Three reasons not to move your investments into cash

If you’re tempted to move your stock or bond holdings into cash when the market drops, don’t be too hasty, says James Norton.

Nobody likes to see their investment portfolio lose value. Market volatility is unsettling and can rattle even the most disciplined investor.

You know – or should know – that your mix of shares, bonds and cash should change only if your goals change. But in the face of extreme market swings, you may have a hard time convincing yourself of that – especially if you’re retired or close to retirement. At times such as these, the perceived safety of cash can be a great lure.   

However, don’t be too hasty. If you’re tempted to move your stock or bond holdings into cash when the market drops, consider first these three questions before taking any action.

1) Will I effectively be locking in my losses?

Once you’ve sold, your trade can’t be changed or cancelled even if conditions improve immediately. If you liquidate your portfolio today and the market rebounds tomorrow, you can’t undo your trade.

If you’re retired and rely on your portfolio for income, you may have to take a withdrawal when the market is down. While that may mean locking in some losses, remember that you should probably be withdrawing only a small percentage – maybe 4% or 5% – of your portfolio each year. Your retirement spending plan should be built to withstand market fluctuations, which are a normal part of investing. If you maintain your asset mix, your portfolio will still have opportunities to rebound from market declines.

2) Once I’m out, when do I go back into the market?

Since the market’s best closing prices and worst closing prices generally occur close together, you may have to act fast or miss your window of opportunity. Ideally, you’d always sell when the market peaks and buy when it bottoms out. But that’s a dream, not a reality. You can’t rely on being able to time the market – even the most experienced and skilled investment managers struggle with that.

3) Does it really matter if I miss out on a few days when markets are rising strongly?

Whether you’re invested on the market’s best days or not can make or break your portfolio and jeopardise your investment goals.

Take £100,000 invested in a broadly representative portfolio of global shares over the last 20 years or so. What would’ve happened if you’d moved your money in and out of the market over this period and unwittingly missed out on the best-performing days? The answer is that it would have had a devastating effect.

If you’d stayed fully invested in the global FTSE Developed Index since it first launched in mid-2000, that £100,000 would have grown to £325,000 by the end of March 2020 – £225,000 more than originally invested. But take away the best 25 days of market performance in that period and your portfolio would have shrunk by just over £10,000 to less than £90,000.

This example applies to retirees, too. Life in retirement can last 20 to 30 years or more. As a retiree, you’ll draw down from your portfolio for several years, or maybe even decades.

Withdrawing a small percentage of your portfolio through planned distributions isn’t the same as getting out of the market. Unless you liquidate all your investments and abandon your retirement spending strategy altogether, the remainder of your portfolio will still benefit from the market’s best days.

Market swings can be unsettling but let this example and its dramatic results buoy your resolve to stick to your plan.

The moral of the story is to buy and hold in line with that plan and tinker with it only if your ratio of shares and bonds has strayed off target because of market moves. Alternatively, invest in a multi-asset fund that does this rebalancing automatically for you.

James Norton, senior investment planner for Vanguard UK.