Is now a good time to invest (and other common questions)?
One of our Financial Planners, Bethany Wood, answers some common questions from clients about their existing investments and potential new investments during the COVID-19 pandemic.
Is now a good time to invest?
It’s human nature to be nervous, particularly at a time when we have seen investment markets fall.
Often, the best time to invest is when markets are low as this can represent an opportunity for your money to grow as the market grows.
It’s important to remember that the time it takes for a market to grow, if at all, can never be predicted and can never be guaranteed and the market could instead fall. But if you have money available to invest – that is, money which you do not think you will need for at least 5 years – then there are a variety of investments that exist which can suit many different needs, including those which are more cautious in their approach to investment risk.
My investments have fallen in value, should I protect the remaining value by selling them down to cash?
It is widely accepted that we feel the pain of losing money more than we feel the gratification of making money.
You may have worked hard to save into your pensions and investments and have been faced with seeing them fall in value, suddenly, and without being able to control it. This can be extremely unsettling and we understand why investors may want to move into ‘protection mode’. This is most commonly expressed as a desire to sell the investment and move it to cash.
However, when you sell an investment and move it to cash, you are securing the losses and removing any chance of recovery.
It’s understandable for investors to worry at times like these, but it’s important to go back to basics and focus on the long-term potential for investment markets. It’s rarely wise to base long-term investment decisions on short-term market fluctuations.
Context is important and history has shown that stock markets survive severe downturns. The chart below shows the value of sitting tight and riding out waves of uncertainty. It looks at some of the biggest falls in value of the UK stock market since 1987 and how long it took to recover. Past performance doesn’t tell us what will happen in the future, but there are always things we can learn from history to make us better investors today.
Value of UK stock market following falls in recent history:
Past performance isn’t a guide to the future. Source: FTSE All-Share, Thompson Reuters Eikon 13/03/2020.
For these examples it’s assumed that an investment has been made at the highest point before the market started to fall. Provided you are invested in line with your risk appetite and objectives, remaining invested at times such as these is a sound strategy. Theoretically, this means you will not miss any of the market up-swing, if and when it comes.
What advice would you give to someone who is taking an income from their pensions or investments?
In these situations, something to be aware of is the sequence of returns risk (also known as ‘sequencing risk’). It’s something which impacts investors who are taking withdrawals - whether as an income or as lump sums - from their pensions and investments. The risk is that if losses occur, the investments have to work harder to make up the losses.
Taking withdrawals compounds the loss even further and the bigger the loss and withdrawals, the bigger the gain required to make the loss back.
For example, a 20% loss in year one, requires a 25% gain in year two just to make back the loss and put the investment back to the position it was in:
If you have £1,000 invested and it falls by 20%, you subsequently have £800 invested.
If your £800 grows again by 20%, its value increases to £960 (£800 x 20% = £160).
In order for your £800 to return to £1,000, it needs to grow by 25% (£800 x 25% = £200).
If you took £100 out of your investment when it’s value was £800, resulting in a value of £700, it would need to grow by 43% to get back to the original £1,000 (£700 x 43% = £301).
So what can you do to combat this?
Well, there is little any of us can do to control investment markets. Therefore it is important to focus on what we can control. Ultimately, this will involve making decisions about how much, from where and when, any income and/or lump sums are withdrawn.
Organising your finances to be as flexible as possible is key. When it comes to it, your options will include the following:
Reduce or stop all withdrawals from your pensions (assuming they allow this) and investments; and
Make do on a reduced income during a time when most people are tightening their belts.
Or, you could instead rely on any cash-based savings you have set aside to supplement your income. This is after all the purpose of keeping cash reserves - to be able to fall back on them when you are unable to, or it’s not appropriate to, rely on your investments.
Even reducing your withdrawals by a small amount can mitigate the negative impact of sequencing risk. And while this may cause you some short-term deprivation through reduced income, conversely, when markets recover, you should have greater scope for increasing those withdrawals in the future.
Bethany Wood, DipPFS (Certs CII SMP & ER), Financial Planner at AV Trinity
About Bethany Wood
Bethany is an authorised and regulated Financial Planner and has worked for AV Trinity since 2017.
“Bethany is a very talented financial planner and her warm and empathetic approach with her clients has meant she has received many recommendations to their friends, family and colleagues. Bethany’s youthful appearance belies her experience - Bethany has multiple enhanced qualifications, enabling her to give specialist financial advice on later life planning for long term care, and on equity release to clients over the age of 55. I highly recommend Bethany to any of our clients, and in particular those who are seeking advice on investments, pensions, personal and family protection, long term care and equity release.” Louise Morris, Managing Director, AV Trinity.
Here to help
If you’re considering investing or pondering what you should do with your existing investments, talking to an independent Chartered Financial Planner can give you options you might not have thought of, or indeed thought possible.
If you would like to find out more about how we can help you, you can arrange a free no-obligation chat with us by contacting us via our website.
This article offers information about investing and should not be taken as personal advice. Remember that investments can go up and down in value, so you could get back less than you put in.