Spooked by sliding share prices? Why it pays not to take fright


 

 

Any investors spooked by sliding share prices risk losing thousands of pounds if they quit the stock market at the first sign of trouble.

Yet this is what thousands of people have done lately, after world events sent shockwaves through global markets.

Covid-19 caused share prices across all indices to crash by 30 per cent before recovering in August 2020, five months later.

Horror show: Covid-19 caused share prices across all indices to crash by 30% before recovering in August 2020, five months later

And, since the war in Ukraine began in February, the U.S. S&P 500 Index has slumped by 7.29 per cent. The UK’s FTSE All Share Index is down 3.26 per cent. And inflation is having a damaging effect on stock prices, particularly technology.

However, experts warn against ‘knee-jerk’ decisions to sell investments, as these rarely pay off. Waiting for several years is often the more fruitful path.

Online investment company Moneyfarm revealed that long-term investors who rode out the Covid-19 crash achieved a 16.8 per cent return, on average, between January 2019 and December 2021.

Nervous investors who permanently retreated from the stock market in the first half of 2020, after share prices began falling, pocketed a return of just 3.2 per cent.

Those who stayed the course also grew wiser. Moneyfarm found they were 16 times less likely to withdraw their investments when the war in Ukraine began than new investors joining last year who had no experience of market turbulence.

Hargreaves Lansdown has also seen investors’ confidence wobble in recent months. In February, more money was withdrawn from the investment platform than was paid in, which typically occurs only in volatile times. But the trend reversed in March and April.

Chris Rudden, head of UK investment consultants at Moneyfarm, says: ‘Nervous investors who withdraw from stock markets when they are falling historically come off worse than long-term investors because they don’t benefit from the economic recovery that follows.’

Moneyfarm analysed the losses of one nervous investor who closed his portfolio with the firm when share prices began tumbling at the start of the pandemic. His original investment was £36,000 and by the end of December 2019 this had grown to £38,804.

He withdrew all his money in March 2020, suffering a loss of 7 per cent, leaving him with £32,049. Yet had he held his nerve, he would have achieved a 19 per cent return by May this year and would now have a £39,400 pot, Moneyfarm’s figures show.

During a prolonged period of share price decline — a ‘bear market’ — it takes 13 months on average for stock markets to fall from their highest to their lowest point. 

This is based on scrutiny of market behaviour since World War II by U.S. advice firm LPL Financial. After hitting rock bottom, it then takes an average of 27 months for stock markets to return to their previous peak.

Quick recovery

A recovery period can be much quicker after a sudden shock, as with the pandemic.

Using analysis of the U.S. S&P 500 index, investment platform Bestinvest shows how quickly share prices can recover after a major crisis. 

One week on from the Cuban missile crisis on October 16, 1962, the index fell 6.3 per cent. 

A month later, it was 5.1 per cent higher than on the day of the crisis. Six months on, it had risen by 22.6 per cent.

Almost 40 years later, it dropped 5.4 per cent a week after the September 11 terror attacks. But it took only a month to recover and sit 0.6 per cent higher. A further six months later, the index was up 7.3 per cent.

Hold firm: Inflation, the Ukraine war and lockdowns in China are hitting stock prices but experts warn against 'knee-jerk' decisions to sell off investments as it rarely pays off

Hold firm: Inflation, the Ukraine war and lockdowns in China are hitting stock prices but experts warn against ‘knee-jerk’ decisions to sell off investments as it rarely pays off

More recently, a month after the Covid-19 outbreak, it plummeted 19.6 per cent. Six months later it was beating its pre-pandemic performance by 0.9 per cent.

Alice Haine, personal finance analyst at Bestinvest, says: ‘Markets loathe uncertainty. Every crisis is different but, hopefully, nervous investors can take some comfort from the past.’

Ms Haine says volatility is to be expected as Russia’s war with Ukraine continues to unfold. She adds: ‘The fallout from the war is not only having a huge effect on energy prices but also on food prices.’

With energy prices expected to rise further and inflation forecast to break into double digits, there is more uncertainty on the horizon for investors.

Balancing act

Not all investments will perform badly at the same time. So, rather than reacting to daily news by selling off investments, savers are advised to keep a well-balanced portfolio from the start.

Holding only shares is a risky move if global stock markets are plummeting in response to a worldwide event. 

A combination of government and corporate bonds, currencies and commodities adds diversification.

Investing across sectors such as retail or technology, and in different countries, also brings balance.

Hargreaves Lansdown investors who don’t have a balanced portfolio will receive a prompt from the platform to look again. 

Its message will encourage users to consider their goals, appetite for risk and diversification. 

Understanding the level of risk you are prepared to take with your money, in bad times as well as good, is also crucial, adds Moneyfarm’s Chris Rudden.

He says: ‘Before beginning your investment journey, establish if you are comfortable accepting losses to make gains over the longer term. That way you’ll avoid making knee-jerk decisions that damage your chances of success.’

You also need to be prepared to invest for at least five years to ride out the inevitable ups and downs of stock markets.

moneymail@dailymail.co.uk

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