Investment values have been flat for what feels like forever, and savings accounts are currently offering 5% (or even more). Should you cash in your investments and enjoy the guaranteed comfort blanket of interest on your cash?
Well, as always that depends, but probably not.
In previous articles I’ve written about how having an appropriate amount of cash is fundamental to having a balanced investment portfolio and not being over-exposed to investment and its associated volatility. An appropriate amount of cash is the foundation stone on which everything else is built.
Global investment markets have had a difficult and turbulent time over the last few years, in fact, the events that we’ve experienced, and the sequence of those events, have been truly remarkable; the phrase that I’ve heard more than any other from fund and portfolio managers has been “you couldn’t make it up”.
September last year was the icing on the cake. Due to government naivety the value of the pound crashed, along with the Bank of England Gilt markets. Bank of England Gilts have always underpinned any cautious or even remotely cautious investment; they are like the Super Tanker heading across the Atlantic, they don’t really deviate too much and are very predictable. Or were, until that moment last September. One of the many bizarre situations that we’ve experienced in the last few years, is that last September, the more cautiously you were invested, the more adversely you were affected. Bonkers.
Historically, investment markets have always recovered and have outperformed the returns available on cash. Investment markets also have the ability to turn and move very swiftly (even the humble FTSE 100). Of course, I’m not suggesting that will always continue; I can’t predict what will happen in one minute’s time, let alone one year’s time.
One of the mistakes private investors typically make is investing money when asset values are high and selling assets when their values are low. This is 180 degrees out from what a professional fund or portfolio manager tries to do; they buy low and sell high. So, selling well-managed assets that currently may be undervalued, to move that money to cash, is unlikely to be a good idea (as long as you were appropriately provisioned with cash in the first place).
Due to how swiftly investment markets and market sentiment can change, the timing of when to sell, and when to reinvest is incredibly difficult; even fund managers take a long-term strategic view, and there’s an often used saying when it comes to investment returns, “it’s time in the market, not market timing”.
Even missing just the first couple of days of being invested, when ‘the market turns’ can have a significant impact on the value of a portfolio. Statistics have shown that missing the best 10 days of market movement can have a 50% detrimental effect of the value of a portfolio after 15 years!
My suggestion is that if you already have an appropriate amount of cash and are appropriately invested, then leave that investment to do its job.
The nights are already drawing in… it’ll soon be Christmas!
David Hinch is the Managing Director of David Burnell Financial Services.