground.

Watch for a new management to use its honeymoon period to produce eye-catching initiatives.

William Kay is Personal Finance Editor of 'The Independent'