By Natalie Tysoe, portfolio specialist at Morningstar
Rising interest rates have brought uncertainty in their wake. While share prices have made some progress, investors would be forgiven for seeking the perceived safety of cash. Nearly 80% of advisers in our most recent poll stated that ‘market uncertainty’ was front of mind for their clients.
When investors are fixated on inflation, poor returns, concerns for the future and interest rates, clients may wonder why they should be invested at all when cash rates are so high.
Keeping clients focused on their goals, reassuring them about investing and taking a holistic view across their whole situation is an adviser’s main concern.
This means adopting a long-term perspective – something that can be particularly challenging when investors are being bombarded with so much short-term noise.
At times like this it can be helpful to revisit the basics and reiterate that investing is a long-term project.
Investing is the only way to beat inflation
Stock market investing has proved itself the most reliable source of inflation-beating returns and has a vital role in building wealth over time.
Inflation is a scourge for investors, eating away at the future purchasing power of their savings. While inflation has been benign for much of the past thirty years, it has been substantially higher over the past 18 months. It may be on a downward trajectory but there is still uncertainty ahead.
It’s a key risk for clients and investing has historically been the best way to manage that risk. Swerving stock markets because of short-term volatility is not the answer. Cash is ideal for short-term needs and objectives, but investing in the stock market is vital for long-term inflation protection.
When investing for long-term goals such as retirement, many of the most dramatic stock market falls barely register on a 20 to 30 year time horizon.
Even if an investor had bought at the very top of the financial crisis in 2007 and suffered the full decline, their money would have grown by more than 250% 15 years later. Markets recover and companies rebuild.
Time in the market makes all the difference
While markets do recover, short-term instability can be unnerving, hence why we are seeing investors being tempted to withdraw their money. But this can mean missing out on a subsequent market recovery.
Staying invested is vitally important. Morningstar Wealth research shows that £1,000 invested over 20 years in the MSCI All Country World index would now be worth just under £7,000. That drops to just £5,000 without the best five days. Missing the best 60 days leaves it the red. Those best days often happen swiftly after significant falls in markets.
Diversification can smooth the way
Holding a blend of assets, geographic regions and sectors means a portfolio is prepared for a range of eventualities, which smooths performance over time without sacrificing growth opportunities.
Good quality bonds – government bonds for example – can help balance returns during a recession when equities may be down because governments pay back debt whatever the market conditions. Likewise, consumer staples and healthcare assets are less reliant on economic success and may even thrive during difficult periods.
Investing regularly captures opportunities
Regular investing is another tool to manage volatility. Investors only take the full force of market falls if they buy at the top and sell at the bottom, which may sound basic, but it is easier to fall into this trap than it appears.
Humans are programmed to run with the herd, so it can be easy to suffer FOMO when markets are high and panic when they are low – regular investing helps mitigate this.
Drip feeding money into the market means buying at a variety of price points. Investors don’t have to worry about whether the market is high or low because their cost price evens out over time. This is psychologically easier and encourages good saving behaviour.
Compounding is the driver of long-term growth
All roads lead to compounding when it comes to investing. Growth fuels its own growth, whether that’s through dividends, diversification, regular investing or just sitting tight and waiting for the storm to pass.
Sometimes the most difficult thing to do is nothing, but that is often the best course of action. This is a complex and difficult time, but cash is not the solution. The key to building wealth over the long term is to stay invested and take steps to manage volatility.
