Seeing the value of your stocks and shares ISA suddenly plummet can be nerve-wracking, especially if you were planning to cash in your investment soon.
Whilst it’s perfectly understandable that you might be tempted to pull your money out immediately in case markets fall further, it’s vital to remember that this will turn your paper losses into real ones.
Here, we look at what you can do to help prevent yourself from panicking when stock markets take a dive.
Why do stock markets fall?
A big fall in the stock market index such as the FTSE 100 always gets covered by the media, and the headlines alone are enough to unsettle all but the calmest investors.
There are plenty of reasons why stock market indices in the UK and around the world fall, but most frequently it happens during periods of political and economic uncertainty.
For example, markets went into freefall following former Chancellor Kwasi Quarteng’s disastrous mini Budget in October 2022, only stabilising after both he and Prime Minister Liz Truss resigned.
US markets similarly tumbled recently after the publication of economic data which indicated that the Federal Reserve may need to continue raising interest rates for longer to combat inflation. Markets hate a lack of certainty, so whenever it’s difficult to know what’s likely to happen in future, you can expect volatility.
What do market falls mean for investments?
If you have a stocks and shares ISA, its value will fall when stock markets around the world fall. The extent to which it will have fallen will depend on what it’s invested in (many funds invest in a mixture of shares, bonds and cash-based investments).
If your fund has fallen or is falling in value, ideally you should try to sit it out until the market improves, as it’s a bad time to cash in share-based investments if they haven’t had any time to recover. However, if you’ve lost money in the past, it’s perfectly understandable to find periods of volatility quite worrying or unsettling.
What – if anything - should you do?
- Don’t sell shares when the stock markets are low. Unless you need the money in a hurry, selling now could be the worst thing to do
- Go back to basics. Before making any decisions, think about why you invested in the first place, why you’ve taken the amount of risk you have and how long you can leave your money invested for
- Think about drip feeding money into your ISA rather than paying in lump sums. By saving a monthly amount into your ISA you can smooth out the highs and lows in share prices. This is because when they go down your next contribution buys more shares or units, and when they rise, you buy fewer. This is known as “pound-cost averaging”.
If you’re looking to invest in an ISA, fund platforms such as Fidelity, Hargreaves Lansdown and AJ Bell can help narrow down your choices with recommended fund lists, which might highlight 50 funds out of the 3,000 plus available to UK savers. They also offer ready-made funds for a range of different risk profiles if you don’t want to pick investments yourself. Bear in mind that there are charges associated with stocks and shares ISAs and you’ll pay a fee to the platform as well as for the funds held.
- If you don’t know where your money is invested (or even if you have money in shares in the first place) it’s a good idea to do a bit of research so you have a better understanding of some of the reasons why your investments may go down (and – hopefully – back up)
- Make sure that investments held in your stocks and shares ISA pass the ‘sleep at night test’. You should make sure that when you look at the level of risk that you spend more time considering the potential impact of a fall in value rather than concentrating on the potential return
- Do make sure that you have enough money that is readily accessible in cash savings accounts. This helps to pull the overall level of risk down and means that you won’t need to suddenly access cash held in your stocks and shares ISA that needs a longer time frame
- Do make sure you regularly review your investments. Circumstances change and markets certainly do, so it is unlikely that investments that you have set up will always be right in the future. You service your car, you service your boiler, so please do service your ISAs too
- Check the charges. All stocks and shares impose a charge, which is normally made up of several different elements. The key number to look at is the ‘total expense ratio’ or TER, which tells you how much all the charges add up to
- Do understand that times when the markets are falling significantly are not unusual and are perfectly normal. Prices will rise, prices will fall and prices are likely to rise again.
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