The markets doesn’t like disruption and as investors in the stock market, we don’t like it either. April 2 is “Liberation Day” for the US, when 25% tariffs on a host of nations. But Trump changes his mind on a whim, so that can all change between now and then.
Hindsight
This volatility in the market has made some investors are getting nervous who want to move to cash. The mantra from advisors is “stay invested”. Why do we say this? Because we can’t tell the future. It is only with hindsight that we are able to know whether investors should have moved to cash or not. The questions that are answered after it has happened are:
- What will cause the next crash?
- How bad the volatility will be?
- How long it will last?
- When has it hit the bottom?
If we look back at the last major crash in 2020, who would have thought that a pandemic would hit and close down the global economy? As a result of this major event, the global stock index fell by -31% in just one month. But it then started a V like recovery with markets growing by 23% in the next 7 weeks before there was a bit of a wobble.
Imagine that you had moved to cash when the markets started to fall. They fell hard and fast, so it was unlikely you got out at the top. Even if you were lucky enough to get out at the top, did you know when to get back in and make a profit? Given the nature of the crash and the fact that the global economy was shut down, you would have thought it would last longer than it did. I know I did.
If you miss the best days
The biggest returns in the market tend to happen just after the market has hit the bottom. Thanks to great research carried out by fund managers, we can see the impact on your money when you miss those best days and it is significant.
To put those numbers into returns:
- Stay invested: 11.03% per annum
- Missed the best week: 9.58% per annum
- Missed the best month: 9.03% per annum
- Missed the best 3 months: 7.88% per annum
- Missed the best 6 months: 7.54% per annum
Now scale that up. A pension fund of €500,000 and staying invested throughout the 10 years has €1,423,522 at the end. Another investor with the same pension pot at the beginning but who missed the best week of returns at the end of the market fall during Covid in March 2020 has €1,248,196.
Do you think you would have called the end of the market crash when it fell in 2020? If you were just one week late in getting back into the market, the other investor lost €175,326
Invest in quality companies and invest for the long term and your money will be fine. Moving in and out of cash is a sure fire way to lose money.
- By Steven Barrett
