Following this recent setback in equity markets, I’ve had a number of clients contact me about whether they should move their investments into cash given the so-called “uncertainty” around. For anyone thinking about switching to a more defensive stance, please read on.
Firstly, your concerns are justified. The world always carries uncertainty and there is enough of it about what with BREXIT, the threat of trade wars and a slowing global economy. Both were factors in the recent setback in equity markets, along with rising interest rates in the US, which was the principal trigger for the sell-off in February this year.
The trouble is that equity markets generally trend upwards over the longer term, even though it’s not unusual for them to fall by 10% over a short time. The FTSE 100, for example, has regularly fallen by 10% since 1990, but it is relatively rare for it to fall by more than 20%. Even if you are an ‘unlucky investor’ and invest right before the market crashes, you could still earn good long-term returns.
Adopting a wait and see approach
Some of my clients who email me talk about selling and moving to cash for six months, effectively suggesting a wait and see approach. But any decision to move to cash/sell down equities means that two things need to happen to make it ‘work’: 1) markets must continue to fall and 2) a decision must then be taken to reinvest after they have fallen from current levels.
From experience, it is not obvious that 1) always happens. Markets are just the collective opinion of what the price of something should be. Everyone buying and selling securities has taken a view as to what might happen and even if markets do fall further, getting back in is extremely difficult. When markets fall further then the gloom is amplified, and people do not want to invest or buy.
It is possible that you sell down to cash only to see the market recover. This then puts a massive dent in your returns profile and forces you to make an uncomfortable decision to reinvest with markets at a higher level. I have seen this first hand and it is not an easy decision to make.
I always suggest thinking about how a correction would affect your financial situation. As an Independent Financial Adviser, I am legally obliged to ensure my client’s investments are suitable for them. A 10% correction, or even one of 20-30%, should not change that assessment. If it does, think about your appetite for risk, but I would caution against any knee-jerk decisions based on any feeling of deemed ‘uncertainty’. It’s better to review your risk profile on a fixed, regular basis, rather than move it around depending on how you feel on a day to day basis.
Remember your long-term goals
When you take a long-term view, these setbacks are only ‘blips’. If you are still working and ‘accumulating’ capital, you should welcome these setbacks as it allows your fund managers to buy more equities with a given amount of capital: when the recovery comes, you get an outsized effect on your overall pot. Volatility is your friend at this stage and I welcome these sorts of setbacks when I think of my own investments. It means my monthly pension/ ISA contributions can buy more units/shares.
I understand it can be unnerving to see the value of your portfolio suddenly drop. But if you sell or move to cash you run the risk of selling at exactly the wrong time. Regular corrections are the ‘price’ investors pay for good returns over the long term – 7-8% p.a. on average on equities. If you are not prepared to ride out these market phases, you should think hard about what you are prepared to invest in.