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The maximum annual allowance for Stocks and Shares ISAs is currently at £20,000. If I had accumulated a lot, I would have considered distributing it to the current stock. That’s because most markets – especially the major US indexes – have fallen sharply.
These massive drops in the stock market seem to happen every decade or so on average. Although they can happen more or less often than that, and usually without warning.
But the stock market – whether in the US or the UK – has an amazing track record. He has recouped losses from every crash and setback in history, and then raised them up to achieve new ones.
Although it is not easy to do psychologically, investing in the stock market during a downturn can be very profitable. As Warren Buffett famously said: “I will tell you how to become rich. Close the door. Be afraid when others are greedy. Be greedy when others are afraid.”
There should be a lot of fear among investors today. So I will buy when others are selling. And here I will look.
Across the pond
Home to many of the largest companies on earth, the US stock market is far and away the largest in the world. It is rare for an index to drop significantly. But that happened in 2022. It was the worst year since 2008.
| Index | Performance in 2022 (excluding dividends) |
| S&P 500 | -19% |
| Nasdaq 100 | -30% |
| Long 30 | -9% |
At Nasdaq 100 performance in 2022 is the worst in history. The tech-heavy index contains stocks such as Microsoft, Apple and Amazon.
Everything is far from the all-time high, and today’s prices can be seen as a bargain in the future. I doubt this tech behemoth is going away anytime soon. All have the ability to survive an economic downturn.
So I would consider adding some fallen US giants.
FTSE 100 dividend
In 2022, the FTSE 100 is the best major index in the world. I have to say that it is basically flat, which may not sound impressive. But it’s better than finishing in double digits as two of the three US indexes.
And I’ve been collecting dividends, with the UK blue-chip index returning 3.5% on average. That’s almost doubled S&P 500 yield 1.8%.
Of course, income from dividends is not guaranteed. Dividends can be cut by companies to preserve capital. This risk is high with the coming global recession.
But if I’m looking for dividend stocks, I’ll definitely start in the UK stock market.
Diversification
Whatever shares I choose to buy in my Stocks and Shares ISA, I will make diversification a top priority. It’s not just about the number of shares, but also about the sector and size. Owning a 25 cent stock is not diversifying. There are no 25 software or biotech stocks. It’s not the number, but the number.
No one knows for sure what sectors will be involved (or not). That’s why diversification is so important. But with many stock prices falling, now is the perfect time to start bargain hunting.
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