The FTSE 100 has tumbled to a one-year low amid fears a global trade war could plunge the UK into recession.
The US president has so far showed no signs of backing down on his sweeping tariff plans despite warnings they could drive the economy into a downturn.
The London stock market opened 6pc down today having suffered its biggest decline since the pandemic on Friday. The S&P 500 also dropped and is now officially in bear market territory.
Even gold, traditionally seen as a safe haven asset, is down from record highs.
But is now the time to buy? The world’s most famous investor’s most famous quote seems pertinent.
In his 1986 letter to shareholders, Warren Buffett wrote: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. Might this be good advice today?
Here, Telegraph Money explains what investors need to do to protect their portfolio. Is it time to sell, or cash in, on the stock market bloodbath?
Which investments have been hardest hit?
Aerospace business Melrose Industries, Barclays bank and defence company Babcock International Group were the worst hit FTSE 100 stocks as investors ran for cover.
Darius McDermott, of advice firm Chelsea Financial Services, said: “Banks have borne the brunt of the sell-off, with names like Barclays down 20pc since Trump’s tariffs were announced. Oil majors such as BP and Shell have also suffered heavy losses.”
Some funds have a particularly large allocation to the top 20 FTSE fallers. Artemis UK Select Fund has the biggest exposure, representing 28pc of its overall holdings. It is followed by the BNY Mellon UK Equity Fund, 24pc of which is invested in beleaguered UK stocks.
Tim Lucas, portfolio manager of the BNY Investments UK Income fund, said: “Companies have a way of adjusting and adapting to changes in their situations, particularly when considered over a meaningful time period.
“As and when shares fall heavily, this can therefore provide opportunities to selectively increase weightings in areas in which we are most convinced at much lower prices.
“Ultimately, the important thing is to maintain flexibility and valuation discipline so as to take advantage of these market moves.”
Artemis said its fund managers “will be sitting tight”.
Tech-heavy funds have also taken a hit with Scottish Mortgage Investment Trust down 7pc today.
Should you buy stocks now?
Opportunistic investors could be tempted to bag quality London-listed stocks and funds while they are cheap – “buying the dip” in the industry jargon.
Mr McDermott said Artemis UK Select could be an attractive option for bargain hunters.
“The fund has outperformed the wider UK market across multiple time periods – and after the recent sell-off, entry points look compelling for the long-term investor. However, there is still substantial uncertainty.”
However, anyone considering buying the dip must remember that prices could fall further still as there is no telling when the market will bottom.
President Trump announced tariffs on the US’s trading partners last week which were more extensive than expected. The Federal Reserve’s chairman has warned the plan is likely to raise prices and slow economic growth.
Economists at investment bank JP Morgan have upgraded the risk of a global recession from 40pc to 60pc.
Mr McDermott said: “Although the FTSE 100 is a UK index, it is packed with global companies that depend on the kind of free trade Trump is threatening to upend – so it’s no surprise this has been one of the hardest-hit areas of the market.”
Where to invest
The market sell-off has been indiscriminate but some stocks have been less severely impacted than others.
Mr McDermott says: “Investors have found some shelter in consumer staples. Companies like Unilever, down just 3.5pc, are holding up better, as they produce the everyday essentials consumers continue to buy, even in tougher times.”
But even gold has fallen for a third session as investors rushed to take profit and move money into cash, while bitcoin, the most popular cryptocurrency, is also down.
Mr McDermott said the “only real refuge” is government bonds. A 10-year gilt yields 4.5pc right now, down from closer to 4.8pc at the start of last week. Gilts are considered low risk because the UK government has never defaulted on its debt.
However, investors sitting on losses should think twice about buying up so-called “safe haven” assets, which can be expensive.
Laith Khalaf, of stockbroker AJ Bell, said: “If you’re looking at moving out of shares and into safe haven assets right now, the risk is that you’re moving from an asset which is currently out of favour and into those which are highly prized.
“The current flight to safety may continue, and no-one knows how long that may last, but by moving out of shares you risk missing out on any rebound, which could be damaging to your long-term wealth.”
Michael Walsh, of T. Rowe Price, said the investment management firm was generally cautious and holding cash to take advantage of market opportunities.
Increasingly, he said, the company think there are better opportunities outside the US.
“We have added to the UK and also to emerging markets, where attractive valuations and improving sentiment is supported by dovish central banks, expected increased defence spending and other stimulus measures.”
One in three wealth managers reduced their exposure to the US in the first quarter of the year, according to research firm Asset Risk Consultants.
Plunging stock markets could prompt some investors to shift from passive to active strategies where managers attempt to use their stock-picking skills to beat the returns you can get cheaply by simply buying the whole market.
In recent years, active funds have generally failed to beat their low-cost passive counterparts amid a technology boom. But this trend could now reverse, Mr Khalaf said.
Mr Khalaf added: “An active strategy may once again be called for seeing as over two thirds of a global tracker fund will be invested in the US stock market.
“This was a market which was already priced for perfection and the potential for an economic slowdown as a result of tariffs could be felt particularly heavily in the US.”
Balancing your portfolio
Looking at the equity markets and then at your own portfolio it will be easy to panic. Global stock markets have suffered a blow on Monday trading with some hitting record lows for recent years.
Germany’s Dax dropped by 10.4pc after the US president compared the tariffs to “medicine”.
James Norton, of passive investment manager Vanguard Europe, said: “We know with human behaviour that when markets go up investors are happy and they tend to buy more. When markets are going down fear kicks in and they want to sell. It is a very natural human emotion but it is not right.”
Instead, said Mr Norton, investors should check whether their circumstances have changed and whether they still have the balance in their portfolio that they are looking for.
“If their circumstances have changed then they need to look at the construction of their portfolio – the split between equalities and bonds. Ask yourself, is that balance where it should be for you and the level of risk you want to be taking?” he said.
For example, if your portfolio is set up to be 80pc equity and 20pc bonds but the market fall means it is now 70pc equity and 30pc bonds, that is no longer your preferred risk. As a result you may not be as well positioned to benefit when the market bounces back.
So despite it feeling counter-intuitive, Mr Norton suggested it is worth looking at selling safe income assets, such as bonds, and buying more equities to get back to your desired weighting.
“We are not saying we are at the market bottom, we are aligning the level of risk of the portfolio to where the investor wants to be so that when the market does bottom out they have the market allocation they want to benefit from the bounce,” Mr Norton added.
Consider buying bonds
However, that does not mean you should disregard diversification. Mr Norton said that fixed income assets, primarily bonds, are the most important asset class often overlooked by investors.
He suggests that high quality bonds are currently offering good returns for a low level of risk.
Ed Monk, of broker Fidelity International agrees, despite noting that the risk of higher inflation traditionally makes fixed income assets less attractive as it erodes the value of the amount they pay.
However, Mr Monk said: “High quality government bonds begin to look very attractive when returns from riskier assets, like shares, are in question. Unlike corporate bonds issued by companies, that face a raised risk of default during a recession, government bonds carry very low default-risk.”
Mr Khalaf added: “So far this year the typical global equity fund has seen its value fall by 9.4pc. For a typical cautious managed fund, which holds a maximum 60pc in shares, the fall has been just 1.4pc. Over the long term, full exposure to the stock market will probably still deliver higher returns, but with much more volatility along the way.”
