Post election hangover. What now happens to stock markets and how can investors protect their investment portfolios
If like me you’re fed up with TV coverage of the election and a hung parliament, then there is some good news. Stock Markets did not fall off a cliff edge and although the UK is experiencing some political turmoil, the rest of the world seems to be getting on with business as usual.
The current challenges facing the UK cannot be underestimated, but consider some of the issues we’ve faced over the last forty or fifty years. If you’re investing for the long term, markets tend to be efficient and take into account all the information available. Long term investors are rewarded for the additional risk they are taking by investing into Stocks and Bonds.
However, there are some things investors can do to help ensure if there is a fall in Stock Markets. They can help limit the downside impact of temporary falls in the value of their investments.
If you are investing for the long term then at some point you should expect stock markets to drop. Fund managers see this as an opportunity to purchase stocks at a lower than normal price, hoping to make additional profit when normality returns.
Don’t follow the herd
How many times have you read the financial press, giving investing tips on the next big investment success? As markets are efficient, if it’s in the paper, then you’ve probably missed the boat. Investors that buy on these recommendations, whether it’s stock or investment funds should be aware of herd investing.
The simple illustration below shows how this works and the long-term effect of doing this.
Are you taking too much or too little risk?
Financial Planners often ask their clients to complete a risk questionnaire. The reason for this is to ensure that the client is not taking too much or too little risk. If you haven’t reviewed your portfolio or your financial plan in some time then it might be worth asking your adviser to re-assess the risk you are taking with your investments.
Rebalance your Portfolio
One of the key investment principles to controlling risk is to ensure your investment portfolio is re-balanced on a regular basis. This might be carried out annually, half-yearly or quarterly. Our recent article called the importance of rebalancing your Investments describes why this is an important task. Rebalancing controls the split between your Stocks and Shares, Fixed Interest, Gilts, Property and Cash. The aim is to ensure your portfolio does not become riskier over the long term.
Your financial Planner should have built into their Investment Policy Statement, the re-balancing process and how they put this into practice.
Use your annual allowances
The UK Government want to encourage people to save for the future such as retirement. Each tax year investors will have certain allowances they can use i.e. tax breaks. Examples of the allowances are:
Investors should always make use of their allowances first if they are considering adding to or starting new investments or pensions.
For the current tax year 2017/18 the ISA allowance has increased to £20,000 per person. The maximum annual allowance for pension contributions is £40,000, however this might be reduced if you have taken benefits from any pensions previously or if you are a high earner.
Apart from ISAS and pensions, Investors should also make use of their annual capital gains tax allowance if they have profits on investments that are subject to CGT. The current allowance is £11,300 for the 2017/18 tax year.
There is also a £5000 annual allowance in relation to dividends.
Many savers use a combination of saving each month and or investing a lump sum into pensions or ISAS’s. By investing each month, you could possibly benefit from pound cost averaging, whereby if the price of the investment falls then you are buying in at a lower price, hoping to benefit from price increases in the future.
If you have any questions about Investment Advice or any other article we have written, please feel free to contact us. You can use either the contact form or alternatively call us on 01454 321511.