Global markets are crashing, fear over Covid-19 is growing and market uncertainty is prevalent, but some may believe now is the best time to get into investing – to buy shares in the sales after a huge fall.
The FTSE 100 saw its second biggest daily drop last Thursday at 10.9 per cent and is down 33 per cent on its mid January peak.
After the panic selling, many big name companies are cheaper than they were and some are very cheap (although with airlines, for example, there is a reason for that).
Investors might be thinking therefore that there are bargains to be had. But is it ever wise to try and catch a falling knife, as the investing expression on buying into market crashes goes?
The FTSE 100 dropped by as much as 8.5 per cent yesterday before closing down 7.7 per cent
Some amateur investors have been sniffing around said ‘bargains’, with Barclays’ Smart Investor platform seeing its highest buy percentage on record last Tuesday at 73 per cent versus 27 per cent of sales.
What investors must steel themselves for is more potential falls before any gains
The problem for those investors is that after that the market fell on Wednesday, tanked on Thursday, rose on Friday, slumped again on Monday and is down again today.
Yet, those who have been thinking about investing, but have never taken the plunge could be in a better position than people already invested and in the red.
Some of the world’s biggest names have seen millions – even billions – wiped off their value, meaning entry prices are lower and new investors have the added benefit of starting without any losses.
What they must steel themselves for is more potential falls before any gains – and they must be happy taking risk and thinking long-term.
Adrian Lowcock, head of personal investing at Willis Owen, said new investors have cash – which is ‘one of the most powerful things going for them’.
He said: ‘New investors can go into the market without the need to sell something first and looking for a better opportunity or to balance out a heavy loss.
‘You don’t have to buy everything today or in one big go. It’s better to slowly feed into the market as it will still be volatile and there will be swings.
‘But by starting out now, you’ve already avoided major losses of as much as 20 per cent. Though that’s not to say it can’t fall further.’
Buying shares or funds?
David Coombs, fund manager at Rathbone Investment Management, advises starting out by investing 25 per cent of your cash into the biggest companies that you are 100 per cent sure can get through recessions, coronaviruses, or any other panics that may come along.
He said: ‘I’ve been investing for 35 years but I’m not trying to be clever here, I’d rather be cautious. They’re the names I have been adding to across my portfolios.
Rathbones’ David Coombs said it pays to take the emotion out of investing
‘Think of your Warren Buffett-type companies: the Visas, the Microsofts, the Coca Colas of this world.
‘They’re the mega-cap companies that may not be down as much as the airlines but you will still make enough money.’
He also advises against going into middle-sized companies, or really beaten up energy firms at this stage as it’s harder to tell how they will move going forward.
‘It doesn’t always pay to be too clever and go for oil stocks when they’re down 20 to 30 per cent – that might look smart but it might not work out.’
Meanwhile, Coombs think US equity funds, as those investing in American shares are called, are the best bet at the moment although the pound’s fall against the dollar could pose an issue.
‘I would recommend buying something like the S&P 500 tracker that hedges to sterling (just in case sterling rallies) which can be bought through a passive provider such as BlackRock or Vanguard.
‘If you want to stay in the UK though, it might be best to avoid the FTSE 100 at the moment because it is too reliant on banks, minors and energy companies.’
On bonds – which are often considered safe havens during times of crisis, and which were among the best performers during the last week of February as the coronavirus panic took a step up – Coombs said you could end up losing a lot of money as a new investor.
‘You don’t need to buy any safe havens if you don’t have a portfolio to begin with. First-time investors don’t need them.
‘Coronavirus could peak next week, the oil price could go back up, and the next thing you know, the market rallies. Then bond and gold markets would sell off and you could lose a lot of money.’
Have a system in place – and stick to it
Most importantly however, is to have a system in place that you then stick to. Lowcock says to do your research and not to rush to invest just because the market has sold off.
‘Have a plan in place,’ he said. ‘Decide how you’re going to invest whether that’s through a platform – which means you have exposure to a range of managers and market leading rates – or directly through an asses manager where you can more easily access trading systems and monitor their portfolios.
‘Also think about what type of product you’re investing in and why you’re investing.
‘Your time horizon shouldn’t be the next ten weeks or so, it should be the next ten years. Keeping that perspective in mind, then sell-offs are a good time to start investing.’
Once you’ve decided when and how you’re going to invest, Coombs recommends only using 25 per cent of your cash and to then to ‘do nothing until the market takes another leg down’.
He added: ‘It’s better to drip feed and do it in chunks. Set yourself levels of the index at which point you’re going to invest – for example, say you’re going to invest if the FTSE 100 drops to 5,800, and again at 5,500. It pays to take the emotion out of it and set up a system and stick to it.’
Always think long-term
It’s also important to remember investing shouldn’t be a short-term game. Markets will rise and fall and over time and will usually recoup short-term losses as the economy recovers.
Joe Healey, investment research analyst at The Share Centre, said: ‘What is different regarding this drawback is it was not created by fundamental weaknesses within the economy; rather it has been caused by factors outside of anyone’s control.
‘This suggests that in the longer-term should the virus impact markets it can likely be mitigated.’
The Share Centre’s Joe Healey say now is a great time for younger investors to get started
Now is also a good time for younger investors to get started. With more time on their side, they can take more risk in pursuit of growth, should they wish, and look at sectors such as technology, communication services or consumer companies.
Growth companies tend to pursue share price appreciation for their shareholders accelerating revenues and profits to grow shareholder value.
Healey added: ‘For the younger investors with a lower risk tolerance, sectors such as consumer staples, healthcare or utilities may be more suitable.
‘These companies prefer to focus on sustainable business models distributing company profits to shareholders in the form of dividends.
‘These types of companies are generally more sheltered from market cycles in periods of instability.
‘But regardless of your investor profile, the most important thing is getting invested in the first place and allowing your hard-earned money to work for you.
‘Of course, there are going to be ups and downs but over the longer-term, studies highlight the benefits of being invested through market cycles.
‘Furthermore, powers such as compounding will help build your capital over time. The earlier investors start, the more time these powers can generate healthy returns in the long term.’
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