Private pension: Expert discusses impact of stock market falls
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September is the only month of the year where the global share prices have fallen on average over the last 40 years. Top investment managers are protecting themselves against a potential stock market crash so how should you respond?
Autumn is traditionally tough on investors. The Wall Street Crash 1929, Black Monday 1987, the 9/11 attacks in 2001 and the Lehman Brothers collapse in 2008 all happened in September or October.
Jason Hollands, managing director of fund platform Bestinvest, said history suggests we should be worried. “September spells danger for investors, as it is a month with a reputation for volatile markets. This is more than a myth.”
Global share prices have fallen in 21 out of the last 40 Septembers, making it the only month where stock markets have declined more than half the time.
September is also the only month of the year where share prices have fallen on average, including some major crashes.
Stock markets have made a strong start to the year, rising 16.2 percent, according to the MSCI World Index.
The rally has been fuelled by Covid vaccine optimism and massive monetary and fiscal stimulus programmes, but this may not last, Hollands warned.
“Momentum in global equity markets has been fading. Anecdotal evidence indicates that some fund managers have been buying derivates to protect against market falls.”
Inflation is a major threat, as the prices of goods and services start to rise around the world. This could force central bankers to increase interest rates and taper stimulus programmes to stop the economy from overheating.
Higher borrowing costs will slow growth and increase the cost of servicing government debt, which has shot up in the pandemic.
Hollands lists other reasons why the stock market could crash: “Historically demanding valuations for technology companies, high levels of corporate debt in the US and concerns about a surge in the Covid Delta variant give grounds for caution.”
Geopolitical risks are growing too. “These include worries about whether Afghanistan will become a safe haven for terrorists again and rising tensions between the US and China.”
It is important to stay calm.
Hollands said anybody investing money in stocks and shares must realise that markets never move in an unbroken upward direction forever. “Occasional pullbacks are to be expected.”
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If September does bring a stock market crash, it is important not to panic. “Keep calm and remember that sell-offs are usually a good opportunity to buy funds and shares at a lower price rather than sell them.”
September may be the cruellest month for investors but history shows that November and December are among the best, so the best strategy is to sit tight and wait for the recovery.
Alternative investments such as cash and bonds pay such low interest rates that few will be tempted. “Equities are still the main game in town,” Hollands said.
Cautious investors may want to target funds that invest in high-quality, defensive companies with reliable revenues and dividends. “UK-focused funds to consider include Liontrust Special Situations, TB Evenlode Income and Threadneedle UK Equity Income,” Hollands said.
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