When markets are fluctuating, it can be very tempting to do the investment equivalent of running for the hills.
Seven reasons to stick with your ISA in jittery markets
When markets are fluctuating, it can be very tempting to do the investment equivalent of running for the hills – not least when financial news reports are peppered with words like ‘fear’ and ‘carnage’.
But there are good reasons for staying with your ISA, and resisting the urge to realise your holdings into cash, even at the most troubled times for markets.
Timing markets is hard
By selling out of holdings in anticipation of possible losses, investors may miss out on the gains that can often follow declines in the prices of assets like company shares.
Returns on cash are low
While cash offers a steady return and more short-term security than investments in company shares or bonds, interest rates remain at historically low levels. And because some rates are currently lower than the pace of inflation, holdings in cash can lose their purchasing power over time.
Volatility is the friend of the long-term investor
Market fluctuations can actually help long-term savers who add to their investments on a regular basis, by enabling them to pick up certain assets on the cheap.
Diversification, diversification, diversification
Investors can lower the overall risk of their ISA portfolios by holding different types of assets from different regions, thus not ‘putting all their eggs in the same basket’, in a process known as diversification.
Favours from foreign currencies
If the source of market angst is a domestic event – say, the departure of your country from a trading bloc – exposure to overseas currencies can also help to lower risks. Should the pound drop, the value of investments held in other currencies would immediately rise in sterling terms, all else equal. A strengthening in sterling would produce the opposite effect, however.
ISA allowances operate on the principle of ‘use it or lose it’: by selling assets from your previous tax year ISA you will not be able to use that allowance again, you may not be able to shield an even greater amount of your investments from tax during the next financial year.
Following the herd may not be a good idea
Lastly, being ‘contrarian’ – going in the opposite direction of the herd – isn’t always successful. But by fighting the knee jerk reaction to follow the crowd when everyone else appears to be selling, we may at least avoid the costly error of selling low and buying high.
Underpinning all of these reasons is fact that for long-term savers, it can pay to keep calm and stay invested, as we have written elsewhere. The next time the headlines are flooded with tales of doom and gloom, this is something worth remembering.