Ahhhhhhhhhhh…FREAK OUT! Last week was a scary week for investors – especially young people who are relatively new to wild drops in the stockmarket. So how should young investors view the latest turn of events? Was this inevitable? How can you mitigate the risks? And when will it all blow over? We don’t have all the answers but we’ll try to set your mind at rest…
For anyone who has taken the plunge into investing, it has probably been a scary week. I mean, who knew that the FTSE-100 could drop like a stone in a few days, wiping off horrible percentages from shares and funds?
Well, older investors do of course. They’ve seen it all before, in 2002 with the dotcom burst, and 2008 with the financial crash. But for younger investors, this may be quite the novelty.
As always, the transformation of Coronavirus from a cruise ship bore to a possible full-blown global pandemic took stock markets by surprise.
Even a week ago, they hadn’t woken up to the potential damage that may well be caused by a sudden sharp slowdown or halt in normal economic activity. Last Monday the penny finally dropped and markets plummeted. And although there has been a weak rally, it may not last. Business as usual it ain’t!
Unfortunately, we can expect this market depression to last for some time. How long? Who knows. But since China has more or less shut down economic production, that is bound to have an deep effect on businesses, consumers and investors. Global supply chains are intimately wrapped up in China’s ability to be swift and efficient (ruthlessly so) in producing goods. When that stops, we will all slow down, to some degree. And the old adage that when China sneezes, the rest of the world gets a cold has taken on a rather unfortunate new meaning as of this last week.
So that’s it: investing is a mug’s game, you can lose 10% of your savings in a week, it’s all too stressful, why bother?
This may be an (understandable) reaction among those who are new to long-term investing or have been considering it. And for those of us who did jump in the pool when waters were calm and not a virus in sight, what do we do now?
Take a chill pill
Well, for a start we should take a step back from the hysterical headlines and social media mayhem and think back to when we started on our investing journey. What were we trying to achieve, what was our strategy, and what level of risk were we ready to face?
We know that markets don’t go up in straight lines, that we have to expect volatility at some point and that it’s going to (even slightly) mess with our heads. That’s what riding the roller-coaster is all about – and who would jump off into the nearest bush on the first downward lurch? The fact is that you should be investing for at least three years and preferably five or more anyway.
Thinking about this stuff should help steady the nerves. Yes, you’ve got to be in it to win it – but that takes time. And if you have time on your side (which most young people do), there is no reason to panic or to sell investments.
Chances are that – like me – you will have bought in at higher prices than today’s. So yes, it looks like you’re losing lots of cash. But you’re not – until or unless you sell.
Now I’m not going to pretend to know how low this will go, or how soon it will whoosh or crawl back up. But I’ve decided to hope for the best and prepare for the worst.
For starters, I’m already dripping money into my Lifetime Isa once a month on the same day. Most of us who are saving or investing for the long-term are doing so to buy property (though my LISA is effectively my pension, as a freelancer who misses out on a workplace pension). That means we should all be embracing the LISA – even if it’s not perfect – as a long-term vehicle for our house deposit.
Drip-feeding saves dealing costs and it also acts as a risk buffer because I’m buying my little selection of investment trusts at a different price every month. Come March 10, it looks like I’ll be getting a lot more shares for my money than I did on February 10. So that’s a win right there.
Now it’s time for an investing confession. On February 10, I read the Doomsday columns in the media, looked at my stocks and shares Isa and sold my biggest holding which was showing a profit. I feared it would be particularly vulnerable if things deteriorated – which they did soon afterwards.
Yes, I’m feeling a bit smug now but really, it was a lucky hunch. Only a minority of people in early February were forecasting how widespread the economic disruption would be. But it’s also a lesson in managing your emotions. I didn’t freak out but I did make an assessment that it was better to quit while the going was good rather and lose out on further possible gains, rather than wait for my profit to be wiped out altogether. Gordon Gekko was wrong: it’s not greed that’s good, but gratitude.
So while this may seem like shutting the stable door and all that, a wise strategy for the future would be to consider ahead of uncertain trends like an unpredictable virus whether you can exit with profits early, regardless of whether the market still looks very upbeat.
Don’t get me wrong: I’m not rolling in it. A couple of other things in my Isa – mainly defensive exchange-traded funds – are about level. The rest are well under water. And I might consider buying a little more of these riskier trusts when I think their prices are rock bottom – but of course I won’t know, because as the saying goes a bell doesn’t ring at the bottom (or indeed the top).
I’ll just have to take a call about how far the virus has gone, whether it has any road left to run and most importantly, whether the market will quickly latch onto any signs of improvement.
Hold on tight
What I think we can say with certainty is that things will get worse before they get better. But they will get better – and you want to be ready to take advantage.
The big Isa platforms went very quiet at the beginning of last week, probably stunned at the sudden turn of events. But they were out in force again by the weekend, dispensing their usual advice to us investing foot-soldiers – do nothing, sweat it out, all will be well. And TBF, they’re right.
It could take some time. Some economists are cheerfully assuring us that the world economy will escape recession and all will be back on cruise control by later in the year. Hmm.
But investors who sweated it out in 2008-9 after seeing markets crash by 30% were rewarded with a whopping 30% rise in the following 12 months. The silver lining in times like these (at least for investors) is that once the darkest hour is over, there will be light, and stock markets do generally rise like a phoenix from the ashes.
My moral? There’s ALWAYS heat in the kitchen but hey, you still want to cook up your own future prosperity, no? It’s better than constantly being in short-term mode with our finances, playing safe and getting screwed over by low interest rates.
Plus, it’s times like these that will force us to face our inner demons of investor psychology, and harden us up for the future. Hang on in there!
My quick tips for managing your investments:
- Keep reading. Take on board journalists and experts who provide detailed assessments of what’s going on to help you make a judgement call.
- Keep drip-feeding at low prices if you can. It’s counter-intuitive I know but it will help to set you up for that (eventual) market recovery.
- Hedge with safe havens. My portfolio is being balanced out a little with defensive exchange-traded funds, one tracking gold, that are holding up well right now.
- Get a handle on costs. Now more than ever, you need to keep an eye on trading costs. I switched my Lifetime Isa from Hargreaves to AJ Bell last year to net big savings. AJ Bell charges investors 0.25 per cent on the value of the fund and listed assets investors buy, capping that fee at £30 per year for listed investments. Hargreaves Lansdown charges 0.45 per cent and caps that cost at £45 for investors buying stocks, shares and investment trusts.
- Suspend if need be but DON’T pull out. If you need to suspend payments into your LISA, do it. But under no circs should you pull out altogether, otherwise you pay that massive 25 per cent penalty that’s simply not worth it.
- Banking gains is nice – but sticking to your game plan is better. Don’t beat yourself up if you didn’t anticipate last week’s events. Stay on your grind and remind yourself why you’re doing this with my LISA piece for the Financial Times last year.