Should I sell my investments and move the money into cash?

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful” - Warren Buffett

I joined this industry in May 1987 and one of my first experiences was Black Monday in October of that year. It was the first time I had witnessed capitulation in markets and seen genuine fear. I saw it again in the early nineties (First Gulf War), 2000 (Dotcom boom), 2008 (Financial crisis) and 2020 (Coronavirus). These are just the big ones! There have been plenty of “mini” crashes in between. The reasons for each crash have been different in each case, but they all have one thing in common. Each time they occur, there are plenty of doom-mongers in the media claiming that this time it’s different from all the others and that, this time, we are all going to lose our shirts so we may as well give up and grow carrots. These people are often the same people who claim that markets are “overheated” and due for a collapse, sometimes when there is another four years of growth left in the cycle!

I have to say that the historic crash which concerned me most was the Financial Crisis of 2008. This represented an existential threat to banks which are the cornerstones of capitalism. Capitalism has its flaws, but you cannot doubt its resilience! Within a couple of years, the whole thing was forgotten (albeit at huge expense in terms of national debt) and people were riding the up-turn yet again.

No one likes to see their portfolio fall in value. It is painful for all of us, and I think we all feel the emotional temptation to stem the flow in case things get worse. I fully understand that and feel it myself. At such times it is important to look at things in perspective. The danger of coming out of the market (particularly if there is an intention to go back in again) is that you could miss out on some recovery performance. Between January 1st 2001 and December 31st 2021 the S&P 500 had many ups and downs but, overall, achieved an annualised growth rate of 9.52%. However, if you had missed the best 10 days of growth, the annualised return reduces to just 5.33% which means that the total pot, after twenty years, would be only 45% of the growth compared to the “fully invested” portfolio.

So, what should we, as the investing world, take from all of this? If we live in a constant state of fear that markets are either going to continue to fall (or that they are about to fall) do we simply leave it all in cash? Historically, cash deposits do not keep up with inflation so this is, in the long term, a sure way of losing money in real terms. Likewise, the equity markets (stocks & shares) have performed better than inflation (over the long term). But without a crystal ball we do not really know when the ups and downs in markets are going to occur. We would all love to invest at the bottom and cash in at the top but, in reality, this way of thinking isn’t a million miles away from looking at the winning lottery numbers and wishing you’d known them yesterday!

The truth is that if our investments lose value in a crash, we only experience that fall if we cash in. If someone had gone into hibernation in February 2020 (just before the Coronavirus crash) and woken up nine months later, their investments would have looked the same. If the same investor had panicked and cashed in at the end of March, they would have missed out on the recovery. All of this happened very quickly. On one day, markets jumped by 9%.

This, really, is the key to investing. Risk portfolios are to be viewed as long term. They will experience the ups and downs of markets and should only be tapped into when they represent a real profit for the investor and this can only be done if the investor is not forced to encash. For this reason, whenever we invest money for clients it has to be for the long term and if they require access in the short term (say three years) we would normally advise that this element should be retained in cash. Medium term money (say three to five years) should be invested in lower risk portfolios and higher risk (with substantial equity exposure) can be confined to five to seven years. This approach would have protected any investor from having to encash higher risk portfolios at a loss for virtually all crashes that have occurred since 1900.

I may be wrong, of course. Maybe this is the end of capitalism. Maybe we are just around the corner from having a command economy and investing may be a thing of the past. Maybe we are in for two years or five years of pain. I really don’t know and, I suspect, no one else does either. But I wouldn’t be surprised if, at some point in the future whether it be near or far, this downturn will be consigned to history along with all the others and many people will regret having cashed it all in in 2022 and consumers will be tempted by adverts on the underground to invest in the latest star manager’s fund which has produced 28% return in the last year. Now! Maybe that will be a time to sell?

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Please note: Past performance is not a guide to future returns, investment returns are not guaranteed, and you may get back less than you originally invested.

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.