Victoria Scholar’s advice on how to survive a stock market crash
While savers are finally celebrating as best buy accounts pay more than six percent a year, pension and Isa investors have suffered another frustrating year. The “cheap and hated” UK stock market has been particularly poor, with the benchmark FTSE 100 index sliding almost 10 percent from February’s all-time high of 8,014 to close at just 7,256.94 on Friday.
The US is doing better but this is down to the strong performance of just seven mega-cap stocks in its technology sector. The rest of the market is going nowhere as recession looms.
The past six months have been tumultuous due to rising interest rates, banking crises and geopolitical volatility, said Nick Wood, head of fund research at Quilter Cheviot.
This year’s “magnificent seven” big winners are all benefiting from the hype around artificial intelligence (AI), namely Apple, Microsoft, Amazon, Google, Nvidia, Facebook-owner Meta and Elon Musk’s Tesla.
“AI excitement has been fuelling extreme share price movements,” Wood said.
As tech rebounds, some of last year’s weakest funds have been this year’s strongest. “T. Rowe Price Global Technology, Baillie Gifford American and Morgan Stanley Global Insight were in the bottom 10 performing funds for 2022. This year, all are in the top 10.”
Investment trusts Polar Capital Technology and Allianz Technology Trust have soared due to the AI fad.
Disgruntled investors who dumped tech after the Nasdaq crashed by a third last year will be kicking themselves today. “This shows the advantage of long-term investing for the long-term,” Wood added.
However, there are now growing concerns that investors have got carried away, and the magnificent seven could soon get shot down.
Veteran investor James Penny, chief investment officer of TAM Asset Management, recently warned that the AI frenzy “smells very much like the dot-com era” which saw a huge boom and boost, and many agree with him.
Even Sam Altman, founder of chatbot OpenAI, says today’s AI systems are “wildly overhyped”.
Investors who buy them today are taking a big risk as valuations look incredibly expensive.
Jumping onto the tail end of a bandwagon is always risky.
At the start of 2023, analysts reckoned China would boom after its economy reopened following strict Covid lockdowns.
It didn’t happen, with China-focused investment funds some of the worst performers of all. Yet Chinese shares are cheap and could enjoy a resurgence just like the tech sector has done this year, Wood said.
It’s another risky call, though.
The Japanese stock market has done well but the falling value of the yen means it’s only up around seven percent this year in sterling terms.
Investors will be hoping for a more rewarding second half, but as ever with investing, there are no guarantees.
Given today’s uncertainties, many investors are playing safe by keeping money in cash, attracted by today’s rocketing savings rates.
Investors have not given up on shares altogether, but they have lost faith in the ability of fund managers to beat the market.
Nine out of the 10 most popular Isa funds on AJ Bell’s platform for DIY investors are index trackers, which passively follow stock markets up and down rather than actively trying to beat them.
Research repeatedly shows that three quarters of fund managers underperform the market in any year, after charges, while even those who do beat the market one year struggle to repeat their success.
So why pay more for less?
Many of the most popular trackers are exchange traded funds (ETFs), which can be bought and sold in seconds like shares and have incredibly low charges, which means you get to keep more of your returns.
Fidelity Index World, Vanguard S&P500 ETF, iShares Core FTSE 100 ETF and the HSBC FTSE All-World Index all feature in AJ Bell’s top 10 best sellers.
Head of investment analysis Laith Khalaf said one actively managed fund has beaten them all, Fundsmith Equity, run by star manager Terry Smith. “This is the only fund left carrying the torch for active management, and is the UK’s overall best seller. Few active managers have anything approaching its brand awareness.”
Scottish Mortgage Investment Trust, which invests in fast growing US technology companies and privately owned firms, briefly matched its popularity but suffered a horror year in 2022, with investors losing half their money.
It’s still in demand but has yet to show signs of a meaningful recovery.
Investing in the UK is an act of faith today, but history shows that the best time to invest is when shares are down and trading at bargain valuations.
Markets usually bounce back in the end but it could be a long haul as today’s financial problems drag on.
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