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How to weather the storm with investment companies

9 April 2020

David Prosser tells us why we should keep calm and carry on.

As financial markets plunge amid the chaos of the Covid-19 pandemic, the natural response is to run for the hills. But resisting the temptation to panic at this time is absolutely vital – the rollercoaster ride we’re seeing on the markets right now is deeply unsettling, but for most people, jumping off will simply make a bad situation even worse.

Anyone investing in stock market funds is warned that their money can fall in value as well as rise. When we make our investments, such warnings often feel hypothetical; this episode is certainly a very nasty reminder that there really are bad times as well as good.

Nevertheless, unless your investment goals have changed, or you’re surveying a different timeframe than before, it makes sense to stick with your plan. For one thing, your losses in recent weeks are currently all on paper – you’ll only crystallise those losses if you sell up. Moreover, selling now will mean missing out on any recovery. The past isn’t necessarily a guide to the future, but there have been three occasions since the mid-1990s when a medium-risk investment portfolio has lost more than 15%; the average return over the next 24-month period was 24%.

Stick or twist?

Holding on to your investments is one thing, but surely you should abandon further plans for adding to your savings until the chaos has eased? Well, again, while this may feel sensible, it’s not the best course of action for many people. There will be savers for whom further saving is now out of the question because their financial circumstances have deteriorated, but if you can afford to maintain your investment, there are good reasons to do so.

Most investment experts swear by the advice that it’s time in the market rather than timing the market that counts. What they mean is that the stock market is too unpredictable to try and second-guess; anyone trying to call the top or bottom of the market will invariably be caught out, so buying and holding for the long term is a better way to operate.

Following that advice may feel especially difficult right now, but there are ways to calm your nerves. In particular, regular savings plans, where you drip-feed a set amount of cash into your investment funds each month, rather than investing a more sizeable lump sum upfront, can work very well.

The advantage of this approach is that you benefit from “pound-cost averaging”; in months where markets have fallen in value, your fixed investment goes further, and you bounce back more quickly as markets recovery. Regular saving in this way can smooth out some of the ups and downs of investment.

A shelter from the storm

It’s worth remembering too that 6 April marks the first day of the 2020-21 financial year; with it comes a brand new £20,000 individual savings account allowance, enabling you to shelter a broad range of savings and investments from tax. A regular savings scheme could also be a smart way to begin taking advantage of your new Isa allowance.

Investment companies could be a good option for many savers and investors as they work out how to continue accessing the stock market in these volatile times. Many platforms accept monthly contributions of £50, and almost all are eligible investments for your ISA.

Moreover, the structure of an investment company offers some valuable protections when markets are volatile. Investors buy and sell investment company shares on the open stock market, while the manager gets on with managing the underlying portfolio, free from worrying about inflows and outflows of funds. Importantly, investment company managers never have to sell assets in order to meet demands for cash from investors – anyone wanting their money back simply sells their shares on the market.

Also, investment companies are uniquely allowed to build up cash buffers, retaining some of the dividend income they earn on their investments. These funds can then be used to support dividends to their own shareholders in years when income is in short supply. That’s especially valuable right now, given the way so many companies are cutting their dividends, or abandoning them altogether.

The bottom line is that amid the storm, investment companies represent an opportunity not to be blown off course. Stock market investment isn’t right for everyone of course and it’s possible your circumstances have changed. But for most of us, the key right now is holding our nerve until the bad weather passes.

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