Why do many private investors hesitate to invest money in the stock market, only to kick themselves when they miss a surge in the price of shares?
According to stock broker Hargreaves Lansdown, 29% of people who chose not to put money into their stocks and shares ISA this year were too worried about market volatility as part of the Brexit process. It was the second most common reason after not having the money to spare.
Another 27% of them haven’t invested because they were worried about market movements caused by the pandemic. The FTSE All Share index is down 9% from pre-pandemic February last year. However, during that time, it has dropped 31%, before climbing 27%, dropping and then rising again.
The data came from a survey of 2,000 people by Opinium for Hargreaves Lansdown in January 2021.
“Since the onset of the pandemic, the stock market has been as volatile as a home-schooled teenager – and sometimes it has been as difficult to live with too,” explained Sarah Coles, personal finance analyst, at Hargreaves Lansdown. “When markets plummeted at the outset of the pandemic, some investors were worried into selling up and retreating into cash. Others held back from investing this year’s ISA allowance. However, being put off by volatility means missing out on potential long-term growth. The FTSE 100 is down less than 10% from the pre-pandemic levels, plenty of funds and markets are up over this period, and we’re only a year down the line.”
Investors are discovering, in the most hands-on way, that in the long term, everything passes. You might want to take advantage of the opportunities that volatility creates, but if you have a well-diversified portfolio and a long term investment horizon, sitting tight is a sensible way to ensure your portfolio is best positioned for recovery.
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Hargreaves Lansdown’s six strategies for volatile times
Check you’re happy with your level of diversification
The best strategy is to ensure you have a diverse portfolio that matches your objectives, and then hold on through the volatility for the long-term growth. However, don’t assume your portfolio is diverse: revisit it. Over time, growth in some areas and falls in others can unbalance it, so check you’re comfortable with your holdings.
Buy into long term growth stories while they’re well priced.
A falling market will drag almost everything lower, regardless of the prospects of the business, so when the market pulls back, there will be some companies you may want to take advantage of while they’re cheaper. Some will have had their prospects fundamentally altered by the course of the pandemic, but those with sound fundamentals offer a potential buying opportunity.
Protect your allowance right now: invest whenever you like
If you’re not keen to invest your entire ISA allowance right now, you can still protect your allowance. You can open a stocks and shares ISA and park the money in cash, then gradually drip feed it into stockmarket investments when it suits you best.
Drip feed cash into next year’s allowance
A useful approach in difficult times is to start regular savings into an ISA. You can make payments from £25 a month, and then top up with lump sums throughout the tax year when it makes most sense for your finances. Alternatively, you can spread ISA contributions through the tax year by investing £1,666.66 a month. This means your money goes further during the dips, and benefits through the rises.
Open a Lifetime ISA to bag the bonus – even if it’s with the bare minimum
If you’re 39, open a LISA and put a small sum of cash in it. You may not have plans to buy a first property, you may own a home, you may already be saving in a pension, and you may be worried by market movements – and all of those things may have put you off. However, taking out a LISA now protects your right to have one, and pay into it any time before the age of 50. It keeps your options open in case your plans change and you want to take advantage of the government bonus. Failing to take one out before the age of 40 means you have lost the opportunity altogether.
If you’re eating into your pension pot, consider ISA income alternatives
By far the best approach when you’re drawing cash from your pension is just to take the natural income it produces. However, over the past year, dividends have dropped, and some people will have nibbled into the capital instead. This can be very risky. You’re eating into a larger percentage of your pot when prices fall, and this will continue to have an impact even when it recovers. If you have ISAs alongside your pension, it gives you far more flexibility. You can draw the income tax free from stocks and shares ISAs to boost your income, or you could dip into cash ISAs to make up the shortfall, and refill the coffers when better times return.