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Investors who sold out of their investments and into cash during the coronavirus pandemic are missing out on significant gains due to their time out of the market.
Quilter research* found that 55% of investors who moved to cash during the pandemic would hold off reinvesting until they see at least a 10% recovery, with almost a quarter specifically saying they would wait until markets had returned to pre-crisis levels. A quarter of investors would hope to ‘time the market’ by investing when it’s at its lowest.
These are risky strategies which could cost them dear
The cost of remaining in cash are clearly demonstrable. Following the dramatic falls experienced by stock markets in February and March, share prices have recovered globally by more than 10%, and even higher in some cases.
However, if you were to wait for the 10% market recovery before reinvesting, you would have stood to have missed out on over £2,000 on a £10,000 portfolio invested five years ago. If you had waited for markets to return to pre-crisis levels, then returns would have been more than halved with a difference of £5,333 in investment growth.
|Investment returns on £10,000||Missed investment returns|
|Reinvest following 10% rebound||78.18%||£7,818||£2,051|
|Reinvest following return to pre-crisis levels||45.36%||£4,536||£5,333|
Source: Quilter. Based on an initial investment of £10,000 in the MSCI World Index over the period 14/10/2015 and 14/10/2020. The information provided is for illustrative purposes only and doesn’t represent the past performance of any particular investment. It is not possible to invest directly into the MSCI World Index.
The effects of missing just a handful of the best days in the market
As this chart shows, if you missed just the best five days in the market, you could be losing out on nearly £20,000 of growth over the long-term.
Keep calm and stay invested for the best chance of long-term gains
With Covid-19 restrictions continuing to risk destabilising markets, Quilter is cautioning investors that moving to cash in times of crisis can often leave a devastating impact on portfolios.
Indeed, trying to time the market or waiting for markets to recover can be a dangerous game and result in a huge amount of lost growth.
Safety isn’t always the best policy
While cash is often considered a ‘safe’ investment, holding it for too long or in place of assets that do grow over time can result in a lot of pain.
Even this year we saw markets recover swiftly following the Covid-19 induced panic, and if investors were sat in cash during this period they will already have missed out on a significant part of the recovery. Instead of protecting them, selling during a falling market can lock-in losses and deprive them of the opportunity to capture the benefit of the recovery in asset prices.
So what should you do?
Every investor needs a cash buffer in case of emergencies, but too much can negatively impact on returns. If you don’t want to miss out on the chance of significant gains, you need to find the right balance, which is where professional advice becomes invaluable.
Speaking to a financial adviser can often identify the best ways to make the most of your cash and ensure it can deliver for you over the long term, and not make your goals out of reach.
*Quilter research with 2,005 UK adults aged 40+. According to ONS figures over 40s hold 90% of the UK’s savings.
This communication is issued by Quilter Investors Limited (“Quilter Investors”), Senator House, 85 Queen Victoria Street, London, England, EC4V 4AB. Quilter Investors is registered in England and Wales (number: 04227837) and is authorised and regulated by the Financial Conduct Authority (FRN: 208543).
This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document.
Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Quilter Investors as a result of using different assumptions and criteria.
Quilter Investors is not licensed or regulated by the Monetary Authority of Singapore (“MAS”) in Singapore. This document has not been reviewed by MAS.
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The UK economy contracted by more than 20% in the second quarter of 2020, officially bringing the UK into its first recession in more than a decade.