Investing in an ISA when markets are falling

When is the right time to start investing in an ISA?
Investing in an ISA when markets are falling
Reading time: 5 mins

With a Stocks and Shares ISA, your money has the potential to grow in a tax-friendly way by letting you keep more of your gains as you don’t need to pay UK tax on the profits you make. Sounds good, right? So, what are you waiting for? Are you waiting for markets to recover to begin your ISA adventure? Here are some reasons why you don’t necessarily need to wait for market stability to take the plunge.

 

When is the right time to start investing in an ISA?
The best time to start investing is whenever you feel ready, financially speaking. It’s very tempting to let market movements dictate your decision. But since markets are by nature unpredictable and volatile, the wait could last forever, and your investment journey could never see the light of day. Obviously, entering the investment world when markets are down can be intimidating, but it’s not necessarily a bad idea to do so. In fact, when markets fall, investments typically get cheaper, meaning there are bargains to grab. If you were looking for a particular coat and noticed it was on sale, would you let this opportunity slip away? And think about it, if you want to make a profit when investing, you’ve got to buy low and sell high. That’s exactly what could happen by starting your ISA adventure when markets are down. You buy cheap investments, and if their value rises when markets recover, you’ll be making a gain. Of course, we can’t predict the future or tell where the markets will be heading next, but historically, they’ve always bounced back. So, there’s every chance financial markets will recover at some point.

Also, if you want to open a Stocks and Shares ISA, it’s generally a good idea to do it sooner rather than later. Each tax year comes with a new ISA allowance of £20,000 (subject to change), and if you don’t use it by the 5th April, midnight, you lose it forever. So, if you’re financially ready, try to make the most of it while you can without worrying too much about market movements.

 

What can I do to smooth out market bumps?
Assuming your finances are in good shape, it doesn’t matter when you start your investment journey. It’s what you do once you’re in that counts. And there are many ways that could help you make the most of your journey whilst smoothing out the bumps you’ll inevitably encounter along the way.

 

Make sure you think about diversification
One way to mitigate risk and potential losses is to diversify your plan. What do we mean by this? Well, instead of investing all your money in one or two companies and taking the risk of losing everything if things get rough, it could be worth spreading your money across investment types and regions. That way, poorly performing investments in your portfolio should be balanced out by others that are doing well, and the likelihood of losing all your money will decrease.

 

Consider investing little and often
Another way to iron out market bumps is to drip feed your account by investing small amounts of money on a regular basis. Doing this means you can buy at different prices, which in the long run will help smooth out the impact of the bumps on your overall performance. For instance, say you invest £1,000 and a month later, the market drops 10%. If you don’t drip feed, the value of your plan goes down by £100. Now if you had invested a smaller amount to start with, and made a similar contribution a month later, you would have benefited from the dip and potentially benefited from shares being 10% cheaper.

If you want to drip feed your ISA Plan, it’s easy! Simply set up a Direct Debit into your investment account and forget about it. We’ll do the rest, from monitoring the markets to grabbing best buys when the opportunity arises.

 

Think about the long-term
Market movements over the short-term can be scary, but investing is for the long-term, and as an investor, it’s important to try and look at the bigger picture. The longer you remain invested, the more likely you are to make a return. Take anyone who invested in the FTSE 100 between 1986 and 2019, for example. Those who stuck with their investments for any 10-year period have had an 89% chance of making a gain – and their investments probably went through some of the worst dips, like the financial crisis in 20081. So, although market bumps are scary, it’s important to remain focused on your long-term goals.

 

Reference:

1: Data from Bloomberg

 

Past performance is not a reliable indicator of future results.

The tax treatment depends on your individual circumstances and may be subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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