Darius McDermott: This one habit can take the stress out of investing in volatile markets

24 April 2020

With the stock market plummeting, you might be happier investing on a monthly basis

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No one likes to see their investments fall in value. Even less so when they drop by 10% on what seems like a daily basis.

The coronavirus has spread exponentially, and Europe is currently being described as a new epicentre. Governments around the world are having to impose emergency powers to deal with the health crisis.

The UK stock market, as measured by the FTSE All Share, has experienced its worst fall since 1987 and at one point last month was down more than 30% compared with a year ago. By the time you read this, I do not know whether it will still be falling, will have bottomed or bounced back. Any one of those scenarios is entirely possible.

Over the past 50 years we have seen 10 market crashes. The shortest downturn was in 1981, which lasted 42 days. Then, the FTSE All Share fell 21.5%. The longest downturn was in 2000 to 2003 when the stock market fell some 50.9% over 1,167 days. 

No one knows when falling stock markets will bottom. There is no announcement, no sign – sometimes not even one we can see with hindsight.

And this makes it very difficult for investors. In this type of fast-moving environment, should you buy, sell or do nothing? For many, doing nothing is often the best strategy: selling holdings is a bit like shutting the gate after the horse has bolted, but who wants to invest and see yet more savings fall in value? It takes a brave investor to do the latter, although it can be rewarding.

But rather than umming and ahhing and trying to second-guess whether markets will fall again or bounce back with vigour, taking a ‘little but often’ approach could be a less stressful solution: instead of investing that £6,000 lump sum, you could invest £500 a month.

Advantages of regular monthly savings

There are a number of potential benefits associated with regular monthly savings:

First, this removes ‘timing’ considerations from your investment decisions. Very few investors can successfully predict the direction of the market in the short term, and getting it wrong can be costly, so why try? 

Second, regular savings also provide us with peace of mind: we can sleep at night, knowing that we are investing smaller amounts on a regular basis and that the fluctuations in the value of our portfolio will be less pronounced. Once you have set up your direct debit, you can sit back and relax for the rest of the tax year. 

Third, you benefit from ‘pound cost averaging’: when we invest the same amount on a regular basis, we simply buy more when an investment is cheaper and less when it is more expensive. For example, a £100 investment into a fund with a share price of £5 could provide you with 20 units during the first month. Say the share price fell in month two, your £100 now buys 25 units at a price of £4. In total, you have 45 units at an average price of £4.44.

Finally, you can invest as little as £1 a month, or as much as £1,667 a month into your Isa and it can be taken directly out of your bank account. This means it can become one of your regular monthly outgoings – only instead of paying a bill, you are saving towards your future.

Three fund ideas for your monthly savings

1 Smaller companies can fall further in market routs, but they can also bounce back stronger. Montanaro UK Income fund focuses on small and medium-sized businesses and, as the manager says: “Find the hardworking, honest entrepreneur with skin in the game and you will be fine.”

2 Asia is where the coronavirus was first reported and could have been the first to recover. Usually more volatile anyway, monthly savings can work well in the region. William Lam, Invesco Asian’s manager, is careful not to confuse good businesses with good investments: the two are not always the same. He has a pragmatic approach and uses behavioural theory in his research process.

3 Going into this global health crisis, the US economy was in one of the strongest positions. So many of its companies should be able to cope with any temporary economic slowdown. Schroder US Mid Cap fund is an option. It focuses on the US’s medium-sized companies, which still have plenty of room to grow.  

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views and those of the investment professionals quoted are their own and do not constitute financial advice.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre.