What a rollercoaster ride investors have endured since the beginning of last month, after the US launched airstrikes on the poisonous Iranian regime.
With every bellicose comment from President Donald Trump and every attack from Iran on the energy infrastructure of its near neighbours, stock markets dropped sharply – only to bounce back at the sniff of a ceasefire.
Now, with a fragile two-week truce agreed between America and Iran, markets are happier – but things could change very quickly.
It may take only an attack on shipping in the Strait of Hormuz by Iran or its proxies, or one too many airstrikes by Israel in Lebanon, for the ceasefire to be ripped up and hostilities to recommence.
For investors, volatile stock markets can undermine their faith in shares – and the latest data from global funds network Calastone confirms that the conflict in the Middle East persuaded many to sell some of their investments.
Calastone found UK investors pulled some £1.4 billion net out of funds in March, representing the highest monthly withdrawals since November when many got the jitters ahead of Rachel Reeves’ disastrous Budget amid concerns of higher taxes on capital gains.
The selling was across the board, with withdrawals made from funds of all types – the only exception, ironically, being US invested funds where inflows exceeded outflows by £99 million.
Some of those who sold their investments did so with the full intention of reinvesting at some stage in the near future – and many will have done so already.
Such a sell high, buy low approach involves transaction costs (and maybe tax costs further down the line) and doesn’t always work out. But I know readers (Eddie from Manchester among them) who adopt this policy and usually come out on top.
Others, maybe with retirement just around the corner, will have chosen to get their money out to protect their wealth from a severe haircut. Totally understandable.
Yet I sit in a different camp. I don’t consider myself savvy enough to time markets.
I’m among those who Calastone’s Edward Glynn describes as ‘content to stay invested knowing that most crises look like blips through a long-term lens’.
It’s a strategy I have followed throughout most of my investing life, and it has tended to work – especially in the immediate aftermath of the Covid lockdown in March 2020, when the temptation was to sell your investments and put everything into cash.
Over the past month, my modest portfolio has held up rather well, helped by some stellar returns from investment trust Seraphim Space (up 30 per cent). And it’s not surprising given the FTSE All-Share Index is down just a tad since missiles rained down on Iran.
Not once was I tempted to sell up and run for the proverbial hills. There is a lot of data around that supports the ‘grit your teeth and hang on approach’ that I adopt.
Investment house Fidelity wheels it out whenever markets tumble, and for those thinking of deserting equities it’s worth clocking.
Looking at the MSCI World Index, a proxy for the performance of global equities across developed countries, there have been only two occasions in the past 56 years when markets have fallen in consecutive calendar years: 1973 and 1974, and the three years 2000, 2001 and 2002 (the dotcom crash).
Even then, Fidelity’s investment specialist Ed Monk says those who hung on were rewarded with ‘huge growth in the value of their investments in the years that followed’.
Positive stock market years, adds Monk, total 42 compared to 14 of losses. And the data, he says, supports the case for gritting your teeth and staying invested ‘to capture both the highs and lows of markets as the years pass’.
On the issue of timing – selling up in the hope of buying back at cheaper prices and crystalising profits – Monk recommends caution. Missing out on some of the market’s best days, he says, can be seriously damaging.
For example, missing just the best five days recorded by the FTSE 100 Index since 1992 would have reduced your overall returns by around a third.
While staying invested makes sense for most long-term investors, it doesn’t mean you should just sit on your hands. At regular intervals, it’s imperative you look at the shares and funds you hold – be they in an Isa, self-invested pension, an employer pension or an investment portfolio – and assess whether they remain fit for purpose.
After the volatility of the past month, now is a good time to carry out such an audit.
By doing this, you may decide to keep things as they are. But you could conclude now is the right time to rebalance your portfolio by taking a slice of profits from some of your more successful investments and putting them into other funds and shares. This will help diversify your portfolio, ensuring it’s not over-dependent on a particular stock, fund or equity market.
Carry out such a review within the wrapper of either a stocks and shares Isa or pension, and you won’t need to worry about nasty capital gains tax. Apply it to your investment portfolio and you’ll need to be aware that profits above £3,000 will attract tax at either 18 per cent (basic rate taxpayers) or 24 per cent (higher or additional rate taxpayers).
A long look may also persuade you to de-risk your portfolio, especially if you’re nearing retirement.
That means more income-producing assets, such as dividend-friendly shares and funds as well as exposure to fixed interest bonds, and fewer investments that are growth-oriented and prone to sharp corrections.
If your wealth is in a pension fund and you can access it, buying an annuity could make financial sense, although seek advice first.
And, of course, you must ensure you are utilising your stocks and shares annual allowances (£20,000 per adult, £9,000 per child) for the new tax year which started last week. Also, squirrel away as much as you can into a pension.
Prioritise these two tax-friendly vehicles above building a stand-alone investment portfolio.
My message to you is to keep investing through market thick and thin. If you’re contributing to an Isa or pension on a monthly basis, keep doing so – don’t let short-term noise distract you into suspending your investments.
And if you still have doubts, let me leave you with the thoughts of Paul Kearney, executive chairman of investment specialist Asset Risk Consultants UK.
Last week, over coffee, he reminded me of the ‘Magellan Paradox’ – the gulf between the stellar returns that legendary investor Peter Lynch generated between 1977 and 1990 as manager of the Fidelity Magellan Fund and the average return of his investors.
Although Lynch delivered an annual fund return close to 30 per cent over this period, investors earned only single-digit gains. This is because many piled into the fund after it had performed strongly and headed for the exit when stock markets dipped and its price dropped.
‘The fund’s portfolio performed brilliantly,’ recalls Kearney, ‘but investor behaviour meant they diluted much of that success in terms of the gains they made.’
He adds: ‘Investors chase winners and sell in downturns. In other words, money flows into rising markets and out of falling ones. Over time, these decisions erode investor returns.’
Please don’t fall into this trap.
