Question: There is lots of coverage in the press at the moment about possible recession and high inflation. Should I look to move my investments into cash to avoid losing money? With high interest rates cash looks very attractive.
Answer: Global stock markets are indeed very volatile at the moment and we are seeing big moves up and down daily. While I appreciate that this is of concern to you I would caution against making any decisions based on short- term factors. I obviously don’t have the full details of your financial affairs so my comments are quite general.
Though cash returns may be relatively attractive at the moment, I would strongly advise against making a switch to cash within your investment portfolio unless your circumstances are such that your time horizon is very short.
The equity market is volatile by nature and it’s not uncommon to see large moves up and down. Markets move in cycles. A down trend is part of the cycle and there will be an up trend to come. Over the long term, history has shown that the returns from equity are much higher than those on cash and that in order for our investments to grow and beat inflation we need equity exposure.
Unfortunately , what typically happens when investors try to move in and out of the market is that they sell when the market is at its lowest and miss out on the growth. They then buy back into the market just as the next down cycle is about to begin.
Over the past 10 years the return on the SA equity market has exceeded 19% a year. It has achieved this healthy return despite the fact that there were five periods when the markets fell by more than 20% from high to low.
The return on cash over the same period has been about 11% a year. When this difference in return is compounded over 10 years, it starts to become clear why we need to have some exposure to equity markets. It is important to have a balanced portfolio and in the same way as it is not appropriate to have no equity, it is also not appropriate to have exposure to equity only.
My advice to you would be to determine together with your financial adviser what the correct allocation is for your particular needs over the long term. Then you should stick to this strategy through all market conditions and you will do better than trying to switch in and out of cash, hoping to make the correct timing decisions.