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Investors braced for more stock market falls

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Written by: Emma Lunn
18/05/2020
More than half of investors think UK markets will fall further in 2020, according to AJ Bell.

The FTSE 100 has been on a rollercoaster ride this year, reaching as high as 7,675 in January before falling to a low of just under 5,000 in March.

AJ Bell surveyed 2,412 AJ Bell Youinvest customers about the stock market’s prospects this year in the first week of May.

It found that half of investors think the FTSE 100 will end the year lower than its current level of about 6,000, while a quarter of investors think the FTSE 100 will end the year at about 6,000.

Laura Suter, personal finance analyst at AJ Bell, said: “Despite a rebound in markets since March investors still have a very gloomy outlook for the UK economy and think the worst is yet to come for stock markets. When asked if the worst of the current downturn is over, 51% of people think that there is more bad news to come and that markets will fall further.

“But there is still some optimism out there among investors: 39% of people think the market has seen its worst falls, while a particularly bullish one in eight people questioned think it will return to its previous high within a year. What’s more, just over one in 10 people think the FTSE 100 index will end the year above 7,000, including 2% who think it will sit at 8,000 or above – a high the blue-chip index has never hit before.”

Investors who think the worst is yet to come can prepare now for future falls. Here are AJ Bell’s tips:

Don’t put all your eggs in one basket

The recent falls in equity markets have been a wake-up call for many investors that they had too much risk in their portfolio – and too many of their assets in the stock markets.

“Investors who think bigger market falls are yet to come may want to diversify some of their money into other asset classes that may be less affected, such as bonds, infrastructure, other real assets and even cash,” advises Suter, “Look at how much you have in each sector, asset class and country and assess whether you need to rebalance.”

Check your concentration

As well as thinking of the spread between asset classes, investors also need to make sure they don’t have too much money in a handful of companies. This is trickier if you invest in funds and investment trusts, as you need to make sure they don’t have too much overlap in their holdings.

“For example, anyone with exposure to oil companies has been hit by the oil price war and subsequent plummeting oil price. This should be ok if you only have a small portion of your portfolio exposed to these companies, but if you discover that lots of your fund managers own these same stocks you’ll see a much bigger impact on your portfolio,” says Suter.

Assess what you’re investing for

If you think markets are going to be turbulent for a long time, you need to make sure you’re investing for the long term.

If you know you’ll need access to the money in the next couple of years, for example for retirement or to buy a house, you should think about gradually de-risking your portfolio so you’re not exposed to swings in the market when you need the money.

Invest in funds that protect against falls

Investors should consider shifting some of their fund exposure to fund managers whose investment styles could do well in a downturn, and help to protect their money during any falls.

According to AJ Bell, one option is the Personal Assets investment trust, run by Troy’s Sebastian Lyon. The £1.2bn trust invests in a range of assets including high-quality companies, short-dated government bonds, cash and gold. It currently has about  40% of the portfolio in US and UK Government bonds and another 10% in gold, meaning it is positioned fairly defensively.

“Mr Lyon focuses on avoiding loss of capital, as well as giving an instantly diversified portfolio in just one holding. So far this year the trust has grown by 2.2%, while markets fell by far larger amounts,” says Suter.

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