Anyone looking at the value of their pension or Individual Savings Account (ISA) would be forgiven an expletive or two. These have been a turbulent few weeks in financial markets, and there have been some frightening drops in the value of investments.
But rather than rushing to sell your investments and hiding all your money under the bed, it may help to understand why markets have fallen – and to consider when they might recover.
Coronavirus is the immediate issue
The worry is that measures implemented to slow the spread of the virus will have an impact on companies’ ability to make profits. People will take fewer flights, buy fewer meals, gyms will have to refund membership fees, and so on.
Even if demand for some goods and services holds up, supply will be impacted as remote working is introduced and, of course, as people become ill. The share prices of companies are based on assumptions about their long-term profitability and if that looks likely to fall, share prices will fall too.
That’s the numbers bit. However, there’s also a sentiment bit. There are broad and unquantifiable worries about the future of the global economy. Will people be laid off from their jobs? What will this do to consumer spending?
No one knows the answers to these questions just yet but, understandably, it’s making people nervous. And when they’re nervous, they’re more likely to consider selling their investments.
This can create a snowball effect – people see others selling and they want to get out as well. As a result, share prices become divorced from the reality of companies’ actual prospects.
Some leisure and travel companies have seen their share prices fall significantly. Although pubs and restaurants may be shut for a couple of months, and people aren’t currently travelling, are these businesses really worth so much less than their previous value? These falls may not necessarily be rational and should hopefully start to correct as people start to feel more confident about the future.
So that’s the context for why the value of your pension or ISA has fallen, but it doesn’t really help with planning what you should do next. Should you stay invested? Or look to move into investments such as less volatile government bonds or cash? Before you make any quick decisions, it’s worth bearing a few things in mind.
The first is that volatility is part and parcel of investing in markets. Markets always go through wobbly patches and, although past performance isn’t a reliable guide to future performance, history has shown us that they usually recover.
Of course there will be some casualties in the current environment but, as long as you have a good mix of investments, they hopefully shouldn’t have too great an impact on your long-term financial plans. You can read more about this in our article How long can this go on – could I lose all my money?
Also, in the same way as the worst time to buy home insurance is just after your roof has leaked, usually the worst time to buy what are generally considered ‘safer’, less volatile investments, such as government bonds, is when markets have just had a panic. The problem is that everyone is thinking the same.
When everyone invests in the same thing, it pushes the price up. So you may end up paying a lot for an investment that doesn’t do a good job of maintaining the value of your portfolio.
Finally, some reassurance
This isn’t the first time markets have seen major sell-offs and it won’t be the last. Have a look at our article Market crashes – a brief history for more on this.
So think about continuing to regularly invest during what are admittedly unsettling times – in other words, continuing regular payments into a pension or ISA. One way of looking at this is that markets are on sale – it costs a lot less to invest in the largest companies in the UK than it did a month ago.
And as we’ve previously mentioned, it’s generally considered a good idea to have a mix of different types of investments, so you’re not putting all your eggs in one basket.
Last but not least, it’s always important to have some money in cash to cover unexpected shocks or nasty surprises. Most advisers will suggest we have at least three to six months’ income in easily accessible cash, so that’s something to factor into broader financial planning too.
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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. Information is based on Boring Money’s understanding in April 2020.