Did the 2020 stock market crash put people off investing in shares in a Stocks and Shares ISA? Many will surely now think it’s a bad idea, and that really doesn’t surprise me. After all, by the middle of March, the FTSE 100 had crashed by more than 30% since the start of the year. And FTSE 250 investors had it even harder, sitting on a 40% loss at the low point.
I could simply point to the long term and claim that, in the scheme of things, 2020 doesn’t matter. But that alone might not be much comfort to folks approaching retirement and looking at severely diminished pension pots. The traditional answer is to move investments out of shares at least five years before we need the cash. It’s one common approach, but I’m not going to do that.
Now, when I finish investing in shares and start taking income to keep me going, will I need all the cash at once? No, of course I won’t. All I’ll need in the first year will be, well, one year’s income. And even then, I won’t withdraw a full year’s cash in one go. In fact, I’m hoping to have to sell relatively few shares, and live as much as possible on dividends.
A big cut in 2020 dividends
Sure, dividends have been damaged since the Covid-19 pandemic struck. AJ Bell‘s quarterly Dividend Dashboard is a must-read for me. And figures in the latest one suggest that when the dust settles, FTSE 100 dividend payments will have been slashed by 20% in 2020.
That might sound like a disaster, but I see two main reasons why it’s really not such bad news. Firstly, even that reduced level of payout would still represent a yield of 3.2%. That’s some way below the yields of 4% and more that we’re used to. But income from investing in shares is still beating the pants off savings accounts and Cash ISAs.
My second reason is that forecasts already point to an 18% rebound in FTSE 100 dividend payments in 2021. That suggests many dividend cuts were perhaps a little over-cautious, and that’s not such a bad thing. I’d always prefer my companies to hold back short-term dividends in order to strengthen my long-term prospects. Then, of course, banks were forced to withhold their dividends by the PRA whether they needed to or not. And it seems they probably didn’t really need to.
When will I stop investing in shares?
So if I had retired this year, maybe I’d have sold a few shares to make up for the shortfall in dividends. And that would have been at unfavourable prices. But how long would I have to wait for the rest of my portfolio to recover? Well, over the past 12 months, starting around the time the first Covid cases were emerging, the FTSE 100 is now only 12% down. And the FTSE 250 has lost just 6%.
If that’s the worst that such a horrendous year can do, it just reinforces my conviction that shares are still my best investments ever, especially if I have at least a five-year horizon. I’ll be investing in shares for life.
