Private pension: Expert discusses impact of stock market falls
The UK’s blue-chip index plunged 1.99 percent to just above 7,000 as rising Delta infections threaten global lockdowns, while the US Federal Reserve may cut back on stimulus. Today’s crash will hit people’s pensions and Stocks and Shares Isas in the short term, but experts say equities remain the best way to build long-term wealth.
Investors are being spooked by the Covid virus once more, said Steve Clayton, HL Select fund manager at Hargreaves Lansdown.
“The Delta variant is threatening the reopening of economies and could hit the world’s second biggest economy China particularly hard.”
Supply chains bottlenecks and concerns that the US Federal Reserve may reduce its efforts to prop up the economy hit sentiment this morning. “Markets are a sea of red, with commodity and energy producers amongst the worst hit,” Clayton said.
Fawad Razaqzada, market analyst at Think Markets, suggested today’s crash may be an overreaction. “Some softness in data should not trouble investors too much unless it becomes a trend. Let’s not jump to any conclusions.”
Razaqzada said that many investors like “buying the dip” and some could see an opportunity to buy equities at today’s reduced valuations.
This morning’s crash wiped £50 billion off London share values but do not panic
The best thing most private investors can do when stock markets crash is keep calm and carry on, said Laith Khalaf, head of investment analysis at investment fund platform AJ Bell. “While watching the value of your investments fall can be unpleasant at the time, resist the temptation to panic and sell.”
If you do that, you will turn your paper losses into real ones.
You will then face a tough decision over when to buy back into the market and could easily get that wrong.
For example, investors who sold during the Covid crash in March last year will have quickly regretted their decision.
The FTSE fell below 5,000 on 23 March, but rebounded by a third in the months that followed.
Khalaf said: “When investing in shares always look past short-term volatility, and keep your eye on the long-term.”
READ MORE:Worried about the State Pension triple lock? Invest £50 in Isa funds.
Investing in shares is riskier than leaving money in cash, but much more rewarding over the longer run, said Jason Hollands, managing director at investment platform Bestinvest. “Many are afraid to invest but leave their money languishing in cash savings instead, getting near zero interest.”
Having a mountain of cash in a savings accounts gives you a false sense of security, Holland added. “The real value of your money will be eaten away by inflation, reducing your future spending power.”
Cash has delivered an average annual return of less than 2 percent over the past decade, while global shares have delivered 11 percent a year on average, according to figures from wealth manager Quilter.
This suggests that if you had invested £10,000 in cash a decade ago you would have £12,190 today.
By contrast, if you had invested in a spread of global shares, you would have £28,394. That’s an incredible £16,204 more.
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Stock markets are volatile in the short run but generate long-term wealth
Stocks and shares are more volatile than cash, but Hollands said you can reduce your risk in a number of ways.
Buy funds not stocks. Use your tax-free Stocks and Shares Isa allowance to invest in funds rather than directly in individual company stocks. That way you spread your money across dozens of companies rather just one or two.
Spread your money around the world. As well as buying UK companies, invest some money in the US, Europe and fast-growing Asian markets such as China.
Invest for the long-term. You should never hold funds or shares for a period of less than five years, and preferably much longer.
Do not try to get rich quick. Be patient. The stock market is a great way to build wealth for your retirement, but do not expect to make your fortune overnight.