When the stock market takes a dive it can make a lot of investors nervous. That is understandable — but there is a risk it leads them to make bad decisions. Here are three mistakes I try to avoid making with my Stocks and Shares ISA when the market gets rocky.
Selling shares just because of a price fall
There can be good reasons to sell shares in an ISA at any time, including during stock market turbulence. For example, during a financial crisis, bank shares may fall not just because the market is falling overall, but because the profit outlook for banks has crumbled and so they merit a lower valuation.
But it can be a mistake to sell a share just because its price is falling.
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I try to invest in such a way that the money I get when I eventually sell a share and the dividends I have earned along the way will hopefully be much more than I paid. Share price movements in the meantime do not bother me. Unless I sell a share I do not lose money just because its price has fallen since I bought it.
Hunkering down instead of hunting for opportunities
A lot of investors get scared during market turbulence and decide to wait before things become calmer again before making any moves in their ISA.
That can be a mistake because of the opportunity cost it involves. During a rocky market there can be some real bargains on offer at prices that might not last for long.
As an example, cast your mind back to the 2020 stock market crash during the pandemic. A lot of blue-chip companies tumbled. If an investor had added Shell (LSE: SHEL) to their Stocks and Shares ISA five years ago, the investment would now be showing a 73% return even excluding dividends.
Adding dividends, things look even rosier. The current yield is 4.6%, so someone buying five years ago would now be earning a yield of around 8%.
That is despite a dividend cut along the way. That was a risk foreseeable during the pandemic, as uncertain fuel demand posed a risk to profits for the oil major.
A lot of the fear that drove down the share price at that time, such as a permanent loss of demand for fossil fuels, now looks overblown in retrospect. Shell has a powerful distribution network, long industry experience, and big reserves.
Market turbulence always throws up fear – and that can mean there are some real bargains on offer.
Ignoring the basics
But while the choice of shares in a portfolio is a key consideration when the market is down, it is not the only one.
An ISA’s long-term value creation comes from the performance of the shares in it, but also the ISA chosen. Providers impose differing costs and fees. Some may pay higher or lower interest on cash balances. Such factors can have a significant impact on long-term performance.
It is easy when markets wobble just to focus on shares. But, as always, it is worth making sure that you have the best Stocks and Shares ISA for your own situation.
