2020 is not going well for investors. Anyone with money in a FTSE tracker is now holding an investment worth 31 per cent less than it was a month ago. The pain has been similar for those invested in the S&P 500 in the US. Specific sectors and stocks have endured an even sharper fall and many industries are facing a terrible few months as widespread isolation rattles major economies.
The pain is cutting especially deep as it has been so long since the stock market took a tumble of this scale. A decade of wonderful growth and momentum has made it appear easy to make money from the stock market, while a rise in cheap tracker funds and digital investment platforms has opened investing up to a broader audience than ever before.
Those who have entered the markets at some point in the last 10 years will be enduring their first major crash and the temptation might be to get out now and never go back. But sell-offs are a natural part of market behaviour. Indeed, they can provide huge opportunities for those with a steady head. Instead of scarpering, history suggests holding your nerve is likely to pay off, and for those who haven’t yet made their first investment now might be a once-in-a-lifetime opportunity to get started.
Buy low, sell high
If markets are falling, should I move my money somewhere safer?
Selling during a sell-off is widely considered as the most foolish course of action and a sure way of crystallising losses. Watching a share price drop is painful, but remember, you have only lost money once you have sold your shares. Unless you need a ready supply of cash immediately (and if you do, you probably shouldn’t have been in the stock market in the first place), you should not sell your shares while they are in free-fall.
The believed safety of cash is also a myth. During a period where interest rates are lower than inflation, the real value of your cash is falling. Central bank interest rates have been cut to almost zero amid the economic challenges of the coronavirus outbreak and the returns you will be getting from the cash sitting in your bank is likely to be negligible. Unlike the stock market, cash is considered certain to lose real value in the next few months and years.
Why would I want to invest now when the stock market is so much more fragile than it was a few months ago?
Firstly, the fragility in global stock markets isn’t new, it has simply been exposed by the coronavirus crisis. Several years of easy growth have stretched valuations to unsustainable levels, especially in the US and a correction has been a long time coming. But it is true that the outlook for the individual companies which make up those stock markets is considerably worse now that coronavirus is disrupting supply and demand of goods and services around the world.
It is also true that things could get worse – much worse.
But they will also eventually get better. Never in the history of either the British or US stock markets have prices been lower than they were 10 years previously. So, if you haven’t got any imminent need for your money, you can put it in the stock market and be confident that it will rise over the long term.
Why not just wait to buy at the bottom?
There is no way of telling when the bottom of this route will come and a huge range of factors will determine how long the crash will continue.
Chances are, we’re still some way from the bottom. The S&P 500 for example has only fallen to the level it was in late 2018 when the economic outlook was much healthier. Many individual stocks, especially in the tech space, are up over a six-month period and still don’t look especially cheap – clear evidence of how hype-driven the markets have been.
But there is no arguing with the fact that the markets as a whole are cheaper than they were a month ago and some individual sectors and stocks are significantly cheaper. Investors getting into the stock market now should be prepared to stomach some short-term pain as markets reach for the bottom, but it is better to get in early than miss the bottom completely.
That’s because a huge proportion of the stock market’s best days come immediately after the worst periods. Lots of studies have shown that being out of the market and missing the best trading days can significantly reduce long-term returns – in one case halving the return over a lifetime of investing. As always, you should always seek the advice of an independent financial adviser.