The old investing adage of ‘being greedy when others are fearful’ has no doubt been trotted out thousands of times over the last few weeks. With markets continuing to fall at breakneck speed, however, following this advice is a lot harder to do in practice.
For those able to take a long-term approach and adopt the suggestions below, however, I think the next few months could prove to be the buying opportunity of the decade.
Get that account open!
If you plan on investing during this period of volatility and you don’t yet have one, I can’t stress enough the importance of opening a Stocks and Shares ISA and/or a Self-Invested Personal Pension (SIPP).
Although there are clear differences between these accounts (and your personal situation will determine which is most appropriate), both protect you from paying any tax on profits you make or income you receive. That could turn out to be a whopping amount of money saved in a few years, once markets have recovered.
Opening an account as soon as possible is also vital since the end of the tax year is fast approaching. Wait until 6 April and you’ll forego your allowance for the 2019/20 tax year (£20,000 for an ISA and £40,000 for a SIPP).
Use it or lose it.
Separate the wheat
The huge fall in sentiment over the last few weeks has sent share prices of all companies — the good, the bad, and the ugly — tumbling. So long as you’re able to distinguish these correctly, you’re likely to make great money in time.
Good companies tend to be those with a strong competitive advantage, sound finances and skilled management teams (who are also part-owners). Bad/ugly companies tend to be burning through cash and are overwhelmed with debt. They may also operate in a declining industry, have poor brands, and limited strategic vision.
Having a watchlist is vital, even if there’s a very real possibility markets could continue falling for quite a while. Which brings me nicely to my next point.
Scale in
Since no one knows when the market will bottom, we have three options. Go all-in, avoid buying anything at all, or gradually drip-feed your money into the market.
The first of these is downright scary The second will not make you any cash (quite the opposite, in fact!). The final option feels the most appropriate to me if things are to remain volatile.
One way of doing this is to divide any spare capital you have into three tranches. Invest the first portion immediately and the remaining two portions within the next two months.
Naturally, this strategy can be modified. Instead of three tranches, you could have five, seven, or whatever. You could also plan to invest every other month rather than on a monthly basis.
The point is that putting some money to work now gets the ball rolling and avoids ‘analysis paralysis’.
Switch off
Having minimised your tax burden, identified desirable stocks and began to gradually feed your money into them, the final smart move is the simplest of them all to summarise.
Learning to take breaks from following the markets isn’t easy. It is, however, important if you’re to avoid making emotional decisions that ultimately compromise your returns.
Switch off and get some air. Your future self will thank you.
