'I am saving for the long term': World stock markets are in turmoil but now is NOT the time to panic

Novice investors who have turned to shares in the past few years in search of income are facing their first test. Having enjoyed four years of virtually uninterrupted gains, investors are experiencing a market of stomach-churning ups and downs.

The FTSE 100 index, which by last month had almost doubled in value since 2009, has fallen five per cent in a fortnight. Other leading markets have fared worse.

For armies of savers who recently turned to shares because of the appalling returns on their savings, this is the ‘first real test of their mettle’ say commentators. But investors should resist panic and the impulse to sell.

Keeping calm: Sophia Joyce, with husband Christopher and Max, says she has invested for the long term

Sophia Joyce, 42, a part-time PA, is among those who decided to try the stock market because of the dismal returns that are on offer elsewhere.

Sophia, who lives in St Albans, Hertfordshire, with her teacher husband Christopher, also 42, and their Norfolk terrier Max, made her first foray into the world of shares with a £6,000 Isa investment in 2011.

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She chose three funds covering the UK, Japan and America – all managed by Fidelity. By the beginning of this year her holdings had increased to £8,000 in value. Sophia is relatively unconcerned about the recent market volatility.

‘It doesn’t worry me as the investment represents just a part of my savings,’ she says. ‘I am also saving for the long term. I am hoping to use it as an additional pension pot, so what happens now or in the immediate future is less important.

Long-term perspective: Funds with an attractive income stream

Professional financial advisers applaud Sophia’s attitude, arguing that stock market investments should form part of a longer-term plan where setbacks should be expected, and if possible ignored.

Darius McDermott, managing director of broker Chelsea Financial Services, says: ‘Long-term investors shouldn’t worry. Some volatility must be expected as markets don’t go up in a straight line. Given the strength of the gains in the past year, some retrenchment is to be expected.’

 

James Robson, financial planner at adviser Plutus Wealth in London, says: ‘Novice investors might be inclined to pull money out of the market if things go wrong, but they should try to look beyond that.’

Trying to ‘time’ the market – selling when you think shares will fall, or buying when you think they will rise – tends to result in heavy losses, because investors inevitably miss short periods where shares enjoy rapid gains.

Figures from Fidelity show that £1,000 invested in the FTSE All-Share index 15 years ago would be worth £2,018 today.

However, if investors had tried to time the market and as a result missed the best 40 days, their original stake would be worth only £366 today.

Gavin Haynes, head of investment at adviser Whitechurch Securities in Bristol, says: ‘Investment is all about being patient and taking a long-term perspective. ‘Trying to second-guess short-term trends in the market is notoriously difficult, even for professionals.’

Many brokers and fund companies have seen increases in flows of money from inexperienced investors, some driven by low returns elsewhere – and others lured by the stock market’s substantial gains.

McDermott says: ‘While we have seen a steady flow of cash Isa transfers into investment Isas over the past four years or so, we’ve seen a marked increase this year.’

Warnings grow over a bonds crash Wary: Darius McDermott of Chelsea Financial Services in West London

While investors in shares are being urged to sit tight, fears are growing that the ‘bonds bubble’ may be about to burst.

Small investors have exposure to bonds, which are issued by governments and companies, through popular funds managed by companies such as Fidelity or M&G.

Until recently, they were seen as good for income and relatively low-risk. But many now say they could crash.

Brian Dennehy, managing director of investment platform FundExpert, says: ‘This will  not end well.’ He is urging investors to reduce their  bond fund holdings.

Heavy losses have been triggered by a surge in bond yields, which was prompted last month when Ben Bernanke, chairman of the Federal Reserve, indicated America’s central bank was considering pulling back on the level of quantitative easing, or bond buying, as  the US economy looked to  be on the road to recovery. 

The current bond buying  to keep interest rates low  has artificially inflated the value of bonds. Darius McDermott  of Chelsea Financial Services says: ‘We’ve been saying for some time we are struggling to find any value in bonds. 

‘They’ve enjoyed a 30-year bull market and the gains are unusual and unsustainable. ‘Investors should only be considering bonds now for  the income and diversification they provide. When interest rates go up, there will be capital losses.’

However, Gavin Haynes of Whitechurch Securities  in Bristol says:  ‘We don’t like government  bonds, but there  is still scope for other types such  as high-yield corporate bonds and strategic bonds.’