Investors could be forgiven for being a little on edge. Financial markets have been on a rollercoaster ride this year. The value of the UK’s biggest 100 companies has plunged by a fifth – with sectors such as leisure, tourism and some retail on their knees.
There are likely to be more stomach-lurching moments ahead as we hurtle towards a messy US presidential election, further disruption from Covid and a possible No Deal Brexit. But for investors who can live with market volatility, the next few months could present some good opportunities.
And besides, what is the alternative? A savings account was once a viable option for those wanting to produce a return on their nest eggs. Today, stick £10,000 in an average, easy access account and at the end of the year you will have earned a mere £22 in interest. So what should nervous investors do?
Nervous: If you want to play it safe during an economic downturn, invest in the companies you feel confident will make it through
INVEST IN THE GIANTS…WITH DEEP POCKETS
If you want to play it safe during an economic downturn, invest in the companies you feel confident will make it through.
These are likely to be large companies with chunky cash reserves that households will use whatever the state of the economy. David Coombs is head of multi-asset investments at wealth manager Rathbones. He says such companies include Alphabet, Amazon and Coca-Cola.
He adds: ‘Large pharmaceutical and healthcare companies could also make sound investments. If they have good cash flow, they can afford to be flexible and adapt, so long as they have management with the right skill set.’
Investment fund T Rowe Price Global Focused Growth Equity has stakes in Amazon, Mastercard and Samsung. The ongoing annual charge is 0.88 per cent and it has turned £100 into £294 over the past five years.
DIVIDENDS WILL GIVE A STEADY RETURN
Investors generate a return in two ways. One is buying shares in companies that go up in value and the second is earning a cut in company profits, known as dividends. Investing in some companies that pay dividends means you’re less reliant on share price growth to make a profit.
Emma-Lou Montgomery is associate director of Fidelity Personal Investing. She says: ‘For share investors, dividends are always a popular way of getting a more steady total return, especially if the dividends are reinvested.
‘For example, Invesco Global Equity Income targets dividends across the world, helping to diversify the income it pays. So you’re not reliant on any one sector or market.’ The fund currently yields 2.64 per cent and the ongoing charge is 0.92 per cent.
AVOID INVESTING ALL YOUR MONEY AT ONCE
A nervous investor’s greatest fear is putting all their money into the market just before a big correction. There is no failsafe way to guess when the next sharp market fall is coming, however good an investor you are.
So, to ensure that you can sleep at night, the best thing is to drip-feed your money into stock markets.
That way, there is no risk of investing all of your money just before markets fall; you’re buying when markets are rising and falling. Do this and a falling market may even be good news, explains Damien Fahy, founder of personal finance website MoneytotheMasses.
He says: ‘In investing regularly, you benefit from the power of pound cost averaging. In other words, you acquire more units or shares for your money as you drip in money on the way down, boosting your return when markets eventually recover.’
COME UP WITH A PLAN…AND STICK TO IT
Part of the stress of investing can be watching financial markets swinging this way and that – and trying to work out how to react.
To eliminate such worries, devise a plan and stick to it, regardless of what markets do. Decide what you are going to invest in according to your appetite for risk, when you are going to put money in the market, and don’t get deflected by market noise. Such an approach takes the stress out of trying to work out if you are investing at the right time,’ says David Coombs. ‘Invariably, people get it wrong if they try to time the market.’
Having a plan also reduces the temptation to panic and sell when markets have fallen. Such a move crystallises losses and means investors miss out on any subsequent bounce back in markets.
TRY TO KEEP A MIX OF EQUITIES AND BONDS
IT’S vital to be aware of the fact that if everything in your investment portfolio is doing well, alarm bells should be ringing.
A portfolio that can ride out a storm should be diversified with a mixture of assets – both bonds and equities. That way, even if some parts of your portfolio lose value, others should hold up better.
‘There will always be winners and losers in bouts of market volatility such as during the sell-off when Covid first hit,’ says Fahy.
‘During the market sell-off in March, UK gilts rose in price by more than two per cent while most equity markets fell by around 30 per cent. A significant exposure to bonds will help reduce the volatility of a portfolio.’
SIX STEPS TO BOOST YOUR WEALTH
Investors are beholden to the ups and downs of financial markets – but that doesn’t mean they are powerless. Here are six tips to guarantee a boost to wealth.
1) Invest within an Individual Savings Account (Isa) wrapper and you can keep every penny of profit. Fail to do so and you may be liable to tax on dividends, interest or capital gains. Everyone has a £20,000 Isa allowance each tax year.
2) Put £80 in a pension and it will be worth £100 straight away – before you even start thinking about investment returns. That is thanks to tax relief on pension contributions. Higher rate taxpayers only need to invest £60 in a pension to get a total contribution worth £100.
3) If you are aged between 18 and 40, you may be eligible for a Lifetime Isa. These give a 25 per cent bonus to your savings, up to £1,000 a year. Savings can only be withdrawn to buy your first home or when you’re aged 60 or over. Lifetime Isas can hold both cash and stocks and shares.
4) Parents tend to be cautious when investing for children, but this is often when you can most afford to take risk. Children’s savings have years to ride out market highs and lows. Under-18s have a £9,000-a-year Junior Isa allowance, which can be put in cash or stocks and shares.
5) If you really want to turbo boost a child or grandchild’s savings, open a pension for them, as children also benefit from tax relief on pensions. If you want the yearly maximum of £3,600 to go into a child’s pension, you just have to pay £2,880 and Revenue & Customs pays the rest.
6) Watch out for fees, as the investing process is riddled with charges. You pay a monthly or percentage fee to the wealth platform where you hold your account, additional fees to fund managers, fees for buying – and fees for selling. These can add up to tens of thousands of pounds over time so watch out and make sure you are getting good value.
Fahy and Montgomery both like Vanguard’s range of LifeStrategy funds as a low-cost way of getting exposure to a mix of equities and bonds. There are five such funds, each with a different ratio of equities to bonds. Annual charges are low at 0.22 per cent.
Montgomery also suggests that nervous investors should consider investment trusts with a focus on capital preservation.
‘While no investment can promise to eliminate the risk of losing money, there are trusts you can buy that provide a bit of ballast in rocky markets,’ she says.
For example, Personal Assets holds safe haven assets such as gold while RIT Capital Partners has a focus on capital preservation. An investment of £100 in Personal Assets investment trust five years ago would be worth £142 today – annual charges are 0.9 per cent.
RIT Capital Partners has generated a return of 27 per cent over five years and has annual charges of 0.68 per cent.
ENJOY THE RIDE AND DON’T FEAR LOSES
Ups and downs are all part of investing. If you have a strategy that you are happy with and are investing for the long term, sometimes you just have to ride it out. If that involves not constantly checking your portfolio, so be it.
Alan Higgins, chief investment officer at Coutts, puts it candidly. He says: ‘Investors need to embrace losses. Short-term losses are part of investing.’ Emma-Lou Montgomery goes further. She believes volatility can sometimes ‘be your best friend’.
‘Investing during volatile times is key,’ she says. ‘Amid the market storm, a glimpse of opportunity can emerge and it is important to keep your eyes open and be positioned to take advantage of this.’
STILL WORRIED? ASK IF YOU SHOULD BE INVESTING
If thought of your investments are keeping you up at night, consider whether they are right for you.
For a start, all investors should have a good three to six months of outgoings in cash before they consider investing. Next, check you are not taking on too much risk. ‘If a market drop of 40 per cent in the next three years would have an impact on your lifestyle, you shouldn’t be investing in the first place,’ says David Coombs.
If you do choose to invest, make sure you are making use of every tax-free allowance to boost the chances of your savings growing, such as pensions and Isas.