Jeff Lewis, director at RobMac, looks at what can happen to investments during a market cycle. In this illustration, it shows the difference between riding out the high and lows of market fluctuations compared with realising your cash and potentially missing out.
When investments markets are volatile it’s a natural instinct to head for cash deposits in order to protect the value of your savings.
However, as we know inflation can erode the purchasing value of your savings over the medium to long term so retaining large amounts in cash is not really in your interest.
While it might seem preferable to avoid bear markets, many of the largest daily gains occur during these periods. Missing these days by divesting into cash would have a clear and significant detrimental impact on your overall returns.
For example, an investment of £100,000 in UK shares reinvesting the dividends in the year 2000 would be worth £247, 430 in 2022 which is not a bad return for the risk you have taken.
If you had missed the best 10 days of market growth during the last 22 years your £100,000 would now be worth £121,540 albeit still an increase. However, if you had managed to miss the best 20 days and indeed the best 40 days the values would be £81,760 and £41,134 respectively.
There is no ability to ‘’time’’ the ins and outs of the market but there is an ability to stick with it when times are a bit rough knowing that in the end market sentiment begins to turn and the value of firms increase along with portfolio values.
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