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  • Writer's pictureInvestment Synergy Team

Investors pull billions from stock market as downturn takes hold

By Lauren Almeida the telegraph - 17 Sep 2022 -

Savers have withdrawn from their Isas and pensions as the DIY investment boom cools

Investors are hurriedly pulling their money out of the stock market as the supercharged returns driven by years of low savings rates and minimal inflation come to a halt.

Enthusiasm for investing soared during lockdowns as hundreds of thousands of new investors used their unexpected savings, and abundant free time, to dabble in share trading.

But DIY investors have started to take their money out of the stock market in large numbers. Savers withdrew a record £1.9bn from funds that invest in stocks last month, the fastest withdrawal rate since July 2016, when the Brexit vote spooked investors and led to a sharp fall in the FTSE 100.

Overall, savers have taken more than £4bn out of the market this year, according to Calastone, a research group.

Sceptics had long warned that fortunes built largely on returns from technology and “growth” stocks – turbocharged by ultra-low interest rates – could not last. Yet the market defied expectations again in 2021 as the reopening of the global economy breathed life back into shares.

But the tide has finally turned this year. A combination of rampant inflation, rising interest rates and the outbreak of war in Europe has shaken investors across the world.

The S&P 500, America’s benchmark index, has lost 18pc of its value. London’s FTSE 100 has fared much better, buoyed by its large number of oil and gas stocks, but has still dropped by 2pc so far this year.

Many DIY investors are now having to confront the sinking value of their Isas and pensions. Their anxiety has rippled across the industry: the number of new customers at Britain’s largest investment broker, Hargreaves Lansdown, is falling.

Julian Roberts of the investment bank Jefferies said Hargreaves, a bellwether for the sector, had attracted fewer than two new joiners for each leaver in 2022 for first time since 2010.

“The cost of living crisis is hurting investors’ confidence,” he said. “Hargreaves’ new joiners are falling, with far fewer investors signing up compared with during the pandemic boom. It is also struggling with investors leaving altogether, as people approaching retirement lose confidence in falling stock markets and instead appear to be handing their portfolios over to professional advisers.”

Inflation, which hit 9.9pc in August, is expected to keep rising. For cash-strapped savers, investing looks increasingly risky. However, no savings account on offer comes close to matching inflation: the average rate on an easy-access non-Isa account is just 0.85pc, according to Moneyfacts, an analyst.

Yet falling stock markets have prompted many to park their savings in the perceived safety of cash. Anna Bowes of the analyst Savings Champion said: “We are seeing a big increase in the number of people coming to our website seeking the best rates – and asking for help to improve the interest they are earning.”

Financial advisers warn against trying to judge the rise and fall of markets, arguing that the benefits of drip-feed investing mean the best strategy is to keep buying into the market when prices are low.

Calastone’s Edward Glyn said selling out of a depressed market, when stocks were generally falling, often worked against investors’ interests, as it meant that they would lose out on returns during the subsequent recovery.

Rick Eling of the wealth manager Quilter added that moving in and out of the stock market would also rack up transaction fees; most stockbrokers charge for every purchase or sale of a fund or share.

“Some savers seem to believe that good investing is about using clairvoyance to jump in and out of shares at precisely the right time,” he said. “This strategy is a fool’s game. If your long-term plan is sound, the best thing you can do when markets tank is to lose the password to your trading account. Many people focus on ‘what should I buy?’ when approaching the markets; the real secret to investment success is ‘how should I behave?’.

“The first approach lends itself to all kinds of dangerous errors and traps, such as herd behaviour, falling for scams or spurious tips, or emotional panic selling. The latter approach requires a clear goal, a relaxed mind, a sense of mission and an acceptance that rises and falls are unavoidable.”

As well as savings accounts, people are searching for reliable returns in the property market. Despite a crackdown on landlords, more than 483,000 homeowners over the age of 65 in England drew rental income from a residential investment last year, according to Savills, the estate agent.

It found that the number of homes owned by over-65s had risen from 1.3  million to 1.5 million over the past three years and estimated that those properties were now worth an estimated £437bn in total, or £387bn after any outstanding mortgage finance was taken into account.

This slow exodus away from the stock market is fraying nerves within the DIY investment industry. Hedge funds have been ramping up bets against Hargreaves Lansdown this month. A record one in 20 of its shares is now being used for “short-selling” – a bet that the company’s value will fall.

Last month Hargreaves Lansdown’s chief executive, Chris Hill, wrote in its annual report that while there had been subdued flows and lower activity, the firm had secured £5.5bn of net new business and attracted 92,000 net new clients.

Investment Synergy - The wind of change is blowing through the continent. Whether we like it or not.... the pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.

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