How to react to a crisis – Jasmine Birtles

Jasmine Birtles is a TV and newspaper journalist and personal finance expert. In her column she’ll be helping you get the most from your investment and reach your personal goals. 

“Be fearful when others are greedy, and greedy when others are fearful,” said Warren Buffett, the fourth richest man in the world.

Buffet, the CEO of the mega-successful corporation Berkshire Hathaway, has spent a lifetime investing in companies – sometimes buying the company in its entirety – and making insane profits for himself and investors in his company. In 1980, a single share in Berkshire Hathaway cost just under $300. Now it would set you back over $250,000.  So you can see that Buffett knows what he is talking about. At age 89 he’s seen a few economic ups and downs in his life too. 

Take the long view

To someone like Buffett, this is a ‘buy’ opportunity, or it soon will be. He and other calm investors take the long view. They are not fazed by volatility, they relish it. Buffett and his team have been analysing companies ripe for investment for years and they then play a waiting game, waiting for them to drop in price enough for them to pick up a bargain. 

Finally shares (or stocks as they call them over the Pond) are looking cheap, and at some point soon he will start to buy and buy big. Buffett is a ‘buy and hold’ kind of guy, holding companies for years…even decades…as he knows that it’s pointless to bother about what happens to the market in the short-term but that over time, good investments will go up.

For example:

  • In 1975 the stock market lost 72% of its value. Over the next twelve months it jumped back up by 100%
  • The 2008 financial crisis was a time of utter market turmoil, but if you happened to have £1,000 in an average investment company just before the crash it would have grown to £2,348 today

In other words – wait it out and you will win.

Be contrarian

Right now I’m seeing questions on social media along the lines of: “Should I sell my shares and ditch my pension? Should I just get rid of all my investments and stick the money under the mattress”.

My answer is ‘don’t panic – go against the crowd’. When all around are losing their heads and selling their investments, stand firm and don’t be spooked.

Buying high and selling low is exactly what we shouldn’t be doing. We need to do the opposite, which is why Buffett and his ilk tell us all to be fearful when others are greedy (i.e. don’t buy when everyone else is buying) and greedy when others are fearful (that is, buy when everyone else is selling).

Should you worry about your pension?

No. If you’re more than ten years away from your retirement, you can ignore the losses you will be incurring right now. 

At some point – maybe in a few months or maybe next year – the stock market will bounce back again. In fact, I think that when it bounces back it will do so in a really BIG way. Even if it’s just a moderate bounce back, though, it will be worth the wait.

If you’re coming up to retirement it’s likely that your company or private pension is being ‘lifestyled’, which means that your money has already been moved out of equities (shares) and into less volatile, more boring investments such as bonds, gilts and cash. You might have lost some money that was invested in the stock market part but overall, not nearly so much.

If your pension hasn’t been lifestyled then it’s worth looking at putting off retirement for a bit, unless you have decent pots of cash elsewhere to give you a good standard of living.

What about your Funding Circle money?

Very sensibly, you have ‘diversified your portfolio’ by also investing in peer-to-peer lending products, like Funding Circle, where you lend to small businesses. It’s likely that returns on this investment will be lower for a while as small businesses are under more pressure financially.

But now is not the time to sell investments. While economic troubles cause issues short-term, once they’re over, economies bounce-back. 

The more mature peer-to-peer platforms like Funding Circle have had 10 years to work on their risk modelling and preparation for such events, which stands them in good stead. As you’d expect, they’ve also made some changes to their lending criteria to protect returns.

With the large injections of cash that the Government is putting into the economy, together with quantitative easing and the drop in interest rates, businesses have a lot of support and can pick again when this is over.

As with shares, it’s about playing the long game and ignoring short-term ups and downs for the bigger picture, which takes longer to become clear.

Should I buy or should I go now?

For most people, this is a dip that will be followed by a bounce, so keep your head and your money in the same place.

In fact, if you haven’t already filled your £20,000 ISA allowance this tax year, consider putting some in by April 5th, either in equities or Alternative Finance or a mixture of the two. 

I’m not saying that we have hit the bottom of the market yet – no one can call that accurately – but we are certainly a long way down and, as China has already started to go back to work, it’s likely that the upturn, or flattening out at least, won’t be too far away.

Having said that, no one really knows when the market will be up or down, so rather than pull your money out in one go, or even buy everything you can in one go, the best strategy is to invest small amounts of money into a range of products (peer-to-peer lending, equities, bonds and so on) every month, whether they are up or down, so that you get a mix of good and bad. 

In the final analysis, if you wait for long enough, you’re more likely to win.

The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice.

To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, such information contained here. If you have any questions, please speak to your professional adviser or seek independent specialist advice.

By lending to businesses your capital is at risk. The tax-free entitlement of an ISA depends on your circumstances and may change. Funding Circle is not covered by the Financial Services Compensation Scheme.

Jasmine Birtles