US tariffs have shaken the markets – should investors be concerned?
As stock markets continue to tumble after the imposition of Trump’s tariffs, does this qualify as a stock market "crash" and what does it mean for investors?
The word crash is not used that often and is usually reserved for a fall of over 20% in a day or so.
One example was Black Monday – 19 October, 1987 – when the US stock market lost 23% of its value in a single day, and stock markets around the world had similar falls, such as the UK FTSE index which fell 23% over two days.
Another was the famous Wall Street Crash back in 1929, when the US stock market lost over 20% of its value in two days – and 50% within three weeks. This led to the great depression of the 1930s.
This time around, at the time of writing, the US stock market has lost around 17% of its value from its peak in February and is now down 2% from where it was this time last year. However, it still represents one of the biggest and quickest declines since the Covid-19 panic in early 2020.
A decline of 20% from a peak is regarded as a “bear market”, so we are close to that description now.
How does it affect your pension?
Most people experience stock markets through their pension plans. If you have a defined benefit scheme guaranteeing you a fixed pension income, you are not directly affected. However, for most people with defined contribution schemes, their pension pot rises and falls with financial markets.
That may sound like bad news for those in defined contribution plans but not all of your pension contributions go into shares. Much of your monies go into safer investments such as government bonds and these tend to increase in value when stock markets fall.
That is what has happened, as government bonds have risen in value and will offset some or all of the fall in your shareholdings. The closer to retirement you are, the higher percentage of your pension pot is likely to be invested in bonds – so the less affected you will be.
There have been many falls like this in the decades since the Wall Street Crash but in the long term, shares have turned out to be a good investment – and pension savings is a long-term game.
What should investors do?
The key for investors is not to panic and to think long-term. Emotional decisions and knee-jerk reactions can do more harm than good to your investment portfolio. Volatility is part and parcel of equity investing and over the long run, history shows that putting money into shares rather than leaving it in cash yields greater rewards.
According to Barclays’ Equity Gilt Study 2024, UK stocks have on average returned 3.1% a year in real (inflation-adjusted) terms over 20 years. In contrast, cash has lost 1.8%. US equities have fared better, up by 6.4% a year over the same period. History also shows us that stock markets do recover from sharp falls.
Diversification
Maintaining a balanced and well-diversified portfolio is the best way to ride out short-term market falls. Diversification and careful planning mean your investments are positioned to handle temporary downturns, while short-term losses in the value of your investments could be offset by gains elsewhere.
Trying to time the market is a mistake
When markets fall, some investors are tempted to try to time the market by moving to cash and then looking for the perfect moment to reinvest. In our experience, investors who try this will likely experience lower returns in the long term than those who stay invested.
You will lock in your losses if you sell after markets have fallen and you risk being out of the market when share prices bounce back. History suggests a lot of markets recover quickly from times of turmoil.
Buy more?
Seasoned investors often see market falls as a reason to invest more, not less, and may look to ‘buy the dip.’ Having some cash ready to invest means you are positioned to act quickly, as and when the next market sell-off occurs.
The next step
Despite Trump’s tariffs taking us into uncharted waters to some extent, history has shown us that volatility and major market falls tend to calm and lead to further gains. Conversely, making changes during volatile times can prove costly.
Investing is for the long-term and market falls will happen along the way. Volatility is part and parcel of the investing process, and the key for long-term investors is to hold a diversified portfolio appropriately positioned to achieve your long-term objectives.
However, if you currently have any specific concerns, or would like some financial advice on the current situation, please do not hesitate to contact us.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.