Thinking Of Switching Your Investments To Cash? Take A Breath, Read This & Contact Us!

Inflation, inflation, inflation! You may have heard a thing or two about it recently, and for good reason. It is an extremely important macroeconomic force that has a profound impact on our pockets and the economy.

If your investments, savings or retirement nest eggs do not keep pace with inflation then you are effectively losing money. The costs of the goods and services we pay for increase year on year and if our savings and investments don’t keep pace with inflation then our future spending power is being eroded.

We have all felt the considerable impact of inflation over the last two years or so, and over that time we have had to adjust to a life of spiralling costs. Levels of inflation not seen since the early Nineties, have resulted in the rise of interest rates, a strategy deployed by the Bank of England, and other central banks across the globe, to get inflation under control.

And seemingly these measures are now beginning to bear fruit. The official line from the Bank of England remains one of cautious optimism, no further rate rises are expected, at least not for now anyway, with inflation expected to fall back to ‘Target 2.0’ by 2026 from its current levels of 6.7%.

With this news, it may become tempting to look towards the offer of fixed-interest deposit accounts from the major high-street lenders and lock in those rates for a fixed period, after all, guaranteed returns can be a comforting prospect. They look even more attractive in the face of turbulent stock market performance. One may feel there is an advantage to be gained by switching everything into cash for a while until things start to look more promising.

Should I switch to cash?

Of course, cash can certainly play an important part in an overall financial plan, depending on your situation, your appetite for risk, and your investing time horizon.

It can also be tempting to think that by timing the market, you may be able to ride out the worst of the storm and jump back in just as the markets begin to improve. However, as the age-old adage goes:

It is very difficult to switch investments in and out of cash at exactly the right time to achieve optimal performance. Even the best fund managers in the world, with a substantial amount of data at their fingertips have trouble timing the market exactly.

A more sensible approach is to remain focused on your long-term financial plan, remain invested, and ‘ride the waves’.

Markets move extremely quickly, meaning that missing just a few of the best-performing days in the market can have a substantial impact on long-term returns.

A study conducted by Dynamic Planner examined the performance of a medium-risk portfolio over 12 years. They found that if an investor were to have missed only five of the best-performing days over those 12 years, or 4433 days to be exact, their overall returns would have been reduced by almost 20%. Meaning, that missing just 0.11% of the best days resulted in a 20% investment performance decrease.

In pounds and pence terms, assuming £100,000 was initially invested, this would have equated to over £30,000 of missed returns over those 12 years. If an investor misses 50 of the best days, this figure goes from £30,000 to a whopping £180,000 of missed returns.

These results are all down to the interesting mechanics of ‘Compound Interest’. Compounding relies on the gradual snowballing effect of invested monies that, if left for long enough with consistent enough annual performance returns, result in exponential investment returns over the long term. However, if, as the study demonstrates, only a few key days are missed, this can impact longer-term returns.

And with the effect of inflation constantly working against our pensions, nest eggs, and investments year on year, it is even more important, now more than ever, that we do not try to time the market and miss those precious ‘best days’.

Comment

Investments should be considered as part of an overall financial plan, which may include a range of assets. Investing is only suitable for those with longer-term time horizons.