In this period of Brexit negotiations and stock market volatility, it’s understandable that you might have some concerns about your own investments and finances.
We don’t want you to worry about what might not happen, but it’s no bad thing to be prepared. Would you know what to do in the event of a stock market crash? Read on for some hints and tips to help see you through should it happen, and to help protect your money in the future.
Stay calm. Investment decisions made in haste and under stress are rarely good ones.
Rebalance your investment portfolio to make sure it remains invested in line with your original objectives and risk tolerance.
Stay invested in shares and wait for the storm to pass. Remember that you invested in shares as a long term (5years +) investment. The fundamental reasons for investing in shares have not changed.
Consider a large drop in the price of shares as a buying opportunity. You may not know for certain that share prices have hit the bottom yet, but you do know that they are cheaper than last week/month/year.
Put the market fall in context. A market correction usually happens after a sustained period of growth, from which you are likely to have benefitted.
Take income from cash. If you are drawing income from your pensions and investments, take your income from cash held inside your pension or from cash deposits or cash ISAs. This will give your share-based investments some breathing space to hopefully recover.
Sell all your shares. Selling at the bottom having bought at the top is the exact opposite of what you should do. Don’t crystallise your losses unless you have no other choice.
Stop saving. In fact, if you can afford to, you should save more, as investments in shares are now available at a discount compared to the price last week/month/year. When investments are relatively cheaper, you should buy more.
Give up on taking risk and move all your savings to cash. Assets such as shares and property have been shown to produce the best returns over the long-term, although their price can be volatile over short periods. Cash, on the other hand, often struggles just to keep pace with inflation, although it’s a good idea to hold some cash to cover emergencies.
Draw income from the shares part of your portfolio. Instead, take income from your bonds, property and cash savings until your shares recover.
Bury your head in the sand or drown your sorrows. Taking positive action such as rebalancing your savings/investment portfolio or changing the part of your portfolio you draw income from will pay dividends in the long run.
Opt-out of your pension scheme. Although your retirement savings may have taken a bruising, you should keep saving to pay for your retirement. History shows that investments do recover if you leave them long enough.
Six tips for the future
Diversify your portfolio. Make sure that you have a good spread of investments in shares, bonds and cash. If one of the assets in your portfolio does badly, a fall in the value of shares only affects a part of your overall savings.
Draw only the natural income. If you are drawing income from your share portfolio either within or outside a pension, taking only the income (dividends) that portfolio produces means that you are not eating into the capital value. That means when the recovery comes, the whole capital value of your shareholding can benefit from an upturn in the markets.
If you are drawing income, hold at least two years’ worth of income in cash, preferably three. This gives you the flexibility to draw income from your cash savings, allowing the shares part of your portfolio the breathing space to recover. Continuing to take income from the capital value of a share portfolio that is falling in value will do lasting damage.
Bank some of your winnings. If you have benefitted from a long bull run (upward movement) in the value of your shares investments, consider banking some of your winnings in other assets such as cash, to provide a cushion in the event of a future crash.
Rebalance your portfolio. There is no point taking more risk with your portfolio than you need to meet your objectives. Rebalancing regularly helps you stay on track with your original aims and your personal tolerance to risk. Rebalancing is also a good discipline that forces you to sell assets when they have become more expensive and buy other assets which haven’t done so well but might do better in future.
Review your investments regularly. It’s easy for your savings and investments portfolio to get out of kilter with your goals, tolerance to investment risk and resilience to market shocks. Make sure you review your savings and investments regularly, to ensure everything is still on track.