Investing in shares (equities) is a long-term game and requires an acceptance that the value of your investment can go down in value, sometimes by quite a lot, as well as up. When falls occur, they are often fast and unexpected.
To cope with market falls, you need to have plans in place before they happen. This short guide will help younger investors to prepare their portfolios in advance of future market turmoil.
Younger investors are most likely to invest for the future via their workplace pension. If you haven’t already joined, you should give it serious consideration, as you could be missing out on free employer contributions and tax relief from the government. Many people pay in at least what they need to get the maximum employer payment. Some consider paying in more if they can afford to.
Most workplace investors invest their savings in the ‘default’ investment fund. Default funds are a one-size-fits-all investment fund designed to cover the whole workforce, including people in their 50s and 60s for whom retirement is imminent.
The trustees or managers of workplace schemes can take a risk-averse approach when managing the default fund. This is because they are worried that a large fall in fund values will be particularly painful for those approaching retirement.
This approach may or may not suit younger investors. Workers who have 20 to 30 years before they reach retirement age have more time to ride out the inevitable ups and downs of the market. So younger investors may wish to consider looking at other investments outside the default option that they feel may be more suitable for their circumstances. This could mean delaying the decision to readjust investments to reduce risk and volatility until closer to their retirement date.
A stock market crash, or ‘correction’, may actually be good for younger workers who invest in shares. This is because they will be buying more shares or investment fund units when the price is low. When, or if, the price of shares eventually recovers, investors who bought at a low price have more shares/units available to benefit from any increase in value.
Things you might want to consider
- Short-term fluctuations in the stock market may not be too detrimental to younger people who are investing for the long term.
- Taking more risk sometimes goes alongside the prospect of higher returns – though you always need to bear in mind that you could lose what you have invested.
- Avoid knee-jerk reactions. While remaining conscious of the risks, you should remember that you are investing for the long term.
For more information visit the I’m saving for my future page of our website.
If you want personalised advice you should speak to a financial adviser. You can find a financial adviser in your area at www.unbiased.co.uk.