When a global crisis causes the market to fluctuate so much, investing in an ISA can be a prudent way to navigate uncertain times.
Investing in an ISA in a volatile market
In these troubled times it may seem inappropriate to mention the ISA season that investors can take advantage of. The coronavirus is having a huge impact on the global economy, leading to pressure on company cash flows and suspension of dividends. Volatility in the markets is extreme and is likely to remain that way for some time yet. In turn this can hit investor confidence, coupled with the worry over the health of loved ones.
There’s little in the way of precedent from previous periods of turmoil in living memory, either. Black Friday in 1987, the Dotcom Bubble in 2000 and the Financial Crash in 2007-08 all had entirely different root causes. Going back to the 1919 Spanish flu epidemic is about as close as we can get, although we are of course an entirely different society and so our comparisons can only be stretched so far.
As a stockbroking firm, we feel it’s not only appropriate but important to give guidance at this difficult time. Crucially, history tells us that recovery will come, no matter how bleak things appear at the moment.
Many investors will find themselves under virtual house arrest at the moment, which could mean that a number will have some extra time on their side and may be looking for things to do. Planning for the future and making considerations as to what to put in an ISA might be a useful (and perhaps even rewarding) distraction.
Investing in an ISA
After some initial inertia, the markets are now reacting to events quickly and our first suggestion would be to get cash into your ISA. This gives you a good chance of taking advantage of opportunities that will arise in the future, especially because you can hold your money in cash without to having to invest straightaway if it’s a Self-Select ISA. This allows you to make the most of the tax-efficient ISA allowance for this tax year, too.
Assess your risk level
The majority of investors should only be drip feeding into the market, as at the moment there is every chance that things might get worse before the much-anticipated recovery.
Remember: you are unlikely to get in at the absolute bottom, so putting some money in the market over time should help lessen the risk of losing large sums if the market continues to fall.
Investing in volatile markets
At this time of year in the past, we might have suggested some individual stocks that we felt would have boosted a portfolio. However, with so many companies cancelling guidance for the year ahead, this has created too much uncertainty; if the company itself has little idea of the outcome with regard to earnings, then fundamental analysis becomes rather tricky.
So, as an alternative, we give investors some broader things to consider:
The state of the market
Be wary of shares that have fallen by significantly more than the market average, which is around 30%. The market has started to factor in the events and the consequences for individual companies. These companies may have made acquisitions which have stretched the balance sheet and now look poorly timed, or could be in industries that have seen their business virtually closed down, such as leisure or travel.
Less is not more when it comes to a comment on a company’s health. Groups with stronger balance sheets will be keen to highlight this, whereas others under greater pressure may give an update with their fingers crossed behind their back.
Behaviour of company leadership
Have directors been taking advantage of the fall in the share price and buying shares? If so, this could be a sign that they see a value opportunity, and they’re confident in the company’s long-term future. Equally, if they’re not taking advantage of the lower price, this could be a foreboding sign of the opposite.
Give some thought as to what will be required for the economy to recover, and which companies will be able to survive. Can a company adapt or cut costs? Will there be an underlying demand for their products and services? For example, sectors such as pharmaceuticals, technology, and utilities will always be needed.
A chance to diversify
This may provide an opportunity for you to broaden your portfolio by diversifying into other areas.
Investing through a fund
Private investors may decide that the risk is just too much at the moment and that they need some help. If this is the case for you, it’s strongly advisable to take advantage of a fund manager’s expertise and resources. Although many managers are highlighting the unprecedented situation that the world finds itself in and the doubts that are coming up as a result, they (and their analysts) will be actively looking to take advantage of the dip in the market. One way they’ll be able to do this is by adding investments to their holdings that they’re confident about in regards to their financial position and long-term outlook. During this time, these investments will most likely be at lower prices, which can also help.
A fund manager with a good track record via either an open-ended unit trust or an investment trust is likely to be the preferred route of many, with the latter having seen average discounts widen to around 11%. Because of the fast changing environment, we suggest going to the website of the fund management group to see if they have provided an update on the situation.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.