The global economy looks set to be a notable casualty of the coronavirus outbreak. Financial markets around the world have anticipated a significant hit to businesses, sending share prices tumbling. For anyone seeing the value of their savings slide, these are worrying times and the temptation for many of us is to sell our investments as quickly as possible.
How easily you can sell though depends on the investments you hold and the ‘tax wrapper’ you hold them in. Both pensions and Individual Savings Accounts (ISAs) come with a number of rules attached.
In general terms, you can’t take money out of your pension before 55. You can sell the actual investments inside the pension and move to lower risk assets or cash-type investments (though you need to be careful before you do this, which we’ll come to later), but the money is locked inside.
ISAs are more flexible. You can take the money out if you want to, although once the money is out of this tax-efficient account, if you later want to put it back in you need to remember that you can only contribute up to £20,000 into an ISA in the 2020/21 tax year (this may change in the future).
Look at the underlying investments in your pension or ISA
These are the basic rules on pensions and ISAs, but you also have to consider the underlying investments that you hold inside them and whether you can sell them.
Many people will be invested in funds through their pensions and ISAs. Most funds can be bought or sold on a daily basis, with fund prices calculated daily. It usually takes about three to four days to switch your money from one fund to another. It may take another couple of days for the money to reach your bank account if you’ve requested a withdrawal from your ISA.
But there can be exceptions. Sometimes funds may encounter liquidity problems – in other words, they can’t sell underlying assets fast enough to meet investors’ selling or switching requests.
This is particularly true for assets such as commercial property. It’s difficult to sell a building in a hurry and if everyone wants their money out at the same time, this can lead to problems. When this happens, fund managers may impose restrictions and investors may not be able to get their money out.
The coronavirus crisis has led to another issue for commercial property funds – fund managers haven’t been able to get accurate valuations for the properties they hold. Because of this, there are currently a significant number of restrictions in place on these types of funds.
So should you sell?
Being able to sell is one thing, whether you should is quite another. Investments are unusual in that people tend to be most inclined to sell when the price is at its lowest. Few of us would sell our home at a discounted price unless we had to, so why do it with our investments? If you’re investing for the long term then a knee-jerk reaction can often be a very bad idea.
Before you start thinking about selling, there are certain things to bear in mind. The first is that you’ve probably missed the boat already. Markets anticipate trouble; by the time it has arrived, it’s already reflected in the prices of your investments. Selling when markets have already fallen a long way is not only too late; it means that you may miss the bounce if it comes.
Why? Because predicting if and when that bounce might come about is fiendishly difficult.
Some examples of why you should think carefully about selling your investments
During the global financial crisis, the time to buy back into markets was March 2009. The Bank of England had just cut rates to their lowest level ever as an emergency measure, it was just a few months after the Lehman Brothers’ crisis (October 2008) and swine flu was emerging.
The Wall Street Journal asked “just how low can stocks go?”. In other words, the moment of maximum pain is often the right time to consider buying rather than selling. The FTSE® 100 Index*, which represents the 100 largest companies listed on the London Stock Exchange, almost doubled in value over the next decade.
The unwinding of the technology bubble from 2000 onwards was a slower and more painful process. The FTSE® 100 Index* lost around 40% of its value from January 2000 to January 2003 and took longer to recover. However, even many investors who bought at the absolute peak of the bubble had made all of their money back by 2007.
Equally, the alternatives are unappealing. Holding your savings in cash will see you lose money in real terms over time because of that infamous bogeyman, inflation. Some savings accounts even charge you money to save with them. And policymakers have pushed interest rates lower in response to the coronavirus crisis, which is likely to see savings interest rates fall further.
The message is that in most cases you can sell, but you should reflect long and hard before doing so. Although past performance isn’t a reliable guide to future performance, investing is a long game and, however uncomfortable it feels, history suggests many people have generally been better off staying put and trying to ignore the headlines.
Want more information?
For further guidance and support about how the impact of coronavirus might affect your pension or investments visit the Pensions Advisory Service website.
*FTSE International Limited (‘FTSE’) © FTSE 2020. ‘FTSE®’ is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence.
Laws and tax rules may change in the future, and your own circumstances and where you live in the UK will also have an impact on the tax treatment.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.
All information is based on Boring Money’s understanding in April 2020.