Where should you invest in a volatile market?

    23 April 2020

    What can investors do about the corona crash that’s wiped around a third of value from the world’s major stock-markets? According to a common piece of advice circulating online (‘Don’t touch your face – or your portfolio’) the answer is apparently nothing. The best thing to do, so runs the conventional wisdom, is to sit tight and wait for your investments to recover.

    Tom Selby, senior analyst with AJ Bell, agrees. ‘While coronavirus, and the government’s response, might well be unprecedented, the dip in markets we’ve seen in recent weeks certainly isn’t,’ he says. ‘Provided you are comfortable with your long-term strategy, there should be no need to radically alter your investments or trade. With the previous big crashes, it was investors who held their nerves that were rewarded when markets bounced back.’

    But while investors might initially have been encouraged by predictions of a V-shaped recovery (that is a sudden sharp dip and a speedy return to norm), many will have been spooked by news from the US – and Britain – that unemployment claims have risen to unprecedented levels. If we’re in for a long slump, it may well be worth changing tack. But what’s the best thing to do?

    Of course you don’t have to look far to find those touting their pet alternative investment strategy as a way to beat the markets. A theory commonly espoused by online ‘experts’ and pub economists is that gold is a safe bet in troubled times. Indeed the gold website BullionVault (which allows retail investors to buy precious metals directly) says it’s seen record levels of interest in gold recently. But while the price itself might not have rocketed, gold-focused ETFs – which traditional investors have long used to hedge against market dips – are largely performing well at the moment. Could the gold obsessives be on to something for once?

    Many old hands aren’t convinced, claiming that those who tout gold as a safe haven overlook basic rules of the world economy. ‘Like other commodities, the value of gold is adversely affected by the strength of the dollar,’ says Richard Hunter from Interactive Investor, the online trading platform. He predicts that, as institutional investors clamour to buy US treasury bonds (‘in times like these, return of capital often outweighs return of capital,’ as he puts it), the stronger dollar will leave the gold price tumbling, exposing the myth of its safe haven status.

    Then there’s that more modern phenomenon often touted as a hedge against market failure: cryptocurrencies. Although still derided by much of the investment establishment, Bitcoin was designed after the last big crash as an asset which would thrive in times of turbulence. So how is it faring right now? In fact, the price of cryptocurrencies came tumbling down in the days after the initial market shock, only making any serious signs of recovery in the past few days.

    So is there anywhere investors can look for a decent return right now? Given the record falls recorded by both the Dow Jones and FTSE in March, many investors will likely conclude that the only way is up from here. Or as is often attributed to Warren Buffet: be fearful when others are greedy, and greedy when others are fearful.

    According to Rob Morgan, a senior analyst from Charles Stanley, market optimists should still tread carefully. ‘Less knowledgeable investors should consider collective funds such as unit trusts and investment trusts,’ he says, rather than bet on individual companies. He also stresses the importance of keeping a broad spread of exposure. ‘A diverse fund that invests globally means you don’t have to worry so much about which regions or sectors might perform best,’ he says.

    Though for those feeling brave enough to opt for individual shares, there may well be rewards to be had. A quick inspection of the big FTSE stocks suggests that – with prices as low as they are – anyone investing today could expect to benefit from dividend yields of more than 5 per cent. Not bad at all but will the situation hold?

    After all, company boards may well look at the backlash against EasyJet – which has been slammed for seeking taxpayer support whilst paying shareholders some £174 million – and decide it’s safer to reduce dividends for the near future. For those reasons, buyers should check the affordability of a company’s planned dividends to assess the likelihood of reductions further down the line.

    If you’re bold enough to pick individual shares, then it’s probably worth sticking to the big names that are likely to have the institutional muscle to weather any further turmoil. Of the most purchased shares over the past few weeks on AJ Bell’s digital platform, the likes of BP, Aviva and Barclays all make appearances. And all have shown initial signs of recovery since mid-March. It might not be revolutionary admittedly, but it’s the tried and tested method. Good as gold, you might say.