Do’s and Don’ts for ISAs during a crisis
Financial markets have seen extreme volatility as the impact of the coronavirus has hit business and industry far and wide. The FTSE 100 alone fell more than 30% in the first few weeks of the crisis though has already started to recover, being up around 15% from its lowest point on 23rd March.
Investors are naturally worried as they see the value of their pensions and investments plummet. With the a new tax year and a fresh ISA allowance, they may be questioning whether they should be placing their money in the stock market. There are many do’s and don’ts when market shocks occur. Here’s what you need to know:
Don’t sell up
More than one in five (22%) investors have already, or plan to, sell their investments altogether as a result of the Coronavirus crisis, according to a study by Opinium.
But the losses are only on paper. If you sell, you realise those losses. Unless you need the money you might consider staying put. If you did sell, it also raises the question where to put the money to access growth potential. Cash returns don’t keep up with inflation.
Do remember that markets always recover
History tells us so. Global markets have been through some incredibly rough times… and recovered. The UK recovered from the financial crisis of 2008, the bursting of the dotcom bubble and Black Monday in 1987. Experts say patience is key.
Don’t overlook a buying opportunity
A market fall can work to your advantage if you use it to buy cheap stocks. If you haven’t got any imminent need for your money, you can put it in the stock market and be confident that it will rise over the long term.
Many private investors are bagging bargain stocks. AJ Bell, which has around 240,000 customers, said its platform had one of its busiest days ever during March, with more people buying than selling.
The bargain hunting has continued with data provider, Calastone, reporting that a net of £2.6bn was invested in equity funds in the UK during April — the highest monthly figure on record and six times more than a typical month, it said.
Do use this as an opportunity to make sure your ISA or pension is well diversified…
…by owning different asset classes that each behave differently during market ups and downs. It’s possible to create a portfolio that can handle any inevitable market downturns, by minimising risk and smoothing out returns.
Investors’ money should be split between shares, bonds, cash and even alternative assets such as infrastructure, property or gold.
Don’t forget you might still receive dividends
While many companies have been cutting dividends lately, there are many companies that have impressive records on paying out through all kinds of markets.
Those with money in investment trusts might still see a decent income. A unique feature of these kinds of funds is that the manager is allowed to dip into a built-in cash reserve to maintain dividend pay-outs.
Alliance Trust and Scottish Investment Trust have more than two years of dividend payments stored away, according to broker AJ Bell. It says seven other trusts have built up enough reserves to cover their dividend for 1.5 years.
Do remind yourself that even with a crash your money is still better off invested
The Bank of England base rate has been cut to almost zero – 0.1% – to help the economic challenges of the coronavirus outbreak.
The returns you from cash sitting in a bank won’t even keep up with inflation. Unlike the stock market, cash is almost guaranteed to lose real value in the next few months and years.
Don’t let expensive platform charges reduce precious returns
If you have old pensions with high annual costs you might be paying hundreds of pounds in unnecessary fees. Consider transferring them to a lower-cost platform. Use our calculator to find the best one for you (robo-advice calculator here).
Do invest regularly
No bell rings at the top or bottom. A much favoured trick is to drip-feed money into your investments.
By saving a monthly amount into an investment portfolio you can smooth out the highs and lows in share prices because when they go up, the value of stocks rise, and when they go down your next contribution buys more.
It’s known as pound-cost averaging.
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