Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How to claw back portfolio losses
Most investors are comfortable with the fact their portfolio will go up and down, but a big slump in value is extremely stressful and can cause even the most experienced investors to panic.
The market has witnessed huge peaks and troughs over the last 20 years and it’s likely the next 20 years will see more of the same.
Your natural instincts will probably be to sell your investments when things take a turn for the worse, but history shows this can be very damaging for your future returns.
As an example, in March 2009 the FTSE 100 plunged to approximately 3,500. That’s less than half the current level.
Anyone selling their investments at that point would have missed out on the subsequent bounce to 5,000 six months later. They would also have got fewer shares for their money if they then bought back in to the market.
Try not to buy high, sell low
Patrick Connolly, head of communications at financial advice firm Chase de Vere, says people are generally happy to invest when stock markets are buoyant, but are more likely to sell out when they’re in the doldrums, effectively crystallising their short-term losses.
‘When investing it is important that you don’t panic. Very few people make good investment decisions as a result of panicking,’ he warns.
Connolly says if you have made losses it is often best to sit tight and not sell. ‘Stock markets go up and down and, unless you’re in a particularly risky or specialist area, if you stay invested your holdings should bounce back over time,’ he explains.
Take advantage of lower prices and consider buying more
Instead of selling, you could even think about investing more money in the market because you’ll be able to buy shares at a lower price.
Connolly says investors will be doing this anyway if they are regularly rebalancing their portfolio. This means selling some of your investments that have done well and reinvesting the money into those which have performed poorly.
‘Rebalancing ensures you don’t take too much risk. Also, by selling investments that have done well in favour of those that have done badly, you are effectively selling at the top of the market and buying at the bottom,’ Connolly adds.
Sally Merritt, head of product for Saga Investment Services, says investors need to realise that investing is for the long-term. She suggests investing
for three to five years as a minimum to help even out the rises and falls in the market.
What to do if you are worried
If you are concerned about short-term impacts on your portfolio it’s a good idea to ensure your overall asset allocation matches your personal appetite for risk.
If it doesn’t, you can adjust your portfolio accordingly. If you like investing in funds, Merritt says you should also research underlying fund manager track records to make sure their past performance meets your expectations.
‘Investors might want to look at their other liquid assets in conjunction with their share portfolio and decide whether the spread suits their particular needs and goals,’ she says.
Keep a checklist of why you bought stocks, bonds or funds in the first place
If your portfolio has done much worse than the broader market, or a particular stock, bond or fund has let you down, you should analyse the reasons for this.
Russ Mould, investment director at AJ Bell Youinvest, says it helps to keep a checklist of why you bought the stocks, bonds or funds in the first place.
‘If all of the reasons are still valid; it may be a chance to average down and then sit tight. Time is on your side if the company has a sound balance sheet, strong business model and competent management,’ he says.
If events aren’t developing as you thought they would – perhaps there has been a profit warning or an overpriced acquisition by the company or the star fund manager has left – you should not buy more at a cheaper price.
‘It may be that you have to sell the position to limit further losses. Hope is not a strategy and sometimes admitting to a mistake is the best course of action, even if it is not a pleasant prospect,’ says Mould.
It’s important to be realistic in your return expectations. Carl Lamb, managing director at financial advice firm Almary Green Investments, says the market today is very different than it used to be.
‘Investors are much less willing to take proper long-term views. There is a pre-occupation with short-term results, and, crucially, the secular bull market in equities which ran virtually uninterrupted from 1982 for almost 30 years is over,’ he says.
Lamb reckons the low growth and low interest rate world makes investment decisions more important than ever before. He suggests coming up with a realistic plan that you are comfortable with – and then sticking to it. (EP)