The FTSE 100’s recent crash could present buying opportunities for long-term investors. However, it continues to face a highly uncertain near-term outlook. And there’s potential for things to get worse for the economy before they improve.
As such, holding some cash for emergencies could be a sound idea. So too could diversifying across a wide range of companies within a tax-efficient account such as an ISA. Doing so could improve your return prospects and lower your overall risks.
Diversification
The impact of coronavirus on some industries is likely to be greater than for other sectors. For example, airlines are likely to be among the hardest hit by the pandemic, since many major companies in that sector have been forced to ground some, or all, of their fleets.
As such, it’s a good idea to diversify across a range of industries. This can help to reduce your overall risks. It’ll also lower your chances of being exposed solely to those sectors which could endure a highly challenging year.
Likewise, diversifying across multiple stocks within a specific industry could be a worthwhile move. Some businesses are inevitably stronger than their peers. This means they may be in a better position to survive, or even capitalise, on the coming economic slowdown.
With buying shares now cheaper than ever due, in part, to the growth in online sharedealing providers, diversifying may be less expensive than many investors realise.
Tax efficiency
Reducing your long-term tax bill may not be a priority at present. But doing so can significantly improve your returns in the coming years, with minimal extra effort required on your part.
A good place to start could be to open a tax-efficient account such as a Stocks and Shares ISA. They’re cheap to open and administer, with the process of applying generally taking less than 10 minutes online.
Any investments made through a Stocks and Shares ISA are tax-free. With the government borrowing heavily to pay for the response to coronavirus, tax increases in areas such as dividends and income outside of ISAs could be on the agenda over the coming years. As such, shielding your returns from tax could become increasingly important.
Cash holdings
Holding some cash for emergencies is always a good idea. It means you have sufficient liquidity to pay for unexpected costs, such as car or housing repair bills.
However, with the stock market and the economic outlook being highly uncertain at present, now could be the right time to ensure you have a generous cash pile. This could provide peace of mind during a volatile period for investors. It may also allow you to capitalise on even lower FTSE 100 valuations should they appear later on in the year.
Through buying gradually and not piling in to shares, you may be able to obtain even more attractive prices in the coming months.
