Should you invest when stock markets fall?

The events of the past few weeks have given investors plenty of reasons to be fearful. Gone (but not forgotten) are the fears over Brexit and Trade Wars - and instead we have worries about the impact of the Coronavirus, both socially and on the global economic system.

With more than 109,695 cases of COVID-19, including 3,811 deaths worldwide*, the threat of the virus has taken hold of the global economy. The global stock market (as measured by the MSCI World) and the UK stock market, the FTSE 100, had fallen 9.6% and 12.5% respectively between 20 February and 6 March 2020**.

Today (March 9) saw the FTSE 100 fall a further 8% in early trading, as a row between Russia and Saudi Arabia saw oil prices plunge by more than 20%*** - an unnecessary shock for an already fragile market.

Mistimed investment decisions can be costly

The sharp declines in the value of investments could tempt people to head for the safety of cash for the time being. However, as Darius McDermott, our managing director, commented: "Share prices could fall further, but losses are not losses until you crystallise them.

“The worst thing anyone could do now, would be to redeem investments. History tells us that holding your nerve can be the better strategy.”

Although it is not impossible to time the market, it is extremely challenging and, while you may miss some of the worst days, it also leaves you open to missing out on some of the best-performing days.

Research from Schroders found that mistimed decisions on an investment of just £1,000 could have cost you more than £19,000-worth of returns in the past 30 years****.

The company analysed the performance of the FTSE 100, the FTSE 250 and the FTSE All-Share over three decades. It found that, had you invested in the FTSE 250 (the largest 250 companies in the UK) in 1989 and left the investment alone for the next 30 years, it might have been worth £26,831 by the end of 2019****.

However, if you had tried to time your entry in and out of the market, the result could have been very different - and not in a good way.

During the same period, if you missed out on the FTSE 250’s 30 best trading days the same investment might now be worth £7,543, or £19,288 less**** (figures exclusive or charges and inflation).

Essentially, if you had left your investment in the FTSE 250 untouched, you would have made an 11.6% annual return over the last 30 years. This falls starkly to 9.6% if you missed the 10 best trading days and then to 8.2% and 7% if you missed the best 20 or 30 days respectively****.

The story is similar for the FTSE 100 where a £1,000 investment in 1989 would have been worth £13,485 at the end of 2019. However, should you have tried to time the market and missed the best 30 days this would fall to £2,958****.

The true impact of missing out on the returns is highlighted in the table below:

For those feeling brave, it is also worth remembering that, if you were contemplating investing in the stock market at the start of January, it is much better value today: the UK stock market has fallen some 20% year to date^, which means you would essentially be buying the same assets at a 20% discount.

Below are five UK-centric funds which investors may want to consider:

Liontrust Special Situations

This is a ‘best ideas’ portfolio, which encompasses any stock regardless of size or sector, although there will usually be around 50% in small and mid-cap stocks. The managers look for firms with ‘intellectual capital’ or strong distribution networks, recurring revenue streams and products with no obvious substitutes. They also like to invest in companies where management teams have a significant personal equity stake.

Montanaro UK Income

This fund is run by industry veteran Charles Montanaro and invests in quality growth businesses, backed by strong management teams. The fund seeks to grow its dividend over time. One of its differentiating features is the absence of stocks listed on AIM (Alternative Investment Market), as the team believes these are too risky. Each holding will offer an attractive dividend yield or the potential for dividend growth.

AXA Framlington UK Mid Cap

This fund invests primarily in the companies in the FTSE 250. However, while it naturally focuses on medium-sized companies, its manager will be pragmatic about including select opportunities from the smaller companies space, investing early in strong growth stories, as well as letting winning mid-cap holdings grow into larger-sized companies. 

R&M UK Recovery

Finding undervalued companies that are yet to deliver on their potential the aim of this fund. Manager Hugh Sergeant uses his three decades of investing experience to identify companies where he believes management have the capability to turn things around and looks to add to his holdings at almost fire-sale prices in volatile times, so has no doubt had a busy few days.

Investec UK Alpha

Investec UK Alpha is a well-diversified core UK equity fund. The manager aims to buy quality companies that consistently create value for shareholders and believes that markets are excessively focused on short term factors, and not where a company will be in five years’ time. This creates opportunities to invest in quality companies that will deliver for many years into the future.

*Source: European Centre for Disease Prevention and Control, as at 8am, 9 March 2020
**Source: FE Analytics, total returns in sterling for the MSCI World, FTSE 100 and FTSE 250 20 February 2020 to 6 March 2020
***Source: www.bbc.co.uk, 9 March 2020
****Source: Schroder Insights -The £19k cost of trying to time the market
^Source: FE Analytics, total returns in sterling for the MSCI World, FTSE 100 and FTSE 250, 1 January 2020 to 10 March 2020

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. The views expressed are those of the author and do not constitute financial advice.