Eyes on the horizon
Individuals looking to take advantage of investment opportunities before tax year-end should not be put off by the potential for future market uncertainty.
Short-term volatility is a fact of life for stock market investors, but so far in 2017 it has been notable for its absence. According to Bloomberg, this is only the fifth time since 1928 that a year has begun so calmly.¹
Investors’ reaction to this news might be relief at one fewer thing to worry about, but even the Federal Reserve has joined the list of those concerned about whether investors are becoming too complacent. Minutes from its meeting at the beginning of February reported that a few officials “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook”.
In the US, that uncertainty centres on Donald Trump’s ability to deliver on his pro-growth campaign policies. Elsewhere in the world, uncertainties looming large this year include potentially high-risk elections in Europe and, of course, Brexit. Economic and market fundamentals, not politics, are ultimately what drive markets, and in that respect some confidence can be justified, but there are a number of events coming up, any of which could provide investors with a short-term jolt.
What investors cannot afford is to let the potential for shocks dissuade them from taking action to put in place the long-term plans needed to help secure their financial future. In the run-up to the end of the tax year, this could include making the most of valuable ISA and pension allowances before it’s too late.
The temptation for investors can be to ‘sit on the sidelines’ in fear of the next market downturn, or in the hope of timing their investment to coincide with the market reaching its floor. But trying to time the market is a fool’s errand. In the meantime, those opting for the perceived safety of cash, maybe as a home for this year’s ISA allowance, face the certainty of losing money in real terms. There are no Cash ISAs currently offering a rate that matches or beats inflation.²
It is sometimes said that markets “take the stairs up and the elevator down”. Fear is a much stronger emotion than greed. It has greater ability to get people to act, which is why market falls are often more rapid as panic spreads. Yet markets can also bounce back quickly following sudden downturns, as witnessed last year in the reaction to the Brexit vote. Consequently, the sharpest falls and largest gains are often concentrated into short periods of time.
Difficult though it can sometimes be, successful long-term investors are those who can keep their nerve when markets do become unsettled. As the chart shows, even missing a small number of days can have a huge impact in reducing an investor’s total returns. When it comes to investing, doing nothing is often best.
Source: Financial Express; stock market represented by the FTSE All-Share Index; data to 31 October 2016. Please be aware that past performance is not indicative of future performance. Please note that it is not possible to invest directly in the FTSE.
FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
¹ Bloomberg, February 2017
² Moneyfacts, March 2017