When global stock markets move into a period of volatility, many investors want to move their pensions and investments into cash and wait until the market recover.

But is this the right thing to do?

In my opinion there are quite a few problems when it comes to moving your investments into cash. The first issue is that there is that there is no clear indicator that you should move to cash and conversely when to move from cash back into the market – There is no early warning system for investors to tell them when to move to cash or when it is safe to invest again.

Investors have to make the decision for themselves as financial advisers do not have a crystal ball. No one can time the market.  The decision to move to cash is of course subjective and seriously affected by the investor’s emotions in the moment. Fear leads to moving to cash when it may not be the most rational course of action.

On top of making the decision, investor will only know if they have made the correct decision in hindsight.

Hold your investments or sell to cash?

When the markets become volatile, maybe you shouldn’t look at the values too often.

It’s an undeniable truth, no one likes to lose money. Big movements and a falling stock market can make even the most level-headed investor question whether they are doing the right thing. It’s unrealistic to avoid the news especially during a crisis. Especially in these times, it’s unlikely to be helpful if you check your portfolio every day or even every week. This massively increases the chances that you will make an ‘emotional’ investment decision.

We all know that our investments go up and down in value each day. And sometimes, like now, the market movements are much more up and down than usual. Checking your investments will more than likely lead to unnecessary stress and you may end up taking action when you really shouldn’t.

Is Inflation something to be concerned about?

If you are a cash investor, the effects of inflation will mean that your money will have devalued by around 5% in value over the last 12 months (January 2021 to January 2022). And the Bank of England have warned that inflation will rise to 7% later this year. Once money devalues, it devalues forever as it has no opportunity to recover its value especially in a low interest rate environment.

A balanced investment portfolio is currently around break even from 1 year ago. In effect most investors will have lost last year’s growth. However, there is a very significant difference between holding cash and being an investor. Unless you are withdrawing income from your investments, you will still own the same investments and the same number of shares. When the current issues are resolved the value of investments will rise again and recover the current paper losses.

And every time the markets have fallen before, investment values have recovered. Below is a chart that demonstrates how markets have recovered every time in the past.

Source: Vanguard

Financial planning and portfolio construction

Unfortunately, when the market are heading north and growing, planning and portfolio construction is often ignored by many investors. Portfolios that are well diversified are built to withstand long-term market conditions, but not short-term fluctuations. This is the dilemma that every investor faces.

However, investors are far more likely to be successful in the long-term, when they stick to the long-term investment strategy, and the support of their financial adviser who will help them to worry-less in volatile times. A knee-jerk reaction of moving to cash is not usually advisable, however that does not mean investors should not consider making some adjustments during periods of market volatility.

Retirees could consider taking less income from their portfolio or use other Cash assets to supplement their income.

Could it get worse from here?

Almost certainly, it could. But if you’re a long-term investor, you have to try to see the bigger picture. As the chart above shows, the markets have always recovered in the past.

Financial modelling is the best way to sleep at night during periods of market volatility. For most of our clients in retirement, we can have created a simulation of the income that they are drawing from their investments. The simulation factors in both inflation and a low rate of investment return, to test whether they are likely to ever run out of money.

The time to make adjustments to your portfolio generally is not in the midst of a volatility period.

Markets can turn over night

It’s more than likely that the current market problems are not over yet. However, when the market does turn, we will not see it coming, so we need to be ready. The only way to be ready, is to be in the market.

If the plan is to wait until you are 100% certain that we have passed the bottom before investing or reinvesting, you will have already missed out a big part of the recovery.

Below is an extract from CNBC from March 2020, but it could have been written today.

Panic selling not only locks in losses but also puts investors at risk for missing the market’s best days.

Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each  decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.

The firm noted this eye-popping stat while urging investors to “avoid panic selling,” pointing out that the “best days generally follow the worst days for stocks.” 

Source: CNBC

Schedule a Call with us today – if you have concerns or wish to discuss your investments

As with any investment, there is no guarantee that the target return will be achieved, and investors may get back less than the amount they invested. Past performance and forecasts are not reliable indicators of future performance. Tax treatment depends on individual circumstances and is subject to change.

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