The stock market crash happened just in time for ISA season. Today, we all have a new £20,000 allowance and I’d use mine in a Stocks and Shares ISA.
It never feels comfortable to invest in shares when the market has been crashing. But we can often make good returns as shares recover from a depressed state.
Mixed short-term stock market outcomes
But with so much volatility in the markets, we can end up with mixed results, at least in the short term. For example, some shares have been tearing upwards since spiking down recently, such as YouGov, British American Tobacco, Spirent Communications, Plus 500 and BP. And some shares have continued to fall since the coronavirus pandemic hit, such as HSBC, Vistry, Lloyds, Norcros and Gately.
I reckon the key to successful and worry-free investing now is to adopt a long-term horizon. Share price movements in the short-term will likely seem insignificant when viewed from 10 years or so in the future. And we can also mitigate some of the effects of market volatility by drip-feeding money into shares rather than investing a lump sum all at once.
And I’d aim to invest around £500 each month. In that way, even with shares moving up and down, I’d never invest all my money at the highs or at the lows. In the end, such pound-cost averaging will likely work to produce a satisfactory long-term investing outcome.
However, we have the ‘problem’ of picking the ‘right’ shares. And, at times such as these, it can be tough to make successful share picks. But with a generally depressed stock market such as this, I’d be inclined to go for a collective investment vehicle, such as an index tracker fund.
Several advantages
There are several advantages to such instruments. Firstly, the monthly investment thresholds tend to be low and most trackers will accommodate a £500 per month investment. Secondly, running fees are low – typically less than 0.5% — which makes your investment cost-efficient. Thirdly, you’ll gain instant diversification with your investment spread across many underlying shares.
And diversification like that is a strong advantage in these markets. Market set-backs and economic recessions can damage some stocks irreparably – think banks after 2008, for example. But by diversifying widely in a tracker fund, you’ll avoid the risk of having a great deal of your money tied to the performance of one duff share.
I’d go for an FTSE 100 tracker fund because it has cyclical firms in its makeup, which have strong bounce-back potential. And I also see the Footsie as having the potential to pay a large dividend yield. But I also like the FTSE 250 index of mid-cap shares for its growth potential. And America’s S&P 500, which has undeniable previous form.
But you can choose between many trackers these days. And I’d be sure to select the accumulation version of each fund so that dividends are automatically rolled back in to compound my investment.