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Fresh trade-related tensions have reignited fears of a global stock market crash. Shares prices are in danger as markets contemplate a double whammy of sinking spending and rising costs.
Does this mean investors should avoid UK shares right now? Not necessarily. It all depends on investing goals and the ability to hold their nerve.
Costing money
Buying shares to hold only during the good times can be an expensive strategy, as research from Alliance Witan shows.
According to the investment trust, almost a quarter (24%) of investors “have sold an investment at a loss” during the last year. The figure stands at nearly one in 10 (actually 9%) for the past six months.
Alliance Witan says investors who’ve sold at a loss in the last year “did so predominantly because of a fear that the investment performance would fall further.” Some 36% of people of the 1,000 people it asked sold up because of this reason.
Meanwhile, 25% of investors said they exited because they “simply felt it was the right decision for that particular investment at the time.” Some 11% said they sold due to advice from a friend or relative.
The patience pot
Of course, selling assets to raise emergency cash is unavoidable. But doing so as part of a broader investment strategy can end up costing individuals a large stack of cash.
Analyst Mark Atkinson of investment manager WTW notes that “investors that stayed invested throughout periods of uncertainty would have experienced higher returns over a long-time horizon than those that made reactive decisions.”
Research from Alliance Witan backs this up. It shows that individuals who kept their investments during periods of volatility could, after 30 years, have built a ‘patience pot’ of around £192,000.
Watching the FTSE 100
The FTSE 100‘s long-term performance illustrates why holding on during economic upturns and downturns can be a lucrative strategy.
The UK’s premier share index has endured several sharp downturns in the 21st century alone, including the 2008 global financial crisis, the 2016 Brexit referendum and the 2020 worldwide pandemic.
Yet the FTSE has recovered strongly from each of these crises, reaching its current record around 8,871 points earlier this year. Investors who sold their holdings during these episodes would have locked in losses and missed out on the eventual market recovery.
The performance of index trackers like the iShares FTSE 100 UCITS ETF (LSE:CUKX) illustrates the wisdom of staying invested and riding out any storms. Since its creation in 2010, this exchange-traded fund (ETF) has delivered an average annual return of 7%.
Not all shares have risen in value over this period. Some that were in the Footsie at the start have even dropped out of the index altogether. However, funds like this can absorb shocks to specific companies, sectors and regions and still deliver a strong return over time.
Some of this iShares fund’s many diverse holdings include Lloyds, Diageo, Shell, Rolls-Royce and AstraZeneca.
Despite its diversified approach, the fund still carries risk like any investment. For instance, its high exposure to fossil fuels could compromise returns as the shift to greener energy accelerates.
But as a generally-low-risk way to target a strong and reliable return, ETFs like this are worth serious consideration.
