In the busy run up to half-term last week, you may not have noticed that the stock market plunged. It recovered a bit, but not to its recent heady heights. So far this week, it’s been basically flat as today’s obligatory dessert.
The original drop was quite steep and affects everyone with an investment in shares (that’ll be you if you’re saving into a pension scheme). It’s also a warning for anyone saving or borrowing in cash. The stock market fell on good news: the US and UK economies are doing so well that investors worry inflation will pick up and interest rates rise sharply to control it. So if you’re not on a fixed rate for your mortgage, the interest payable may soon go up. Similarly, if you’re saving, your rate may go up a little so don’t fix into a long-term rate now because you may well get left behind.
If you read my blog on 18 January, you’ll see I predicted such a meltdown, although I did say I thought the FTSE 100 would rise to 8,000 before it happened (it didn’t!). I’m much happier now the froth has been blown off share prices which were really getting out of control. But that’s not to say we won’t have another wobble. So here are my five top tips for dealing with a jelly stock market.
1. Regular saving. Invest little and often rather than in big lump sums. You can set up a regular plan from as little as £25 a month by direct debit into an investment fund. By saving a fixed amount, you buy fewer shares when they are expensive and more when they are cheap by default. A great strategy without having to lift a finger!
2. Diversify by asset type. Bonds (government or company debt) are traditionally the antidote to falling share prices. They haven’t had a good run recently and also tend to do poorly in times of high inflation. But every properly balanced portfolio should have some and they could be due a place in the sun at some stage.
3. Diversify by country. Everyone is scared about inflation so investing in those countries where it may not be so much of a problem could be the answer. Europe and Japan could be the solution.
4. Buy into shares which are cheap now. You’ll have less far to fall if you buy into sectors which are currently out of favour. They include domestic UK firms (due to Brexit worries) and the funds which invest in them, typically UK equity income.
5. Don’t sell up. Cashing out now doesn’t make sense because there could be further to go upwards. You should be investing for the long term anyway so you can ride out a short-lived downturn. Check upcoming cash commitments and that you can cover them. If not, you should have arrangements in place because you don’t want to be a forced seller when the market is sinking.
Check out our SMM guide to investing here.