Stock market freefall at tax-year end: Don’t be put off investing your ISA allowance
When it comes to your ISA, you can be your own worst enemy. Many of us are creatures of habit – some of them bad habits.
Much like students cramming in work at the last minute before handing in a project, we wait until the end of the tax year to fund our ISAs.
If that describes you, then you’re not alone. Although many of our clients do save on a regular basis, at Vanguard we still see a surprisingly high number each year taking it right up to the wire on ISA deadline day.
But, then, we’re all busy humans, prone to a little forgetfulness and procrastination. We’re also driven by fear and greed. So when markets fall we tend to sell our investments and when markets are rising we buy them.
At the moment, it’s hard to avoid the negative news, as billions of pounds are wiped off stock markets around the world due to the coronavirus outbreak. But selling out when markets have fallen is not the right approach with a stocks and shares ISA, as with any investment.
I’ve been advising private clients for many years and behaviour tends to repeat itself. When the markets are down at tax year-end investors tend not to subscribe to their ISAs. It’s the fear instinct setting in. We all want to protect our hard-earned money. But if you were prepared to invest in, say, the FTSE 100 when it was hovering around 7,800, as many were, why not when it’s around 5,500?
Unless your circumstances have changed, neither should your investment policy.
At such times many investors will stick to cash. Now I’m a big supporter of cash – we all need to hold some. As a minimum we should all hold three months’ emergency expenditure in cash. For many, the figure will be higher.
But don’t think that holding cash is without risk. It’s not, as the graph below illustrates. Over time, inflation has the capacity to erode the value of the pound in your pocket (or bank account), especially when interest rates are as negligible as they are now.
Investors need to remember that bouts of heightened volatility are a normal part of market behaviour – the value of your investments can always go down as well as up, and sometimes they’ll do so aggressively.
I have seen many sharp market selloffs in my time. But I’ve also seen markets recover and enjoyed the fruits of an investment strategy that is right for me, is focused on my long-term goals, and helps me tune out the short-term noise, however loud and frightening it may sometimes be.
Yes, it’s hard to stay disciplined when stock markets are tumbling and there’s a whiff of panic in the air. But re-pricings are inevitable. It’s why we stress the importance of diversification, so you can weather these tough times and stay invested. By also being invested in government bonds, for example, many investors in recent weeks have been able to offset the impact of falling share prices as the value of those bonds have risen.
Panic and rash action are never your allies under these circumstances. Deviate from your long-term plans and you may well regret it later. Cash out and you may well find it impossible to know when to get back in. After all, the very best days in the market often tend to follow in close proximity to very worst days.
It’s why the best investment approach is to start by knowing how much risk you should be taking in the first place, so you can set your portfolio up to reflect that risk. Make sure your investments are globally diversified and split between equities and bonds. Keep your costs low too, so you keep more of your investment return.
Do all that and you’ll then be in a better position to navigate through these tough times, whenever they come, by keeping those unhelpful emotions in check.
James Norton is senior investment planner for Vanguard UK