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Coronavirus Q&A: Your questions answered

23 April 2020

7 minute read

We answer the questions you have about your investments amid the coronavirus crisis.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • The importance of keeping focused on your long term investment goals during the turbulence
  • Why investing regularly helps take the strain out of timing a stock market purchase
  • How the turmoil underlines the wisdom of spreading money across different types of investment.

Could I lose all my money?

The stock market may have fallen sharply but you are unlikely to lose everything. This is because the stock market isn’t just one company – The FTSE 100 Index, for example, is made up of the UK’s 100 largest firms, most with long track records in their business sectors. Despite the challenging economy right now many have robust operations, which despite the crisis, will hopefully be back to full throttle once the worst is over – and though there are no guarantees, a stock market recovery may follow.

One way you risk losing all your money in the stock market is if you hold all your pot in the shares of a single company and it goes bust – and some will undoubtedly not survive the coronavirus-driven upheaval.

This is why it is always better to spread money across a number of shares – or to reduce the risk further – with funds that invest in multiple companies. If one of the underlying firms collapses, it shouldn’t be the end of the world as you’ll have money invested in plenty of others, which will hopefully mean your goals aren’t completely derailed.

The turmoil is certainly a lesson in the importance of diversifying – that is, spreading your money across different types of investment – and even stock markets. Back in 1917 investors in the St Petersburg stock exchange lost everything when it was shut down just before the Russian Revolution (and remained closed for 75 years). This underlines how what goes on in a single country – politically or economically – can have an impact on your investments even to the extent, as here, of losing everything – a reason to spread your investments geographically.

Shares are at the high-risk end of the spectrum because of their potential to produce greater returns (or greater losses). But you can help reduce the overall risk of your investment pot by having money in other things as well such as cash, gilts and corporate bonds. Gilts are money you lend the Government, and they pay you interest on it. Corporate bonds are similar, but the money is lent to companies – they are both traded on the stock market like shares. Most developed government bond values rose immediately following the stock market crash as people rushed to find alternative homes for their money.

How long could this go on for?

When you’re on a flight encountering serious turbulence it can feel like forever that your stomach is being churned about. Will we ever get through this, will the plane ever land, will it crash and burn?

That’s what it feels like now for many investors as share prices heave up and down. The coronavirus crisis has come as a massive external shock to the world economy, which was in reasonably good health before it was knocked sideways.

The hope is that the vigorous response by central banks and governments with actions such as interest rate cuts and cheap loans to business will help set the global economy back on an even flight path.

Unlike previous stock market upsets, which came about almost naturally to iron out imbalances in the economy – for example, too many people put too great a faith in tech firms in 1999 and it all went pop – there was no such lop-sidedness to be sorted out this time.

Our best guess is that this downturn is likely to be sharp – but once we’re through the crisis the recovery could start relatively quickly, though of course the future is always uncertain so we won’t know for some while what happens.

Should I sell now in case it gets worse?

If you don’t need the money right away, try and ignore the daily upheavals and look ahead to your long-term investment goals, remembering why you invested in the first place. If you sell in haste you will make real those losses that are otherwise just on paper. If instead you continue holding on for the long term (at least five years) the market might recover – eventually. While past performance is no guarantee of future performance, it can be useful to look back at history to help with understanding. Following the 2008 financial crisis, it took less than two years for the FTSE 100 to recover its losses (if you include dividends paid by companies during the period). However, one issue to think about for future investment is that many companies have said they are either cancelling or delaying dividends due to the crisis so dividends may not be available to the same extent as they have been in the past.

All in all, recovery may take longer this time, or it could be quicker – only time will tell.

One risk of being out of the stock market is you will miss out on any rebounds (which are impossible to forecast) that could help reduce the losses you are currently looking at, and won’t benefit from any recovery.

If you sell your investments and put any cash proceeds into a savings account it will earn little interest, because rates are so low and you’ll probably lose value over the years due to the impact of inflation – Inflation reduces the purchasing power of your money over time. That being said, it also affects investment returns. Although investors hope returns will outpace the rate of inflation this cannot be guaranteed.

Deflation is another potential threat. This is when inflation turns negative – essentially meaning your money buys you more than it did before. It sounds appealing as the cost of goods can fall, but deflation can be bad for investments but good for savings. This is because consumers often delay purchases as they believe they will get even cheaper down the line. This means companies make less profit, which can have a knock-on effect on share prices. The value of savings – and what can be bought with them – on the otherhand will tend to rise even if interest rates are low.

Is now a good time to buy?

Anyone who started investing a decade or so ago – after the 2008 financial crisis – will have benefited from the stock market’s upward trajectory and this crash will have been their first serious downturn.

But by keeping calm and carrying on patience is likely to pay off.

With share prices cheaper than they’ve been for years you might see it as an opportunity to get in to the stock market. If you’re considering this course of action, you need to go in with your eyes open and be prepared to accept more ups and downs in these uncertain times.

You might be wondering whether to wait and see if prices fall further.

The truth is it’s too hard to time your entry into the stock market. To benefit from the ‘next big thing’ that might drive the growth of the world’s economies and the profits of companies – and so power your stock market investments – you have to be in it to win it but equally recognise that it could be a rocky ride along the way and you might not get that growth and profit.

I invest monthly. Should I carry on or stop ?

Keep going if you can. Investing monthly is a great way to avoid piling a lump sum in to the market at the wrong time. Your monthly sum buys more shares when prices dip – and fewer when prices rise. This is known as ‘pound-cost averaging’.

It can cost more overall to invest this way with a charge often applied each time you make a purchase or because of fixed charges if you invest only small sums. But regular investing is good for encouraging a savings discipline.

Take this opportunity to check your investments are spread wisely and you have diversification across different types of investments as well as diverse geographical markets to help protect against future shocks.

Bonds sound safer, should I switch to them instead?

Many investors have been pouring money into high quality government bonds during the upheaval. These are loans made to governments in return for interest payments.

The rush to buy has pushed up the price of many bonds. If you hold them already it’s good news and helps underline the importance of diversifying. While the value of your shares might have fallen, your bonds will probably have gone up in value reducing your overall losses.

But with higher values it could be a costly move to switch now. Not only would you be selling your shares for less than before the crash but also be paying a high price for the bonds – and you’ll have missed any gains made so far.

Exposure to bonds gives you diversification and can help reduce your overall investment risk, so you might want to consider investing in a bond fund for that reason. A bond fund spreads the risk further – across many different bonds. If one bond fails (such as when a company defaults on a loan or goes bust) you’ll have others to fall back on.

Many people choose bonds for income. But when prices rise, as they have recently on many bonds, the yield falls meaning you pay more to get the same income.

When share prices recover, bond prices typically decline – and yields rise. The fact they behave this way makes them useful for balancing your investments.

You shouldn’t pick them just because some have performed well recently though.

They have tended to offer a lower overall return than shares over the long term – which may not fit with your investment goals – though you should bear in mind that the past performance of investments is not a reliable indicator of their future performance.

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