Catch A Falling Knife
- BetterAskAdam.com
- 6 days ago
- 8 min read
Updated: 5 days ago
Is now the right time to buy shares?
Between April 2nd and April 10th the FTSE 100 lost a staggering 10% of its value. That wiped out all the gains it made in the previous 12 months. A year's worth of investment gains lost in the matter of a week or so.
That's enough to send you to the bar for a stiff drink and vow never to get involved in the craziness of shares again.
So is now the right time to invest or should you stay away?
The downturn began on April 2nd when President Donald Trump announced a sweeping set of tariffs, dubbed "Liberation Day," imposing a 10% levy on all imports, with additional tariffs on countries including China and the European Union.
Q: The volatility of the US leadership shows no signs of abating - so should we put our money under the pillow or just use it to buy comforting hot chocolates and dine at the Ritz, instead of seeing it evaporate?
A: The problem for a lot of ordinary investors is that when everyone is talking about the stock market and how good it is, they buy shares. When the market is falling and everyone is saying how rubbish it is, they sell. As a result they are often buying when it is most expensive to do so and selling at a time when they lose the most money.
In fact the market rebounded very quickly and within a matetr of weeks regained almost all its lost ground. With the benefit of hindsight the best investment decision would have been to have bought whilst everyone was panicking. You'd have made 9% in a matter of days. Or to put it in context, it would take you 3 years to make that return in a bank account that you could have made in a week or so.
But jumping into the market not just as it is falling but because it is falling, is as dangerous as catching a falling knife. Impressive if you get it right but it can be very hazardous.
Q: So what is the sensible way to approach investing in such volatile times?
A: The truth is that it is almost impossible to know what will happen to the stock market, espcially in the short-term. So often, for long-term investors, it is often best not to panic.
The reason I say that, is this piece of research by JP Morgan on what happens if you just miss a handful of high performing days on the stock market.
If you just missed the 10 best performing days on the American stock market, you'd have cut your investment profit by 40%. If you missed the best 20 performing days, you'd have lost 70% of your investment returns.
That's why people often say that 'time not timing' is the key to investments. Unless you are fairly confident of your ability to get the timing right, admitting your limitations and just trusting in the tendancy of the stock market to perform well in the long-run, might be a better strategy.
That approach depends on your ability to afford to lose some value without causing you huge problems and being able to hang on, to see the market rebound and won't need the cash anytime soon.
Speaking to one investment advisor, Alex Shields, Partner & Chartered Financial Planner at The Private Office, he told me that they try and "ensure that investors understand the risks and before they start putting their savings into stock market related investments, are able to ride out the short-term storms that hit the market. It is something that investors need to be aware of and prepared for."
What's more, the market's best days often follow the worst, as Andrew Casey from Bastion Financial Planing told me. He point to research which shows that after a 10% fall in the market, after 5 years, the MSCI World Index shows a 70% gain after 5 years.
Andrew also points out the cycle of investor emotions that can trap retail investments into unhealthy investing patterns:
Optimism – Investors begin with a positive outlook, anticipating returns from their investments.
Excitement – As markets move favorably, enthusiasm builds.
Thrill – Continued market gains lead to heightened confidence.
Euphoria – At market peaks, investors may feel invincible, often leading to excessive risk-taking.
Complacency – A plateau in gains may cause some to become less vigilant.
Anxiety – Signs of market downturns trigger concern.
Fear – Losses mount, leading to defensive strategies.
Depression – Prolonged downturns can cause despondency.
Panic – Widespread fear leads to hasty decisions, often selling at a loss.
Capitulation – Investors may abandon the market entirely.
Despondency – Lingering doubt about market recovery.
Skepticism – Cautious optimism as signs of recovery appear.
Hope – Renewed belief in market potential.
Relief – Confidence returns as markets stabilize and grow.
Q: So if you want to invest in the stock market and are not an expert, what is the easiest ways of doing it?
A: There are 3 main ways of investing in the stock market:
1: Buy individual shares
2: Buy funds where a manager invests in a range of shares they think will perform well
3: Buy a tracker fund which just invests in the shares that make up one of the main stock market indicies.
The easiest thing to do is invest in a tracker fund, so I'm going to concentrate on that.
Q: How do you buy a tracker?
Beware of some of the headline facts you see about the cost of trackers, as I think they don't tell the whole story and indeed miss out on some very important things.
Since by and large 1 FTSE 100 tracker should be very similar to another - what you are mainly comparing is the cost of the trackers. If the product is the same - you just want the one with the cheapest costs.
Quick Side Bar: Some trackers may pay out income and some reinvest it - so do check you are comparing like with like.
And this is where the financial services market and its companies, lets us down yet again.
Where as it should be simple - it is not.
Let's compare buying a FTSE tracker to buying a chocolate bar.
If you want a box of Quality Street to put in the cupboard for a special occassion, then you go to a shop, see if you like the price and buy it.
If the shopkeeper told you it cost £3 - that would be the end of the discussion. But what would you think if, just as you were about to pay £3 - he then said there would also be an extra charge for every month you kept the box in your cupboard and the longer you kept it in the cupboard untouched - the more he would like you to keep popping back and paying him something.
So Nestle makes it profit from selling you the stuff and then the shop makes an annual amount of money just because you kept it in your cupboard. That might strike you as a bit odd and the phrase money for old rope, come to mind.
But that's exactly what happens with the stock market - and it is not always easy to understand what you are being charged unless you really investigate.
Q: So what are the charges that are made?
The website Motley Fool has a very useful guide to the cheapest FTSE 100 trackers which lists the charges as follows:
HSBC's FTSE 100 Tracker charges 0.07%
Vanguard's FTSE 100 Tracker charges 0.09%
Invesco's FTSE 100 Tracker charges 0.09%
That seems entirely resonable. The company needs to charge something to cover the cost of buying the shares and 0.07% of your fund value doesn't seem bad.
Over the past week I tried to buy one such fund and that's when I realised that:
1: Things are not as easy as the headline rates suggest
2: There is a way round the problems which can save you lost of money
First of all the problems:
Take HSBC's tracker. If you try to buy it, you will find that they first insist you open a bank account with them. It's like our shopkeeper refusing to sell you Quality Street unless you buy a daily newspaper from them as well.
Then you find that in additon to the 0.07% charge which is made by the tracker fund, HSBC won't sell you the fund unless you also sign up to their investment platform. You can't just buy that product, you need to be part of their financial ecosystem. For that privilege they will then charge you an additional 0.25% of the value of all the assets you own in the fund. So that's 300% more expensive than the charge for the fund.
Their press office sent me this link to their charges structure - which makes it look even mroe exoense than I thought - but that's maybe because in understanding all thee charges I am just losing the will to read more and therefore have got confused - all my fault I am sure but it goes to highlight how complex it is to understand.
HSBC is not alone, in fact this is more or less industry practice. But there are ways round it (Read on...)
Vanguard have a similar approach to the ongoing costs and in addition to the fund costs, will charge you £4/month for just holding the investment. Although they say there is no buy and sell charges.
If you are buying Vanguard shares - do have a careful look at the website. It took me a week and a call to their press office, before I could see the faint grey box you have tick to proceed. I spent a week thinking the website just didn't work. Although that could be just my eyesight - I don't think it is easy to use.
Q: So is there a way round those extra charges?
A: Yes
There are free trading platforms you can use. They seemed just too good to be true so I did as much due diligence as I could and cannot find any major problems.
FreeTrade.io is one of them. But the one I looked at in depth is Trading212.com which has no trading fee, no custody fee and no fee to transfer money into your account via regular bank transfers.
I was so dubious about the free deals, I called and had a long conversation with a number of their senior management - and it looks as good as the claims on the website.
Quite why Trading 212 can offer customers free trading and the big financial institutions can't, is a mystery. But that is the purpose of competition and it takes the young upstarts to show the big players and more to the point, us customers, that there can be a better way of doing things.
You can buy the main FTSE 100 trackers via their website without platform charges and indeed can also buy the iShare FTSE 100 tracker, which is often a cheaper option anyway.
It looks a good deal to me and do share your experiences if you have any - so I can report on others experiences as well.
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