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Posted by: The Probe 4th August 2020
Most people around the world will have taken a hit in terms of finances this year. The extent to which you were impacted will depend on a myriad of factors that make your personal circumstances unique to you. That said, you would very likely benefit from optimising your financial situation and making the most of any opportunities that are currently available to make your money work smarter, without you needing to work harder.
Invest in your future
The worldwide economy was thrown sharply into a state of depression this year when workplaces closed, services were restricted and income faltered for many businesses in different sectors. Unctad – a United Nations organisation that monitors trading trends – predicted a 27 per cent fall in global trade in the second quarter of 2020.[i] In the UK alone, the Office for National Statistics reported[ii] that GDP fell by 20.4% in April 2020 – the largest decrease since monthly records began in 1997. This monthly decline was three times bigger that that experienced during the 2008-09 recession.
What this means for the UK’s economic future is yet to be seen. However, we should take some comfort in the fact that following every recession is a recovery period. We will bounce back from this; the questions are just when and how.
With this in mind, there are some very appealing opportunities to invest in what is currently a depressed stock market. In doing this effectively, you could benefit from lower initial costs and significant growth performance, bringing in a little extra cash to replenish your bank account later down the line. As with all investments, there is risk involved, but you can mitigate these risks by taking the right approach.
Pound-cost averaging offers a level of protection against unexpected falls in the market. For example, say you invest £500 a month for 6 months. In month 1, the mutual fund is selling for £25, so you buy 20 shares. In month 2, the share price drops to £20 so you buy 25 shares – your account total comes to 45 shares at an average price of £22.50. Over the six months, you can absorb any minor fluctuations in share price as you focus on the average share price you pay overall. When the market strengthens again and you decide to sell, you will very likely be able to do so at a much higher share price than you initially paid. The key benefit of taking this approach to investment, is that you benefit from any decreases in share price during your investment period – had you invested the full £3,000 at one time, you would have paid full price and not taken advantage of the next month’s price drop.
Buying into dividends is another way to invest with a little peace of mind in a struggling market. This is because you will always receive a return on your investment, even if share prices fall. They are designed to support the stability of returns for companies – a defensive measure to protect against market depressions. As such, you shouldn’t expect high performance in a recovering or strong market and will likely want to navigate away from dividends at that time. If you are interested in long-term investment, then keeping some dividends in your portfolio will help to protect you from sudden declines in the future. Those companies selling dividends also tend to be large, well-established businesses that have demonstrated their ability to weather economic storms.
Just as industries like car manufacturing, retail and hospitality have suffered, other sectors have survived recent months with little impact. These are the industries that produce or distribute essential products that everyone will always need to purchase, regardless of their personal finances, such as food, medical supplies and hygiene items. Consequently, investing in shares of companies involved in related industries is a safe way to introduce yourself to the market. Again, maintaining a portfolio of investments in these areas could also protect against declines in the future.
Don’t go it alone
If you’re thinking about investing in the stock market and making the most of low share prices, be sure to do it right. Protect yourself where you can and make sound decisions based on the facts and the companies – not your emotions. For help in getting started and seizing the opportunities with smart investments, utilise the expertise of Independent Financial Advisors (IFAs) from money4dentists.
For more information please call 0845 345 5060 or 0754DENTIST.
Author: Richard Lishman
[i] Inman P. Global trade to fall by record 27% due to Covid-19, says UN. The Guardian. 13th May 2020. https://www.theguardian.com/business/2020/may/13/global-trade-to-fall-by-record-27-due-to-covid-19-says-un[Accessed June 2020]
[ii] Office for National Statistics. Coronavirus and the impact on output in the UK economy: April 2020. https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/coronavirusandtheimpactonoutputintheukeconomy/april2020[Accessed June 2020]