There’s continued chatter at the moment about the state of the stock market. Even within the past month, the FTSE 100 has swung 500 points from high to low as investors try to get a feel for what the immediate future holds.
If inflation starts to tail off, the Bank of England holds rates at 1.25%, and peace in Ukraine is agreed, we could easily see a strong stock market recovery. Here’s how I’m positioning my Stocks and Shares ISA for this possibility.
Buying the dip
The first way I’m positioning for a market recovery is making use of fresh cash to buy the dips. I have a £20,000 allowance each year for my ISA. With the year resetting in April, I’ve got plenty of my allowance left to use.
Given the high volatility in the market at the moment, I want to be selective on the dips that I buy and the stocks I pick up. I need to be quick to take advantage of these moves. After all, there are many investors just like me that are trying to buy the dip as well!
In terms of specific stocks, I want to buy a real mix. There are 28 FTSE 100 stocks that are down at least 25% in the past year. Another drop in the market could be enough to push some to an undervalued state. I’d study and buy some at that point.
A dip would also help to boost the dividend yield on income shares. The yield is made up of the dividend per share and the share price. If the dividend stays the same but the share price falls, the yield increases. So I can get more value for my money in future income by buying on a short-term fall.
It makes sense to add all of this to my ISA because the holdings are exempt from dividend and capital gains tax. So if I do have large gains further down the line, I’m able to enjoy the full benefit of it, without losing a chunk to the taxman.
Not trimming losses in my Stocks and Shares ISA
I’m also focused on not cutting down my existing holdings to realise cash. Like many people, I’m holding stocks that are in the red. If I sell now, I’ll cement a loss on my original investment. If I think that the stock market is going to recover, this doesn’t seem to be a smart move. Rather, I want to hold until I can exit for a profit.
Even if I do decide to sell, the cash I’ll get is going to be eroded heavily by inflation. Therefore, I’ll most likely have to reinvest the money back into the stock market. Given that my money was already invested, it seems a bit pointless to sell a stock to then reinvest it when I realise that excess cash isn’t a good thing right now!
Clearly, there are some occasions when it does make sense to sell a stock, even if the market in general recovers. Company-specific factors might force my hand. There’s no guarantee that the share price will recover. But in plenty of other cases, it does make sense to hold out for the long-term.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.