Fear amid the stock market tumult is understandable, but there’s little logic in it for long-term investors.
It’s the time of year when new investors might toy with the idea of opening a stocks and shares ISA for the first time, or when old hands top up their existing ISA before the end of the tax year. While market turmoil and headlines about a banking crisis might be unnerving, it can also be a great opportunity for those with a longer-term perspective.
The current market maelstrom was triggered by the collapse of America’s Silicon Valley Bank (NASDAQ:SIVB) (SVB). Doom-scrollers soon read that SVB was the largest bank failure in 15 years, since the global financial crisis in 2008. The collapse followed a ‘run on the bank’ amid signs it was insolvent, largely the result of poor risk management at the bank, too many uninsured deposits, and the forced sale of bond investments at a loss.
Hot on its heels was Credit Suisse (SIX:CSGN). The troubled Swiss bank last month reported its biggest loss since the financial crisis, and waning customer confidence escalated after its key backer refused to invest any more money. The share price crashed, and this weekend Swiss rival UBS (SIX:UBSG) stepped in to buy it.
It all sounds calamitous, but here are four reasons why current events shouldn’t deter you from starting your investing journey or continuing it.
Crash, bang, wallop
As former US defense secretary Donald Rumsfeld memorably said, “Stuff happens”. It does, and because markets never move up in a straight line, falls are an unavoidable part of investing. It’s tempting to think ‘I’ll wait until the market is calmer and then start investing’. But it’s impossible to know how long any period of calm will last and that another decline isn’t just around the corner.
To cut to the chase, it’s not possible for any investor to time the market perfectly, but time invested in the market will hopefully yield good results. The theory is that remaining invested over the longer term – at least five years, but more like 10-years-plus - smooths out all the inevitable ebbs and flows, and you achieve a decent return on your money at the end.
So, given investing is very much a long-term endeavour, the current storm over Credit Suisse and the wider banking sector will likely not loom large when considered over a long period of time.
Little by little
If you invest a lump sum in your ISA, it can be galling to see your savings decline because of market volatility.
If this sort of scenario gives you sleepless nights, you can limit volatility by spreading out your investment over a period of time. By investing regularly, you can benefit from what’s called ‘pound-cost averaging’. This is an industry term for a process that smooths out the fluctuations in the stock market over time. If you’re investing in a fund each month, for example, there will be times you buy when prices are low and other times when they are high. Because you’re investing the same amount of money, you get more units when the price is low and fewer when it is high.
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In a way, when there is a market dip or crash, you can try and ‘enjoy’ the fact that you are getting a ‘bargain’ on your investments that month. It’s certainly what investing legend Warren Buffett thought. While each individual stock reacts to events differently and while recover – or not – at different rates, the broader stock market typically recovers from setbacks over time. As I have written before, it is rare to lose all your life savings if you have chosen a well-diversified investment.
Spread your wings
Diversification is a key tenet of investing, and if your investments are suitably diversified, it helps reduce risk because you haven’t bet the house on one promising but unproven tech stock, for example, or a particular geographical region or asset class.
If you choose a multi-asset fund, the diversification part of investing is sorted because a professional fund manager will spread your money across sectors, assets (shares, bonds, etc) and geographies. interactive investor offers six Quick-start fund options - multi-asset funds that enable investors to get started quickly. There are three sustainable options for those who want to invest through an ESG (environmental, social and governance) lens.
If you prefer to handpick your investments, you will be responsible for the diversification aspect of your portfolio.
Buy, buy, sell, sell!
Rather than rushing to do either, it is vital to do some research before committing your hard-earned money to any investment. This is particularly true when it comes to buying individual shares, or equities, as they are more volatile than funds. A global multi-asset fund, for example, will invest in many different stock markets, assets and sectors, so while you will likely have some exposure to banks, this is balanced against all the other sectors, so you won’t be overexposed.
Lloyds Banking Group (LSE:LLOY) and other FTSE 100 bank shares, such as Barclays (LSE:BARC) and NatWest (LSE:NWG), are among the most-bought shares on the interactive investor platform. However, if you are going to buy individual bank stocks as a beginner, it’s important to do some research before deciding which ones to put in your ISA. Despite what you might think, banks can be very different beasts.
Before investing, be sure you understand a bit about the business, including liquidity. Liquidity is another piece of industry terminology, which means a bank’s ability to quickly access cash. It is important because if investors get spooked and rush to withdraw their money en masse, the bank needs enough liquid assets to meet customer withdrawals.
If an investment has fallen in value and you are tempted to cut your losses and sell, it is important to understand your reasons for doing so. Knee-jerk reactions to stock market events mean investors risk selling low, then buying high when markets recover. There are times when it is right to sell – perhaps you need to raise money, things may have changed at the company you invested in, market conditions might mean a particular style of investing is no longer popular. However, if it’s none of these, often sitting tight and allowing your investment time to recover is a sensible course of action. As someone with a multi-asset fund, I wouldn’t sell because of short-term market volatility. It’s just time to avert my eyes, ignore the noise and wait until ‘stuff’ stops happening.
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.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.
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