ISA investing in the face of Coronavirus

A third day of gains for the FTSE 100 this week will be welcome relief for investors but the rebound only makes up a small fraction of the losses experienced last week. This increased volatility has come at a particularly difficult time for investors who want to utilise their ISA allowance before the end of the tax year and are thinking about where to invest.

Laura Suter, personal finance analyst at AJ Bell, looks at some of the things people need to consider and how they can position their portfolios to ride out the uncertainty.

The difference between contributing and investing

The first thing ISA investors need to remember is that there is a difference between contributing to an ISA and making an investment. If you are put off contributing to an ISA before the tax year end because of the Coronavirus inspired market turmoil, you lose this year’s ISA allowance forever.

Moving money into an ISA doesn’t mean you need to invest it right away. While stocks and shares ISA’s aren’t designed to hold cash for the long term, you can certainly hold off investing until the current turbulence that surrounds markets calms down and you feel more confident about selecting investments.

Think long term

While this feels like a scary time both on a human and an investment level, we have seen such crises before. Markets often rebound quickly once the immediate issues are resolved and selling now will merely lock in losses and result in people missing out on any recovery.

Anyone investing in the stock market should be thinking in terms of five years or more rather than weeks or months, and that is the context through which to view the current turmoil. At most people should use this as an opportunity to review their investments and position their portfolios to ride out this uncertainty.

Diversify

The first thing to ensure is that your portfolio is well diversified, for example not too heavily concentrated on a handful of stocks or funds, or one or two particular countries, industries or themes that could be particularly hard hit. You should also avoid any investments that go beyond your normal risk tolerance or don’t really fit with your long-term goals, target returns and time horizon. These sorts of ‘punts’ are most likely to hurt you if things really do take a turn for the worst.

Have some downside protection

Check that your portfolio offers some downside protection. Keeping a chunk of cash could be a start here. It can also protect the downside and also leaves investors with scope to step in and pick up bargains if they think stocks are becoming oversold. That said, money held in cash for the long-term risks being eaten away by inflation, so make sure you’re happy with the balance you strike here.

Gold may also be an option to help diversify your portfolio, although the price has already rallied a lot. If you wanted to buy options, you could include a fund of precious metal miners, such as BlackRock Gold & General or the VanEck Vectors Gold Miners ETF, which tracks the price of gold.

If the virus does lead to a global slowdown then it’s very possible that central banks will cut interest rates or print money via Quantitative Easing. Governments could look to spend more money and build up bigger budget deficits. All three of those scenarios would traditionally been seen as supportive for the gold price.

Funds for a crisis

Additional downside protection could be gleaned from buying a fund or investment trust whose priority is capital preservation. For example, the Personal Assets Trust, managed by Troy’s Sebastian Lyon operates with an absolute return mindset and offers a diversified portfolio that includes high quality equities such as Microsoft, Nestlé and Unilever, short-dated government bonds, cash and gold. Avoiding loss of capital is a primary consideration and therefore this trust could appeal to cautious investors, not least because it gives an instantly diversified portfolio in just one holding.

Don’t overtrade

It is understandably hard to detach yourself from the emotion of investing but at times like this it is more important than ever that investors don’t panic and overtrade. No-one knows what’s going to happen and it can be expensive to keep moving a big percentage of a portfolio around. If you make a change to your portfolio, make sure it’s for the long-term not for a few days, and that you know why you’re doing it. Chopping and changing can mean you quickly rack up lots of trading costs, which will eat into any returns.

These articles are for information purposes only and are not a personal recommendation or advice.