INVESTMENT UPDATE

Help! I fear losing all my money

  • 17 November 2019
  • 10 mins

The values of investments have varied markedly in the last twelve months, leaving many clients worried about their hard-earned savings. It is at times like this that many are tempted to cash in and sit it out on the sidelines until they judge it a more appropriate time to invest. But we would advise caution and patience.

It’s been a rollercoaster

This phenomenon – known as volatility – is a common feature of investing and is a reflection of how confident investors are in the future. It’s a measure of how frequently investors change their minds about a particular asset. Low volatility reflects a high degree of confidence and high volatility reflects a heightened sense of uncertainty. Since the summer of 2018 the global economy has started to slow and this can make it difficult for companies to sustain profits. The US-China trade dispute, and political uncertainty in the UK and Italy, have amplified these worries.

It’s just history repeating itself

The history of investing has been punctuated by frequent periods of high volatility. Despite the longest continuous period of investment growth in modern times, uncertainty was high 2009, in late 2010, and again in 2017; and was relatively high from mid-2014 to the end of 2015.

Look to the longer term

Rather than fret about short-term performance, we believe it is better to focus on the longer-term opportunities. After all, investments should be held for at least five years.

For example, imagine you’d invested in the FTSE All Share Index at the worst possible moment on the 29th June 2007. On that day the FTSE All Share was at a high. But stock prices tumbled the very next day due to the financial crisis.

According to Bloomberg data, during the following two years, you would have seen your investment fall by 41%. At this point you might have been tempted to move money into cash at that point. If you did, you would have locked-in your losses.

By contrast, if you had ignored the noise and drama and only looked at the value of your investment precisely 10 years later on 29th June 2017, you would have seen that that the hypothetical investment had grown by 18%, again according to Bloomberg, despite the temporary fall in value through to early 2009.

Capturing the rebound

One of the dangers of cashing in and sitting it out is it is notoriously difficult to predict how stock markets are likely to move over the shorter term. Markets can turn very quickly and these turning points are nearly impossible to predict.

This type of strategy – dipping in and out of the stock market in an attempt to avoid losses – is called ‘timing the market’.

However, in trying to time the market there is a significant chance that you actually mistime the market and forego the best days of the recovery.

Chart 1 shows what can happen if you decide to convert your investments to cash in the hopes of reinvesting once you feel more confident.

The danger is that you miss the early days of the recovery while you decide whether this is a true recovery, or a short-term phantom one that could collapse in the near future leaving you no better off than when you started.

It shows the effects of missing the best ten, 30, 60 and 90 days of the past twenty years. These need not be consecutive days. That might seem a difficult thing to achieve. Could you really miss the best sixty days?

As Chart 2 illustrates, there have been a dozen or so market cycles of varying length in the past twenty years.  Missing just the first five days of each recovery would lead to you missing sixty days in total.

So if it's almost impossible to spot the right time to get into or out of the markets, what can investors do if they are concerned about short-term setbacks?

We believe that remaining invested allows you to capture the rapid recovery that, historically, has followed each downturn.

As Chart 2 also illustrates every time there has been a major fall in the FTSE All Share it has been followed by a sharp rebound that eventually leads the stock market to new highs.

Diversification: a helpful component in stabilising returns

We should also acknowledge that there can be no potential return without taking some risks. The key is to understand the interplay between the two and to design a portfolio that optimises the amount of return you could potentially achieve given the amount of risk you can take.

Diversification is the strategy by which investors can seek to reduce their exposure to different types of risk in their portfolios.

It seeks to smooth out performance by reducing exposure to unique events so that the negative performance of some investments is countered by the positive performance of others.

This is because different investments perform well in varying economic and market conditions and asset classes tend to react differently to the same economic or political events.

Conclusion

Volatility is nothing new and a frequent feature of investment performance.  But that doesn’t make it any- the-less comfortable.

Whilst it is natural to want to shy away from further pain – by cashing in – there is a danger that by doing so you can miss the best days of any subsequent return of confidence. We believe that looking at your longer-term financial goals and maintaining a diversified portfolio of investments can help assuage your fears.

In short: try to ignore the storm around you and keep your eyes on the horizon.

Important information

Any views expressed are our in-house views as at the time of publishing.

Eligibility criteria and fees and charges apply at Schroders Personal Wealth.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

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