There’s nothing to sharpen the investing mind like being down thousands of pounds.
I think it’s therefore fairly safe to say that there will have been more than a few This is Money readers with very sharp minds at the end of last week thanks to coronavirus.
The stock market’s hard and fast daily falls were reminiscent of the days of the financial crisis and the question investors were asking was, ‘do bull markets die of coronavirus?’.
The jury’s out on that one after a bounce back this week – but I remember those from the financial crisis too – and we won’t know if it’s curtains for the ageing bull for some time.
The FTSE 100 took a heavy fall last week, dropping 11 per cent and entering a correction phase – defined as a fall of more than 10 per cent. But how worried should investors be?
What seems clear to me as an investor, however, is that moments such as this are a helpful reminder to have a think about what you are doing.
To that end here are five things to think about when investing through a crisis:
Don’t panic sell
This is so obvious it shouldn’t need saying, but it does. The temptation to dive in and start selling when the market has fallen 15 per cent from its peak is very strong.
Sure, the investment world’s experts tell you, ‘it’s time in the market, not timing the market’, but then they would say that, wouldn’t they? The investment world has a vested interest in you remaining invested.
It’s all very well saying don’t panic sell when the market is down 10 or 15 per cent, but what about if it ultimately falls 30 or 40 per cent?
Even if this is your line of thinking, the thing is that it’s impossible to know if this is a big one or not and you may miss prices rising again.
At the end of last week, my investing Isa account was down 12 per cent. Ouch. At the time of writing, the stock market’s gains this week mean that loss has been trimmed to 8 per cent. Ditching investments would have meant missing that rebound.
Plus, if you panic sell, then you are also likely to panic buy.
Check your investment mix is right for you
Who knows if the bounce back will last? But it does buy you some breathing space and a sensible move is to check that your investment mix is right for you.
That involves working out the risk you are taking vs the risk you are comfortable taking. For many of us, last week provided a nice fresh reminder of how those two things marry up.
An investment portfolio needs to be balanced and like a decent football team be able to defend and attack. If you’ve got an entire side of high octane shares, funds and trusts, but can’t afford to take big losses, it is time to open the transfer window.
Smaller companies, large overindebted companies, high growth companies, or junk bonds are among the risky stuff; government bonds, Steady Eddie firms with low debt, strong cashflow and resilient business models are the generally safer stuff.
Most people hold collective investments in funds and trusts, check them accordingly.
Check your investments themselves
In a perfect world we would all do an annual stock take of our investments, evaluating whether there is still a case for holding them, if we’d buy them at today’s price, and checking they don’t take up too much of our portfolio.
If you do that, well done. If you don’t and have a jumble of stuff you’ve bought over the years, then you are like me and most other investors. Now is probably a wise time to do that spring clean.
Coronavirus has rattled investors as it has spread from China, into Europe and now the US
What’s your safe haven?
This is difficult issue that I could write an extra few thousand words on (good news, I won’t today). The big problem is the bond market and low interest rates. Top grade government bonds – think UK gilts and US Treasuries – are meant to be a safe haven for investors. They are the brake that kicks in as your portfolio heads downhill fast.
Generally speaking, when shares slump, bond values rise (this is typically discussed in terms of their yield, which falls as the price rises). That worked last week. The issue is that with interest rates and bond yields so low and debt so high, there are serious concerns about how effective a safe haven they are. In addition, highly volatile bond yields mean you could get sideswiped in a rebound.
The good news is that as a personal investor you have other safe havens on offer. A good old cash savings account is one of them.
You can get 1.3 per cent on easy access or up to 1.6 per cent on Investec’s 95 day notice account. UK ten-year gilts are at 0.36 per cent. The yield’s not the sole point and the capital in the savings account won’t rise in value beyond the interest paid, but it should be protected up to £85,000 by FSCS.
Ageing bull: Led by the US, markets have been rising for a decade since the financial crisis and investors are worried that the bull market’s time is up
When do you buy?
Some cash in a savings account also buys you options and one of those is the decision to buy when you think markets have fallen far enough.
I would argue that this is different to trying to time the market, buying dips and selling falls. This is a more a long-term strategic move, which involves deciding at what point share prices have fallen so far in a bear market that you are willing to take a sizeable bet there are good future gains to be had.
A magic number that I’ve had in mind for some years is 30 per cent. If markets drop 30 per cent, there is every chance they could fall further, but history shows that when the falls end there is usually a strong rebound.
I’m investing for the next 20 to 30 years, so if that day arrives I feel happy taking the risk. Not everyone will feel the same.
To go back to an earlier point, making sure your risk is right for you is essential.
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