When markets are falling, often the best advice is to do nothing at all. Our experience of markets shows that in the long term, everything passes, and if you have a well-diversified portfolio and a long term investment horizon, sitting tight is often the best way to ensure your portfolio is best positioned for recovery.
Unfortunately, as humans, we tend to find it very difficult to do nothing in worrying situations. It’s why so many people find it hard not to run away screaming when they see a bear (which tends to draw their attention).
The good news is that there are plenty of proactive and sensible steps you can take right now, before the end of the tax year, which can leave you better off when the tough times pass.
It’s the ISA equivalent of backing away slowly, while talking in a low and soothing voice – and then climbing a tree.
Protect your allowance right now: invest whenever you like
The opportunity to avoid paying needless tax forever is still incredibly attractive, so don’t let market falls put you off. There are plenty of ways to take advantage of this year’s ISA allowance without piling into shares today, so use it before you lose it.
You can open a stocks and shares ISA and park the money in cash for now. Then you can gradually drip feed it into stockmarket investments throughout the year. That way you have protected your allowance, and can invest when it suits you best.
Drip feed cash into next year’s allowance
One useful approach in difficult times is to start regular savings into an ISA. You can make payments from £25 a month, and then top up with lump sums throughout the tax year when it makes most sense for your finances. Alternatively, you can spread ISA contributions through the tax year by investing £1,666.66 a month. This means your money goes further during the dips, and benefits through the rises, so you end up paying an average price for your shares.
Benefit from the dips by moving existing investments into an ISA
If you have shares outside an ISA, you can sell them and rebuy within the ISA wrapper – using the Bed & ISA process. This lets you sell shares and make gains below the annual capital gains tax allowance (£12,000 this year) then reinvest in the same stocks within an ISA.
When markets fall back, it can be a particularly useful time to Bed & ISA, because you can move more of your investments without busting the capital gains tax limit. The only caveat is to beware of trading right up to the limit, because there may be a delay in issuing your instruction and the sale being made, and if the market rises significantly in that time you want to avoid being pushed over your annual allowance.
Save capital gains tax on your Sharesave scheme too
Given that they’re usually priced at a discount in the first place, some Sharesave schemes will still be showing gains over three years. If you’ve made money, there’s a specific rule to save you CGT on shares from a Sharesave scheme. As long as you transfer the shares into the ISA within 90 days of the scheme maturing, you can transfer up to £20,000 of shares, and there won’t be any CGT to pay on them.
Open a Lifetime ISA – even if it’s with the bare minimum
If you’re 39, open a LISA and put a small sum of cash in it. You may not have plans to buy a first property, you may own a home, you may already be saving in a pension, and you may be worried by market movements – and all of those things may have put you off. However, taking out a LISA now protects your right to have one, and pay into it any time before the age of 50. It keeps your options open in case your plans change and you want to take advantage of the government bonus. Failing to take one out before the age of 40 means you have lost the opportunity altogether.
If you’re eating into your pension pot, consider ISA income alternatives
By far the best approach when you’re drawing cash from your pension is just to take the natural income it produces. This is unlikely to be affected by share price volatility as long as the business fundamentals remain sound. There are, however, some people who are nibbling into the capital as they go along, and at times when markets fall, this can be risky, because it’ll have an impact even when it recovers.
If you have ISAs alongside your pension, it gives you far more flexibility. You can draw the income from stocks and shares ISAs to boost your income, or you could dip into cash ISAs – as long as you still maintain your emergency fund of 3-6 months’ worth of expenses.
Don’t lose sight of relative risks
At times like this, we become very focused on the short term risk of losses from a stocks and shares ISA, but it’s important to put this in context. Shares are long term investments, and the longer you hold them, the more likely you are to be able to recover from losses and take advantage of long term growth. While cash savings are far more suitable over the short term, because there’s no risk of short term loss, if you hold them for the long run you run a different kind of risk – that of losing value after inflation.
About the author
Sarah Coles is a personal finance analyst at personal wealth specialists Hargreaves Lansdown.
Image by mohamed Hassan from PixabayLast modified: June 10, 2021