Will lockdown investors be spooked by market volatility?

Are you a lockdown investor? 

Thanks to trends on social media, online forums and even the mainstream media, the pandemic brought with it a large increase in the number of young ‘lockdown investors’. With an inability to spend money during numerous lockdowns, young investors were lured in with many looking for exciting quick-win investment opportunities with excess money to burn. When surveyed, 58% of these young investors said that constantly hearing about a certain investment via these channels encouraged them to purchase specific investments. However, it has become increasingly clear that some of these investments maybe riskier than they realise, driven by competition and often influenced by hype. 

Certain investments, such as cryptocurrencies, are unregulated and volatile in nature.  Although suitable for some investors who may understand the risks that they are taking on, many investors don’t. In a rush to not miss out on investment trends or benefitting from potential high returns that friends or the wider community are reporting, they are not thinking about the long-term strategy for their wealth but rather focusing on the ‘get rich quick’ dream that’s being sold. Furthermore, when the share price of the high risk investments tumbles, some investors panic, realise their losses at the earliest opportunity in order to safeguard against further falls, and exacerbate the situation. 

According to the city regulator the Financial Conduct Authority (FCA), in a survey of 1,000 people, “of those aged 18 to 40 who invest in high-risk investment products, three quarters (76%) said they felt a sense of competitiveness when placing their money in an investment, with over two thirds (68%) likened it to gambling. Just 1 in 5 respondents (21%) were considering holding their most recent investment for more than a year, and less than 1 in 10 (8%) for more than 5 years. This is despite 60% of those surveyed saying that they prefer more stable returns than investments that rise and fall dramatically.”

Will lockdown investors be spooked?

Not all lockdown investors have invested in volatile stocks; many may choose a longer term investment strategy, however, this year could be the first time new, young investors experience a fall in their investments, having had a good run of the market for some time. One of the major questions facing the retail investor market is whether millions of younger people who started investing during the pandemic will stick with their investment habits or will they be spooked by market volatility?

It is obvious that “lockdown investors” have enjoyed a period of incredible growth – particularly when it comes to US tech stocks and the volatile world of cryptocurrencies, a trend that’s now rapidly unravelling. Conversely, the most experienced investors doubt this pattern will continue, predicting markets are heading for a fundamental shift that could unsettle recent entrants.

Markets since the start of the year have certainly become a lot more unstable, as the world firstly saw a rotation from growth stocks such as Tech companies that have benefitted from historically low borrowing costs to value stocks, strong stable companies with sturdy balance sheets and cashflows. This shift from growth to value stocks, that so many traditional investors are making, may not appeal in the same way to young investors. Furthermore, as geopolitical tensions deepen, with the war in Ukraine, supply chains are disrupted and consequently inflation is running out of control, central banks are looking further to increasing interest rates which will in turn increase the cost of debt in a bid to keep inflation at bay. Combined with the withdrawal of asset-boosting monetary stimulus, markets are set to continue to be volatile for at least the rest of 2022 and possibly into 2023. This is having a knock on effect with the cost of living which is shooting up and affecting the pounds in our pockets, as well as the corporate earnings of companies we invest in. Whilst we’re already contending with rising energy bills and higher food prices, next, we’ll have higher taxes and rising interest rates. This is particularly worrisome for young property owners with huge amounts of mortgage debt.

Will this affect the young investor? Will they panic and take their money out, or adjust their portfolios and stick along for the ride? One thing is for certain the “get rich quick” mindset of the value investor is vastly different from the “get rich quick” drama of chasing overnight gains in GameStop and Dogecoin.

It is certainly a concern, not only to the regulator but also to our Investment Committee at Investment Champion, that new investors are increasingly accessing higher-risk investments which may not be right for them. To help investors make the right call for them, the FCA is launching an £11m, 5-year campaign, InvestSmart. The campaign targets those who are inexperienced at investing, possibly dipping their toe for the first time. The campaign aims to reach those investors through social media and online, where much of the hype around investment takes place. The campaign asks investors to consider their appetite for risk and to ignore the hype, directing them instead to advice.

5 important questions to ask yourself before you invest

InvestSmart recommends 5 important questions to ask yourself before you invest and we encourage you to do the same:

• Am I comfortable with the level of risk?
• Do I understand the investment being offered to me?
• Are my investments regulated?
• Am I protected if the investment provider or my adviser goes out of business?
• Should I get financial advice?

What are the fundamentals of basic investment advice?

To start, the best thing to do is to consider the fundamentals of investing in the context of your own personal financial plan. Everyone needs a cash emergency fund to cover any emergencies or short-term expenditure requirements. The last thing an investor wants to be is a forced seller in a falling market; selling investments to fund expenditure when markets are down, and valuations are low is one of the last thing you want to do, if you can help it. This is why having cash as part of the foundation of your financial plan is absolutely key as it’s not subject to investment volatility.

Next, investing for the long-term is the best proven method. Although it may seem less exciting and not as thrilling as short-term wins, investing for the long-term gives you the ability to ride out volatility in investment markets. Locking away money that’s invested for the long term – at least five to 10 years - is the ideal way to go. This psychologically is difficult if you’re checking investment apps every hour of the day, which a lot of new investors tend to do. Have a long term view of investments and don’t check every day. People who check their portfolio more often actually tend to do worse in the long run, on average!

More often than not, people who try and time the markets get it wrong. The best way to do that is to set up regular savings plans, such as a standing order, where you invest a set amount into an Individual Savings Account (ISA) or General Investment Account (GIA) every month and don’t compromise on that amount. This amount can be automatically invested into funds, trusts or shares of your choice and can start from as little as £100 per month.

What is pound cost averaging?

This is a concept called pound-cost averaging: a strategy used by some investors to reduce their exposure during times when markets are dropping. The idea behind pound-cost averaging is to provide some protection against the possibility of the market dropping sharply shortly after the money is invested. By investing periodically, your money buys more shares at a cheaper price when the market falls and fewer shares at a higher price when the market rises. This averages out the price at which you buy investments and, over time, could help to smooth stock market volatility.

If you are reading this as a young investor who has just joined the retail market or someone who has been investing for a long time, below are some fundamental tips that can help:

Set a goal: Having a long-term aim to invest for will give your investments time to ride out any volatility in the market. This could be a house deposit, retirement, your children’s future. During short-term market falls, focussing on your goals will also help you to avoid selling out and realising losses.

Incorporate regular investments: Set up standing orders into savings plans such as Individual Savings Accounts (ISA) or General Investment Accounts (GIA). Drip feeding what you can afford each month could be beneficial during times of stock market turmoil and economic uncertainty.

Use your tax allowances: such as your ISA allowance, which renews on 6 April each year. This is £20,000 for the 2022/23 tax year. Investments inside an ISA grow free of capital gains tax, which could help you to build a substantial investment pot over time.

Manage your emotions: Don’t let your emotions influence your investment decisions; don’t panic if the stock market falls, particularly as a first-time investor. Try to hold your nerve and remember to invest for the long-term.

Diversification: Choose a spread of investments that aren’t correlated to each other such as - equities i.e. stocks and shares, bonds, and cash. Different assets behave in different ways which  could help to even out returns and reduce the impact of any particular asset falling in value.

How we can help

For first time investors this can be difficult without advice. At Investment Champion we have ready-made, diversified portfolios that you can set up regular investments to in the form of products such as an Individual Savings Account, General Investment Account ISAs, GIAs or Self Invested Personal Pensions (SIPPs). If you need further advice due to a complicated investment decision, tax query or general financial planning then it is recommended to get in contact with a financial adviser. An adviser will help you spread your money across a diverse range of investments in a way that suits your personal needs and risk profile. Advisers can ensure that you are taking advantage of all your tax allowances and reliefs, so that you can feel confident your money is working as hard as it should be.