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Global stock markets wobbled this week beginning 05 February 2018, sending shivers down the spine of those with a large amount of savings in stocks and shares ISAs and pensions.
The fall in the US Dow Jones Index early in the week and subsequent partial recovery, then the following slump in European stock markets, brought to an end two years of relatively plain sailing for global stock markets, as well as bringing down the value of some investors’ portfolios.
It’s not such a problem for those who are not planning on cashing in shares any time soon – there are benefits to buying into the market at lower valuations after all. However, those approaching retirement or planning to cash in their shares typically have more to fear when markets head south.
A pension worth a healthy £200,000 could conceivably have lost 4 per cent this week – amounting to £8,000.
The impact on your stock market investments from a downward slide in values can be minimised, with some careful thought and preparation:
1. Understand the underlying causes
This week’s volatility was caused by investors predicting interest rate rises, following sharper than forecast growth for global stock markets and higher inflation. Bonds often perform better in times when interest rates are higher and there are a range of bond funds to invest in.
If all of your money is invested in the stock market, then all of your money suffers when the stock market slides. If, on the other hand, you have some of your savings kept in deposit accounts, sfor example, in peer-to-peer loans and some in, say, property, only some of your money is affected. It’s a good idea to choose some investments that are “uncorrelated” with the stock market, meaning their performance is not related in any way.
You should diversify within your stocks and shares portfolio, too, so that if one stock or sector or index falls, your other shares may still hold their value.
3. Moving steadily into cash
As you get older and closer to retirement age, it’s a often a good idea to reduce the risk in your portfolio by increasing the proportion of your pot held in cash and decreasing your exposure to equity markets. This is to preventagainst any sudden big falls in value a few days before you cash in (this happened to thousands of retirement savers in 2008).
4. Buying low
If you are wishing to invest more money into the stock market, a dip in values can be a great opportunity. The effect of “pound-cost averaging” is that you regular, long-term investors can benefit from a stock market that moves up and down more than one that is on an ever-upward trajectory.
5. Don’t panic
This should probably come first. “Don’t just do something, sit there!” said Warren Buffett. Panic selling in a market that is already on the slide means you are crystallising losses. Try to understand what’s happening first, before doing anything rash.
The views expressed in Money Means are of the writers and not the FSCS and should not be regarded as advice.
Rebecca O'Connor says the impact on your stock market investments from a downward slide in values can be minimised, with some careful thought and preparation