How should investors respond to the turmoil that has rocked world markets since the UK voted to come out of the European Union? The referendum result has sparked volatility across every asset class you care to mention, with currencies, bonds and shares all bouncing around all over the place. Amongst investment companies, some types of fund are sharply down while others have risen.
The most important advice of all right now is that you shouldn’t panic. The headlines may make grim reading, but rushing to make decisions that will have long-term consequences would be a mistake. Take some time to consider your options – including the option of doing nothing at all.
Should I sell my stock market holdings?
Almost certainly not. While the markets may be volatile right now – and are likely to continue in this way – efforts to second-guess market movements invariably end badly. For example, if you’d sold during the first few days after the referendum result, you would have missed out on the recovery that ensued over the subsequent days.
No investor likes to see their portfolio fall in value. But the truth is that if you’re not prepared to see your investments fall in value as well as rise, you shouldn’t have any exposure to the stock market at all, because that’s always a possibility. Besides, remember that these are only paper losses – you won’t actually lose real money unless you crystallise your losses by selling up.
At times like these, it’s vital to think about why you currently have the investments you do. The answer, hopefully, should be that you’ve built a portfolio of assets you think is well-suited to delivering your long-term financial goals, whether these are very specific or more general. In which case, nothing has changed – and over the long-term, as you work towards those goals, the volatility of the days and weeks following the referendum will look pretty insignificant.
What about buying more?
The short answer is that for most investors now is the time to sit on your hands. With so much uncertainty flying around, doing nothing is a sensible option.
That said, if you’ve set up regular savings plans inside or outside of an individual savings account (ISA) – many investment companies offer the opportunity to drip-feed money into them each month – this is the sort of moment when they can really come into their own. The great thing about investing a fixed cash sum each month is that when markets are falling, your money goes further; that means you’ll do even better when markets recover.
This phenomenon, known as pound-cost averaging, is a really powerful argument for putting money into investment companies via regular savings plans. You don’t have to make an active decision about when (or whether) to invest – your money automatically drip-feeds into your funds each month and works especially hard during periods of volatility.
Should I be opportunistic?
Some financial advisers and stockbrokers argue that when markets make knee-jerk reactions to an external shock, opportunities are bound to be created. Since both good and bad funds fall when everyone is panicking, that could enable investors to get into the former more cheaply than usual.
Certainly, we’ve seen some pretty undiscriminating falls in the investment company sector. Almost all funds investing in medium-sized UK companies are down sharply, for example, because these businesses are seen to be particularly vulnerable to Brexit-inspired economic problems in the UK. Clearly, however, some funds will fare better than others.
It’s fine to be opportunistic if you’re prepared to spend the time working out whether a fund really is the bargain it might first appear. But don’t confuse this sort of investment with long-term financial planning; it’s more akin to speculation and shouldn’t be the way in which you seek to achieve those long-term priorities.