Howard Goodship, IFA, Ringwood - Actions to take in volatile bear markets

Friday 1 May, 2020

Understanding Investments: Actions in Volatile Bear Markets

We have just been through eight weeks of extremely volatile investment markets when we officially entered a “bear market”. This is defined as a 20% fall in an investment index from their recent high. Most investment markets initially fell over 30% but have since recovered some of this loss.

On this occasion, the investment market decline is a secondary consideration as health matters (and the subsequent social distancing restrictions) are rightly the main concern and priority. I hope everyone has been able to get through this difficult time in good health and fair spirits.

Returning to investments, what can we learn from past “bear markets” to help make informed and sensible decisions today?

• Cash liquidity is always king
  Individuals and companies who don’t retain sufficient cash to see them through downturns in the economy or who over-leverage (borrow too much) eventually flounder.  When advising clients, we recommend paying off debt first, then keeping cash for emergencies, plus additional cash to replace income (the amount of cash will vary depending on each client’s personal circumstance). Sufficient cash allows you to ride out a bear market giving your investments time to work (and recover).
   

• If you are drawing income from your investments by selling units, review it immediately 
  If it’s possible to stop encashing units or at least reduce the unit numbers after large declines it will protect your long-term investment values. To illustrate this, if you generate £1000 of “income” by selling units priced at £1, you need to sell 1000 units. However, if the unit price falls to 70p, you need to sell 1428 units so that’s selling 42% more units after a 30% fall in the price to generate the same level of income. You then have less units available to benefit if unit prices rise, so it is incredibly hard for your investments to fully recover. Replacing or topping-up your income from your cash reserves for a period of time is preferable. 
   
• If you are taking “natural income” ie the interest and dividends generated annually by your investments, expect the income to reduce in the short term. 
  Natural income is my preferred method of drawing income from investments as you are not selling units to generate the income (avoiding the scenario above). You retain the same investment units at all times which should subsequently benefit when markets recover. However, during recessions dividend payments are likely to reduce. Due to the severity of the recent economic slowdown caused by COVID-19 and the almost total shutdown of our economy for a period of time, dividends during the next 6 to 12 months are likely to be adversely affected (commentators suggest reductions of 35%-50%). If you need to maintain the same level of income, consider topping up the difference from surplus cash reserves for the next 12 months.
   
• Maintain perspective.  
  Whilst the cause of a “Bear Market” and the accompanying economic recession is always different, they don’t usually last as long as “Bull Markets”. In fact, historically Bear Markets typically last between 6 and 18 months compared to between 5 & 7 years for a Bull Market. Providing you are investing for the appropriate timescale (5 years plus) it should allow your investments time to recover. 
   
• Don’t panic and think rationally
   If you are able to take emotions away from investing, you will likely make better decisions. I often find my role is to tone-down my client’s appetite for risk when investment markets are strong (greed can be the overriding emotion at these times) and ensure they maintain the right level of risk when investment markets have fallen (fear often takes over at these times).

Howard Goodship, chartered financial planner, Ringwood, Hampshire saidl: 

‘I hope this article is helpful. During social distancing if you require financial advice I am available on the phone at 01425 208490 or via webcam should you wish to ask any questions or discuss your investments and I will be happy to meet in person once allowed. Alternatively please contact one of our other offices in St Albans, Barnet, Ware, Harpenden, Stafford or Leeds/Bradford.  Please stay safe and take care.’

This article is a part of an Understanding Investments series.  To read more from Howard Goodship please review the following:
 

1 What are Investments and why should you own them?

2 Managing risk and tax to earn a higher return.

3 Fees, costs and value.

4 Tax efficient investment income.

5 What are my pre-retirement options

6 What are your choices at retirement

7 How much money do you need in retirement?

8 Tax efficient saving for grandchildren

9 The value of independent financial advice

10 Pension contributions for all ages

11 How to combat inflation the enemy of retirees

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice. 

 

 

 

 

 

 

 

 

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