With markets in a period of extreme volatility, interactive investor's head of personal finance shares some ideas to navigate the crisis.
Rule number one of investing is to do everything that’s within your control to make your financial position better. Rule number two of investing is not to react to the headline stories but to stay mindful of your own personal circumstances and (if possible) stay optimistic and continue looking for opportunities.
But rule two is hard as many investors are feeling less than glass half full after seeing a more than 30% drop in the markets since the start of the year.
It’s all very well trying to ‘be greedy when others are fearful’ but the surge of emotions we’re experiencing (not just relating to our investments) mean you might not feel like piling spare cash into the stock markets. Not everyone has the mindset of investment guru Warren Buffett, who coined the phrase.
Instead, here some practical things for the more fearful among us to do and think about while stock markets fall.
1. Keep your platform or provider costs low. Have you got old pensions sitting around that have high costs attached? Many people do and paying hundreds of pounds in unnecessary fees, which could cost them thousands in the long run. If this is you, take some time to track them all down and transfer them into a lower cost plan.
2. Use your tax reliefs. Pensions get an instant uplift on contributions in the form of tax relief – something to make you smile when your portfolio looks worse for wear. You don’t have to invest this straight away as you can keep it in cash. But the important thing is to make sure you use as much of your allowance as you can as if you don’t you’re missing out on free money from the government. The same goes for using your ISA allowances but while ISAs are tax efficient, they don’t benefit from the instant uplift.
3. Don’t rush into a decision. On paper your investments might look bad but remember that you haven’t actually lost anything (in the jargon, we say ‘crystallise your losses’) until you’ve pressed the button to sell up. If you’re feeling emotional – and many of us are, not just in relation to the markets, you’re likely to make a bad decision. Write down your thoughts about your investments and make sure you’re acting rationally and for the right reasons before you sell. This applies to buying too.
4. Time is on your side. There haven’t been many 10-year periods in the stock market when markets haven’t recovered. There’s not to say it couldn’t happen. But if you’re more than 10 years away from needing to draw your money out time is on your side. This will apply to those in retirement too – you’re not having to draw all your money today, only what you need to spend to live.
5. Consider drip-feeding your money. Putting a regular monthly basis into the stock market is a good option for those who are building up funds. It’s a useful discipline that benefits many investors in the long run. It will make sure that you buy in when you’re feeling like you may not want to and this could work to your advantage over an investing career.
6. Check your risk levels. If you can’t stomach a 30% fall in the markets that we’ve seen so far this year and it’s keeping you awake at night, maybe you need to have a rethink. It’s time to check that you have the right level of risk for your portfolio. Most people should make sure that they have exposure to:
- A mix of asset classes – equities, bonds, commercial property and gold.
- Different geographies – a mix of UK shares and overseas shares, including big developed markets such as the US, Japan and Europe, alongside bigger emerging economies such as China and India.
- Different sectors and company sizes – small, medium and large. Some sectors such as infrastructure and food will stand up better to a global recession. Do you have exposure to them?
7. Think about your whole financial picture. Are there assets aside from your pension that you could fall back on in a worst-case scenario in which markets don’t recover for more than 10 years? Maybe you were planning to leave your house to the kids. But most children would prefer their parents to have financial security over receiving an inheritance. You may think about downsizing options. Talk to your spouse – and your children - about it. Most families don’t talk enough about money and just having those conversations can relieve any stress.
8. Protect your family and dependants. It’s a worrying time for everyone and we need to think about the worst-case scenario. If you have financial dependants make sure your wills and life insurance are up to date. You may not even have a will – so time to get one. Check that your pensions have up-to-date details of the nominated beneficiaries. This might involve using an expression of wish form.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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