Should I stay or should I go is a question not just on the lips of MPs right now. Many investors are wondering whether they should sell their stocks and shares Isa now before everything goes down the toilet.
Last week, Brexit fears pushed share prices below their 1999 level (remember when we were partying like it was?) where they have remained. Worries about Donald Trump’s trade wars have added downward pressure. It looks like we’re all going to hell in a handcart – or are we? Because if we’re not, it’s really not the time to sell.
Have a look around you. True, people may not be spending so much this Christmas. Is it the fault of Brexit though? Partly, but it could also be because it’s been so warm and also everyone’s fed up with tat. It’s not because we’re in a recession: our economy is still healthy. And looking forward into next year, we may have some problems with Brexit but we’ll still be going to the supermarket, driving our cars and using our mobile phones. Armageddon it is not.
To me, recent events look like a temporary setback, not a meltdown. This is normal behaviour with share prices and the only solution is to ride it out. If you invest, you must be patient. Shares do recover in time which is why the experts always advise you to have at least a five-year time horizon for any kind of investment.
A regular story I hear from friends is that ‘my Isa wasn’t doing very well so I sold it’. Inevitably they’re only two or three years into it and, understandably, they’re dismayed because it’s not worth as much as they put in. If only they’d waited for a bit longer: the circumstances after long periods of time can be very different. Remember that this year, among all the gloom, the FTSE 100 index of shares actually hit its highest ever level. Events can turn on a sixpence. If you’re out of the market, you won’t get the rally when it comes.
Besides, where else can you put the money? People look at a share price but often disregard the yearly dividend the share is paying. A general rule of thumb is the average paid by the FTSE 100 index – about 3.5% annually. This keeps being paid no matter what the short-term share price is doing (unless the company is in real trouble). This is attractive compared with what most savings accounts are paying currently. And, with inflation at about 2.2%, if your account doesn’t pay more than this, you’re losing money in real terms because inflation is eating away at your cash’s purchasing power.
Of course, if you’re really afraid, or about to cash in the Isa to pay for a house or other saving target, you may need a different strategy. You can swap into less risky bonds, or even cash temporarily, still keeping the money within the Isa wrapper. This way you don’t lose the tax benefits which you would if you sell the Isa outright. Alternatively, if you’re brave, this would be an excellent time to buy. Personally I’m hanging on in there, although, like most people, I won’t be making any large financial decisions until someone (anyone?) sorts out this Brexit baloney.
See our SMM beginners’s guides to investment here.