How young investors can respond to stock market shocks
As if the threat of a large-scale outbreak of an infectious disease isn’t enough to worry about, coronavirus has financial implications too. You might have read about the virtual shutdown of industries in some parts of the world and large falls in global stock markets and in the price of commodities such as oil. It feels like there’s been no shortage of alarming twists. For millennials and younger investors, it’s not all cause for darkness and despondency. A market correction can even be a good thing in the long run.
Why does coronavirus affect stock markets?
There are a few reasons. The first is because it is impacting the ability of companies to produce goods. For example, Apple has already said that factory shutdowns in China will prevent it from getting hold of some of the parts it needs to make iPhones.
The second is in how it affects demand. For example, consumers and companies are cutting back on unnecessary travel, hurting the travel and tourism sectors. Many other sectors are also experiencing a fall in demand.
The third is the impact on investors’ willingness to take risk. Before coronavirus flared up, the stock market had been performing very well and many investors were sitting on handsome profits. This was despite economic growth having been relatively weak for years.
Many investors had been uncomfortable with how far stocks had risen against this backdrop. Coronavirus has given them the reason they were looking for to bank some of those profits and reduce their exposure to the stock market.
What is the silver lining for young investors?
The good news is that young investors with pensions that will not be accessed for many years can worry less than anyone else. Investing is a long-term game.
That is not to say someone with investments should just ignore current volatility though. There are some sensible steps to take, and there might even be opportunities for the brave.
It is rare that anyone can be thankful for not having much in the way of savings. The stock market declines of the past few weeks are one such occasion. The relatively light savings of younger individuals mean they haven’t lost too much from these declines. This can be contrasted with wealthier individuals and generations whose larger accumulated savings may have taken a hit.
In fact, while negative headlines about the stock market can be off-putting, if anything, younger investors should be grateful for them. Every dollar, pound or euro they invest today will buy them considerably more shares than it would have done at the start of the year. This is one of the advantages of being at an earlier stage of one’s savings journey. If you still have a lot of money to invest over your life, actually a cheaper stock market is a great thing for you.
Five sensible steps to protect your investments
1. Don’t panic – think long-term
One of the worst things to do is bail out as soon as things get hairy. It’s an emotional response that will very rarely benefit your savings. By staying invested now you will benefit when the market picks up again. Someone now investing into a pension in their twenties is looking at as much as a 40-year horizon.
2. Reassess your attitude to risk
What these episodes can usefully do is prompt a re-evaluation of how much risk we are willing to take. It’s all very well charging into the stock market when it’s been going up for years: these corrections remind us there can suddenly be a downside. Many of us will take some risk in the hunt for higher returns, and there are ways to moderate that risk.
3. Reassess your portfolio
Are you happy with the mix of risk? Check you are happy with the proportion of your savings that are in the stock market as opposed to cash or government bonds, and diversify if you are concerned. It is also important to make sure you have exposure to companies in different geographies. It is easy to place the bulk of your savings and investments in your home country as it is familiar and perhaps comfortable. The old adage of not putting all your eggs in one basket must also be remembered when it comes to investing. Some funds offer ready-made diversification by spreading across asset classes. Do your research. You can de-risk yourself by simply holding more cash in savings accounts but be aware of the effect of inflation versus low savings rates.
4. Diversify your exposure to the stock market
Even within the portion of your portfolio that is invested in the stock market, be sure that it is diversified in itself. Some people have favourite regions or sectors and over-reliance on them can be a set-up for big losses if things go wrong.
Either diversify yourself by picking different equity funds to spread your money across or choose equity funds that are themselves diversified.
By investing a regular amount each month you take away a lot of risk – it is the opposite of trying to “time the market”. In times of stock market falls the amount you invest will be picking up more units, the cheaper that shares get – and fewer units when they are expensive. This means you will ride out much of any market volatility.