Investing through “market noise” as volatility and rising interest rates bite means holding your nerve.
Many don’t, selling in a blind panic. Too often an ill-considered knee-jerk reaction.
In its most recent announcement, the Bank of England, worried that inflation could pass 11 per cent later this year, increased interest rates from 1.25 per cent to 1.75 per cent – the highest since December 2008.
There is a delicate balancing act here. Too weak the medicine and inflation could stay out of control; but too much and it risks the economy plunging into recession.
What then should be the response of shareholders?
Financial services group Brewin Dolphin suggests a five-strong approach – focus on your goals, take solace from history, remember that investing beats cash, don’t constantly check your investments, and stay diversified.
It states: “It is time in the market, not timing the market, that is key to long-term returns.
“The world has endured plenty of huge shocks – from wars to deep global recessions. History has shown that no matter what challenges the global economy has faced, markets typically recover from downturns and go on to deliver impressive returns over the long term.
“Cash savings accounts typically struggle to keep pace with inflation, resulting in savers losing value in ‘real’ terms. If you are prepared to accept the risk that comes with investing, and have time on your side, you give your money the greatest chance of growing and beating inflation over the long term.
“Limiting how frequently you check your portfolio is generally good for your financial and emotional wellbeing. Otherwise, you may feel an urge to act on a sharp downturn and end up crystallising losses you would otherwise have made up over time.
“Spreading your money across a range of asset classes – including equities, bonds, property and cash – can help to limit losses in your portfolio. This is because each asset class may perform differently in a range of market conditions; some will lose value, while others will make gains. This helps to smooth returns over time.”
Business commentator Forbes agrees: “The biggest mistake investors make when stocks fall is to cease being an investor and sell to cash. Why? Because it’s practically impossible to perfectly (or even adequately) time your exit from the market and your re-entry. Investors often focus on selling and give little thought to when they put cash back in the market again. This is a big mistake.”
It cites research by JP Morgan showing that missing just the ten best days over the last two decades would yield an ending portfolio worth more than 50 per cent less than a fully invested account, while, over the last 20 years, 70 per cent of the best ten days happened within two weeks of the worst ten days.
It adds: “Searching for the bottom isn’t an investment strategy. There are no smoke signals. Buying low and selling high sounds great, but over time, markets go up a lot more than down. So this approach can actually leave you worse off.”
Make the most of tax concessions.
Any investment growth or interest earned within a Stocks and Shares ISA is tax-free. You can pay a total of £20,000 into an ISA in the 2022-23 tax year.
Equally, think of upping your pension contributions. The pensions annual allowance for 2022/23 is £40,000. Tax relief is at the highest rate of income tax you pay. So, for basic-rate taxpayers it is 20 per cent, higher-rate taxpayers can claim 40 per cent, and additional-rate taxpayers, 45 per cent.
Remember, with a little patience, the future can be bright again.