A stock market crash in 2021 has been forecast by numerous advisors. What ISA funds should I be investing in to guard against this?
07 July 2021
Question by Alistair
A stock market crash in 2021 has been forecast by numerous advisors including Warren Buffet. What ISA funds should I be investing in to guard against this?
Answered by Rachel Efetha
Thanks for your question. When considering investing in stock markets, your time horizon should always be for five years upwards. With this in mind, it shouldn't matter if there is a crash this year as experience shows us that you will be in profit a the end of the five year cycle.
However, if you do want to take advantage of a crash, then rather than looking at which fund you should invest, look at the way you are investing. People who invest monthly in a falling market benefit from something called pound cost averaging.
Pound cost averaging relates to the average price you pay for a unit. Lets say you're investing £100 a month for each of the next six months and the market falls every month. The starting price per unit is £1 so in month one you buy 100 units. it then plays out like this:
Month 2 - 95p per unit - 105 units
Month 3 - 85p per unit - 118 units
Month 4 - 80p per unit - 125 units
Month 5 - 78p per unit - 128 units
Month 6 - 62p per unit - 161 units
At the end of the six months you have 737 units worth 62p each, a total value of £456 and cost of £600. However, if you'd invested your £600 on day one you'd have bought 600 units now worth only £372.
Lets say that the stock market recovers to £1.25 per unit at the end of the five year period of investment, Your pound cost averaged units are now worth £921 whereas your lump sum units are only worth £750 because the lump sum would've suffered the whole crash, whereas only £100 of your monthly contribution suffered the whole crash.
Please bare in mind though, that it has the opposite affect in a rising market!
I know this hasn't directly answered your question, but without knowing your full individual circumstances, I can't make a specific fund recommendation. If you would like to discuss this on an individual basis then please get in touch with me or another adviser on the website.
Chartered Financial Designer
Rachel has nearly 30 years’ experience in Financial Services, with the last 21 years advising clients. She advises on a holistic basis but particularly enjoys Cashflow Planning to see when her clients can afford to retire, and has reduced grown men to tears twice by telling them they could afford to resign right now. As a divorcee herself, Rachel loves coaching women going through divorce to take financial control, and has successfully argued with solicitors to gain her clients a much bigger slice of the pension pie.