Investing now and swallowing the near-term market volatility is a better trade-off over the long term than letting your cash be eroded by inflation, according to experts.
Knowing or deciding when to invest can be a hard decision, but it is one made even harder when market volatility is as high as it has been during the past few months.
One of the big drivers of this recently has been Russia’s sustained attack on the Ukraine, which has sent almost all assets apart from oil and gold plummeting.
Prior to this, investors were challenged with a market rotation out of growth and into value, propelled by rising inflation and central banks raising interest rates for the first time in years. This hit many of the funds and stocks that had consistently led markets for more than a decade, causing them to underperform in recent months.
Poppy Fox, investment director at Quilter Cheviot, said “now could be a good time” for investors wondering what to do with their cash in the current macroeconomic and market environment to get invested.
She said “time in the market rather than timing the market” was key, so rather than trying to time the bottom of a market dip – which is even harder to do when it is driven by a geopolitical backdrop, like the war in Ukraine – it was better to give yourself as much time as possible in markets to smooth out the end result.
Fox said that anyone wanting to put their cash to work now should have a time horizon of “at least five years” as any less “may not be a long enough to ride out any bumps along the way”.
It is understandable why investors might hesitate before diving into markets when things appear so unstable, according to Eva Sun-Wai, manager of the M&G Global Government Bond fund.
She said some clients may withdraw assets to hold cash because it gives them some security and reassurance.
In more challenging times like these, fund groups experience redemptions once things become challenging, which is the opposite of what they want.
Sun-Wai called this a “miscorrelation” because fund managers prefer to have inflows “when everything is really cheap” but instead they get “inflows in good times…when it's harder to buy things that are good value”.
While getting into markets sooner rather than later was the ideal, Fox said this did not mean going to zero on cash.
She said it was still important to hold some cash back and ensure you have enough savings to fall back on if needed, but “not investing excess cash in the current climate may mean you lose money in real terms” because of inflation.
“The current inflation situation is challenging, and it is likely to get worse before it gets better.”
Indeed Lena Patel, independent chartered financial planner at ISJ Independent Financial Planning, agreed with this. She noted that inflation appeared to be “rising for the foreseeable future” and that interest rates are still relatively low, despite the hikes, suggesting “volatility can be your friend” when trying to achieve long-term objectives.
Patel said that it was important to accept that “volatility is part and parcel of investing” but that it can be used to an advantage.
“Accepting volatility, in exchange for the downside of your cash deposits being eroded can help achieve your goals in the longer term,” she said.
When choosing where to allocate any cash both advisers promoted a well-diversified and balanced approach, split between equities and fixed income.
Fox said a typical, balanced investor could consider investing around 65% in equities spread across the UK, US, Europe, Japan, Asia Pacific and the emerging markets, 15% in fixed interest with a mix of UK – both sovereign and corporate – and overseas debt, 15% in alternatives and leaving the rest in cash (5%).