Several major global events – including most recently the coronavirus pandemic and the Russia/Ukraine situation – have prompted investors to flee financial markets, but history shows this could have been a mistake.
Moving cash into savings accounts may be appealing to investors who are faced with volatile markets. Amidst heightened volatility, it is understandable that many of your clients may be concerned about the impact on the value of their investments, fuelling uncertainty and triggering radical decisions in even the most seasoned investors.
But looking forward, maintaining a strategy of leaving cash sitting in accounts that pay extremely low rates is likely to guarantee a negative wealth effect over the longer term when the impact of inflation is considered. In short, panic isn’t a strategy.
It’s important to keep a perspective when markets get choppy. For those who are perhaps still feeling cautious, here are three strategies to consider when thinking about putting your client’s cash back to work.
1. Invest gradually
Cash could be invested back into financial markets in regular, smaller amounts – so that the overall amount invested builds up gradually. Because smaller amounts are invested, the short-term ups and downs of markets aren’t as significant – if the market moves downwards, only the invested portion loses out, and the investor still has some assets remaining in cash. This approach can be more appealing to those feeling uncertain when compared with investing a large lump sum all at once or holding on to cash and delaying investment for an unknown period.
2. Diversify your portfolio
Don’t put all your eggs in one basket. Multi-asset investment portfolios can be constructed and managed to take different levels of risk. If appropriate, cash could alternatively be invested in a portfolio at the lower end of the risk spectrum. There is a broad range of investment types, which each have different risk and return characteristics – behaving in different ways, at different times.
Rather than concentrate investments in one area, portfolios can allocate to several different types of investment and spread the overall risk taken.
When it comes to achieving long-term financial goals, the focus should be on investing, and remaining invested.
3. Stay the course
Making tweaks – like diversification – around the edges of a portfolio may make sense. But, while sharp declines in markets can naturally be disconcerting, if you want to give your client’s investments the best chance of earning a long-term return, then it’s a good idea to practice the art of patience.
One of the most common reasons investors lose money is when they try to time the market, trying to avoid the worst days of the stock market by cashing out and then re-investing when they think the market is going to pick up. Try to miss the lows and you’ll probably miss the highs too.
By keeping to an established and proven investment framework, we can look to take advantage of short-term volatility as we continue to seek out longer-term investment opportunities. We look to avoid behavioural biases that may result in decisions that negatively impact long-term return potential. Yes, the journey may not be smooth, but generally it is important to look through the noise and remain invested during times of market stress.
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Important information
The information in this article does not constitute advice or a recommendation and investment decisions should not be made on the basis of it. This article is for the information of the recipient only and should not be reproduced, copied or made available to others. The price of investments and the income from them may go down as well as up and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not a reliable indicator of future results.
