2022
Shall I sell everything and switch to cash?
Robin Thomson / 0 Comments /You could be forgiven for asking – should I sell all my investments and put everything into cash?
Investors have had a lot thrown at them in recent months, with the emergence of the Omicron variant, rising inflation worries and the prospect of higher interest rates. To these concerns, we can now add the Russian invasion of Ukraine, adding geopolitical worries to an already skittish market.
It is entirely understandable that, on top of the immediate suffering & tragedy, the humanitarian and other concerns, even those of us who are relatively far-removed may also be concerned about our own investments. It is hard to distance oneself from the emotion of the moment and make wise decisions about the funds in your care – but allow us the space to take a dispassionate look at the financial issues you should consider.
The question is, when one takes into account rising interest rates, rising inflation, volatile markets and a war in Europe, should one just sell up and sit on a pile of cash for a while? That seems to feel safer.
The rest of this article explains why that may not be a good idea but, of course, this is your money we’re discussing and therefore it’s your choice. If you instruct us to sell your portfolio in order to convert its value to cash, we will do so.
Here are four investment principles to consider as you contemplate that question:
- Only change your strategy when your goals and objectives change.
- Only change your strategy when your risk tolerance changes.
- Avoid trying to time the market.
- Diversified portfolios smooth out volatility.
- Use cash as a buffer, not an investment.
No. 1 Only change your strategy when your goals and objectives change
Your portfolio would have been set up based on your original time horizons and will allow for significant volatility.
However, if your time horizons have changed and you have decided that you wish to use the money soon then you might wish to start switching funds to cash.
If your time horizon is still the same (probably medium or long-term) and you don’t need the money imminently, then hold on. There is good evidence to suggest that buying and holding through a crisis is the best strategy.
Clearly, it is a fast-moving situation which could change very quickly but volatility is likely to continue in the coming days. However, history does give us some comfort that markets should eventually recover from these geopolitical concerns. During the Crimean annexation of 2014, investors experienced some volatility, but global equities did resume their more general, longer term upward trend as the crisis subsided. Going back further, global markets experienced volatility in the run up to the US-led invasion of Iraq, but bottomed out about a week before the troops went in and then spent the rest of that year going up steadily. Clearly, all geopolitical events are different and this current one is particularly serious, but it is reasonable to expect that markets will recover once tensions subside, and over time.
No. 2 Only change your strategy when your risk tolerance changes
Similarly, when you first chose your investment portfolio we spent time discussing risk with you. How much downside would you be comfortable with? What is your capacity for loss? What risk do you need to take in order to achieve your objectives?
We also review these questions with you regularly. Your risk tolerance is a key factor in selecting the type of investments we recommend and set up for you – and they are designed even for such a time as this. However, if you feel that your tolerance for risk has changed then, of course, you should re-assess your approach to investment.
No. 3 Avoid trying to time the market
When is the best time to sell? When is the best time to buy?
When selling in a falling market, how will you know when it has stopped falling?
Once you have your money in cash, how do you know when to buy – when are investments going to start going back up?
After many, many years of observing investment decision-making, we are convinced that trying to judge when to sell and when to buy is a highly precarious exercise.
Try asking your internet search engine ‘missing out the best days in the market’ and you’ll find a host of articles written over many years (e.g. here) which show that if you are out of investment markets for even just a few of the best days you may lose out on the typical post-fall recovery.
If you happened to make the right calls when trying to time the market, you would of course be very glad you did – but if not, you might not only make a loss by selling when prices have fallen, but also pay too much for them after they have regained value.
No. 4 Diversified portfolios smooth out volatility
Balanced portfolios mix up the underlying types of investments (their asset allocation) in order to diversify. This is to counterbalance volatility and provide something of an all-weather investment solution, over time.
You will not be wholly immunised from falls in value (and you won’t often get the biggest uplifts), but it does “smooth your ride” and means that you don’t have to be thinking about selling in the middle of a crisis. Investment advisers talk about how when there is a lot of investment “noise” it is hard to listen to what is really going on.
There is certainly a lot of that sort of “noise” right now. It is precisely at these times that investors rely on the carefully selected asset allocation they have chosen – to ride out the storm and continue to achieve their original goals in the long term.
No. 5 Use cash as a buffer, not an investment
If you are concerned that your near-term financial needs might not be met then there can be a case for increasing your cash deposits. So, rather than liquidate (sell for cash) your whole portfolio, you can convert a portion into cash and leave the rest alone and not worry about the longer-term impact on your goals and objectives.
Conclusion
Whilst we might counsel switching into cash if your goals or your risk tolerance have changed, or if to do so would provide you with reassurance, if nothing has changed for you, we would advise that you avoid market timing altogether.
We strive to apply wise financial counsel for our clients, according to their own circumstances, needs and goals over the long term and we hope that these reminders of our investment principles grant you some peace of mind in confusing times.
Clearly, all geopolitical events are different and what is happening in Ukraine is particularly serious, but we are confident that markets will recover once tensions subside. We continue to take a long-term approach and favour a broad mix of internationally diversified equities (shares) alongside lower risk alternatives, bonds and fixed income. Rest assured that we are monitoring developments closely.
If you would value talking this through further, or if you decide you would like us to make any changes to your portfolio, please do let us know.
Flowers McEwan
2 March 2022
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