Looking to invest in an Isa but worried about the market turbulence? Our guide to navigating Trump's tariffs
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- Investors have a fresh Isa allowance, but may feel cautious about using it
Investors thinking about how to make the most of their tax-free allowances may be feeling more cautious than usual this year.
The new tax year has coincided with the most significant market turbulence since the pandemic.
Equity markets took a huge hit after Trump's bombshell announcement that will see some countries face tariffs of up to 50 per cent from today.
Global markets plunged off the back of the deepening fallout from Trump's tariffs at the start of the week. They reversed some of their losses before descending into further chaos, showing just how turbulent the market is.
On Monday, the market rout continued with markets crashing across the globe. The Vix index, which tracks global volatility and is a good indicator of investor nerves, has also seen its sharpest rise since the pandemic.
We ask experts how investors should approach the current turbulence and whether to open a new stocks and shares Isa this week, or wait it out.
Why are global markets crashing?
Trump had indicated he would impose tariffs during the election campaign, but markets had not fully priced them in. They also underestimated their gravity.
So when the President announced the wide-ranging tariffs last week, markets were sent into a tailspin.
Retaliatory tariffs announced by China on Friday deepened the market rout, and Trump's comments over the weekend suggesting he will not back down, have done little to quell investor concerns. At the same time, the odds of a recession have increased to around 60 per cent.
Hong Kong's Hang Seng index plummeted 13.7 per cent on Monday morning as investors 'played catch-up in pricing in tariff risks' says AJ Bell's Russ Mould. It had pared back some of its losses on Tuesday and was trading up 1.4 per cent.
Asian countries have benefited from selling cheap goods to the West but unless Trump doesn't back down, that threatens to come to an end.
Elsewhere, the FTSE 100 did not have one company in positive territory with defence giants Rolls-Royce and BAE Systems also suffering on Monday.
About three-quarters of the profits made by FTSE companies come from abroad so they are closely tied to how well - or badly - the global economy is faring.
In the last five days, the FTSE 100 has lost over 10 per cent, while the domestically-focused FTSE 250 has shed 8 per cent.
US markets reversed its losses on Tuesday's open before a more chaotic trading period later on. Over five days, the Dow Jones and benchmark S&P 500 are down around 10 per cent, while the Nasdaq is down over 11 per cent.
How long will the volatility continue?
One of the biggest dangers for investors is that the market rout could be prolonged and possibly descend into a full-blown trade war.
For now, there is very little certainty in how it pans out, which only adds to the turmoil and confusion for investors.
'Tariff-related deals are likely to be high up the list of catalysts to drive a recovery in markets, and the next few weeks are going to be crucial in terms of getting a better idea of the new lay of the land,' says Mould.
'Negotiations may not produce rapid results so there could be prolonged uncertainty and that spells heightened market volatility.
'Trump will drive a hard bargain and won't back down or soften the blow unless the US gets something big in return.'
Some markets have marginally recouped some of their losses but it could be a short-lived recovery. After recovering some losses on Tuesday, global markets opened lower again on Wednesday with some turbulence moving into the bond markets.
What should investors do?
Against this backdrop, some investors might be reluctant to open a new stocks and shares Isa this early on in the tax year.
Last Thursday and Friday were among the worst two-day performances in 40 years, matched only by the dot com crash in 2000 and financial crisis in 2008, according to Fidelity.
Experts have made the following three suggestions for those that are concerned.
1. Don't panic and stay invested
The main piece of advice from experts is not to panic and sell your investments in a downturn.
The MSCI All Countries World Index is only back to where it was eight months ago, and over three years it is still up 16.1 per cent.
Similarly, the FTSE 100 is still up 12.3 per cent on its level three years ago, while the S&P 500 and the Nasdaq are up 16.9 per cent and 20.1 per cent, respectively, over the same period.
It shows that staying invested reaps dividends and selling when the market has already fallen is not the best long-term approach.
'Trying to second-guess short-term movements can often do more harm than good which is where it is helpful to have a financial adviser or planner in your corner to help you keep your nerve and hold your course with a reminder of why and what you are saving for,' says Tracy Crookes, chartered financial planner at Quilter Cheviot.
'For long-term investors, the best results tend to come from consistency and discipline rather than perfect timing.'
Dan Caps, investment manager at Evelyn Partners adds: 'The markets have already fallen and selling now only crystallises these losses. If you do sell your investments, the chances of timing the bottom of the market and reinvesting to participate in the recovery are very low.
'It is much better to ride out the storm and capture the long-term rewards of investing in the stock market.'
2. Keep your investments in an Isa
It's still important to shelter your savings and investments from tax in an Isa. Tax thresholds will remain frozen until at least 2028, dragging more people into the tax net.
Even if you're cautious about investing, nothing is stopping you from adding to an investment Isa and leaving it in cash for now.
Caps says: 'Those thinking of opening a new Isa at the moment must remember that you can open an investment Isa and park cash in it, but you don't have to commit to investments right away, or indeed for weeks or months.
'Most platforms pay some sort of interest on cash balances so it's not money that is sitting idle.
'Short-term money market funds are another relatively low-risk possibility to park cash in while markets work through volatility.'
Crookes adds: 'While the current climate may give pause for thought, Isas remain one of the most effective ways to grow wealth tax-efficiently.
'Markets will always have their moments of turbulence, but keeping focused on long-term goals and using the full suite of tools available within the Isa wrapper can help investors stay on course.'
3. Keep regularly investing
Investing regularly, even with the ongoing market chaos, and not trying to time the market is also important.
Ed Monk, associate director at Fidelity International says: 'Regardless of how experienced one is as an investor, it is incredibly difficult to predict how the market is going to behave.
'Therefore, timing the market is a bad idea and you are more likely to get it wrong than you are right. Taking a long-term approach and remaining invested in spite of highs or lows is more likely to get you the outcome you want.'
Alice Haine, personal finance analyst at Bestinvest adds that keeping your regular investments will help to remove any emotion from investing.
'It is all too easy to have your investment decisions clouded by current market turmoil- events that will merely be a blip for those investing for the long-term.
'Regular investing is a great discipline that keeps you going through the ups and downs and helps reduce market timing risk as you'll end up with pound cost averaging, where fewer units of investments are bought at times when the market is up and more when it is down.'
Crookes adds: 'This can help smooth out the highs and lows of market volatility and avoid the misfortune of investing just before a dip.'
This will depend on your risk appetite and your investment horizon, though. Caps says: 'You need to have a greater than five and ideally a 10-year horizon, so in general it's best not to commit funds that you might need within the next five years.'
Where should investors put their money?
Deciding where to put your money in a market downturn is not for the faint-hearted and will depend entirely on your risk appetite. However, if you're willing to ride out the volatility, there could be gains to be made.
Dan Coatsworth, investment analyst at AJ Bell says: 'The stock market is effectively "on sale" at the moment, with shares in many well-known companies trading well below recent levels.
'It might seem odd wanting to invest when share prices are flashing red, yet market slumps can create a window of opportunity.'
As ever, it will help to keep your portfolio as diversified as possible and not rely on one area or asset class to make your money.
'At the moment the US stock market has been the worst hit but the recent uncertainty, and within the US the Magnificent Seven, have fallen more than the broader market,' says Caps.
'Having exposure to different regions and sectors can help protect against the worst of any downturn, and for investors who want to look beyond equities, other asset classes like fixed interest and gold can also protect due to their low correlation with equities; although it is worth remembering that equities tend to provide the best return in the long-term.'
Monk suggests investors look at the Pyrford Global Total Return fund which is designed to minimise the impact of rocky markets.
'It aims for low volatility and to try to minimise falls. Unlike most of the funds on our list, it invests in a range of asset types, combining investments in shares, bonds and cash.
'The allocation to stock markets is usually below 50 per cent and is currently just 30 per cent. Most of the money is in bonds. It has very low exposure to the US – less than 4 per cent.'
He also recommends the value-focused Dodge & Cox Worldwide Global stock fund and the Fidelity Global Dividend fund, which has a low US exposure at 29.7 per cent but is regarded as one of the riskier allocations within a diversified portfolio.
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