Retail investors going ‘whole hog’ on cash leaves industry aghast

Advisers reveal some investors are pulling entire portfolios from the market


The investment industry is warning on the dangers on trying to time the market following reports of retail investors pulling their entire portfolios out of the market and holding it in cash.

Portfolio Adviser spoke to several professional investors who said they had worked with clients or heard of retail investors who have completely exited the stock market. The risk-averse move comes as volatility returns to the market with the MSCI World index falling 5.43% in October, the second global market correction following February’s falls.

Tom Kean, director at Thameside Financial Planning, said he’s spoken with two potential clients in the last month who have “gone the whole hog” and switched their invested pensions funds into cash for the time being, ready to jump back in when they feel more optimistic on markets. “It’s classic market timing, which we don’t subscribe to. I suspect they are anticipating some kind of rally once things calm down, but my suspicion is that it has already been priced in?”

Elsewhere advised clients have switched their entire portfolio into cash.

Darren Cooke of Red Circle Financial Planning said he had a client who approached him worried after four of his other friends had been advised to put all their money in to cash. “He asked me why I hadn’t done the same for him.”

“We had quite a long conversation about the benefits of long-term investing and missing the best parts of it by pulling out. The other blokes have pulled everything back to cash. I don’t know other advisers that would say to do that – that’s just folly,” Cooke said.

The Brexit factor

For UK investors, Brexit uncertainty is bringing political fear to investment landscape not seen since Suez crisis and 1970’s industrial strife, says Gavin Fielding, editorial director at Fundscape.

“At Fundscape we have seen data-based evidence of a move away from stocks and shares ISAs and equities,” he says. “There is circumstantial banking data that customers are moving into cash but there are always seasonal effects that mask what is going on at a macro level.” This would reverse the trend in the 2017/18 tax year when cash Isa subscriptions fell 10% to 10.8 million, according to HM Revenue & Customs figures.

Fielding adds: “This time round there is no safe haven of property buy-to-let, so I expect cash and even gold would be seen as alternatives.”

Meanwhile, Nicholas Rolf, chartered financial planner at Investment Quorum, says this nervousness and move to cash is notable “every time there’s a bit of a wobble in the markets or a correction as we’ve seen”.

“Especially at the moment with the political uncertainty that we can see – interest rates in America are potentially rising and slowing down in the global economy so there’s a lot of factors that play in to. However, our view as a house is that we don’t like to move people in to cash.”

Retail investors are not alone in feeling risk averse, although professional investors have been much more restrained in taking bearish calls.

Global fund manager cash balances were 5.1% in October, well above the 10-year average of 4.5%, according to the Bank of America Merrill Lynch monthly survey. This dropped to 4.7% in the November survey.

Clients don’t pay advisers to hold cash

Fielding did not expect advisers would not be recommending cash portfolios for clients. “Concerned risk averse clients may contact their adviser and insist on cash. The adviser will explain the options and long-term nature of investing but if the client still insists then the adviser will document this and act accordingly.”

Discussing how much cash Red Circle would hold in a clients portfolio, Cooke said absolutely none.

“The client doesn’t pay me to hold cash, doesn’t pay me to invest in cash. If they want cash, they can put it in a bank account. Why are they going to pay me and my management fees, product fees, and an investment managers fee, to hold cash that they can hold in a bank account for free? Your investments are to be invested and cash is not an investment.”

Referencing research from Fidelity, Cooke said that that if you invested £1000 in the FTSE All Share 30 years ago but missed the best 10 days, you would have received an annualised return of 7.9% and ended up with £7,800. If you stayed invested, you’d have achieved £14,733.

Fraught with danger

Market timing is a mug’s game, according to advisers.

Justin King, chartered financial planner at MFP Wealth Management, says scenarios of investors pulling their entire portfolio from the market to hold cash is “fraught with danger” and “foolish” unless their financial plan means they can’t handle the risk.

“Let’s say you get out of the market and you’re right. Well done!” King says, stating they still need to time re-entry to the market. “When do you get back in? If you’re wrong, how long do you sit on the side-lines before you get your confidence back? Do you end up buying the market at substantially higher valuations?”

Likewise, Dennis Hall, CEO and chartered financial planner at Yellowtail Financial Planning, argues he has rarely seen any sustainable success following this strategy. “Where I have reviewed DFM portfolios for people, the long return has lagged the market as they have got timing wrong. Too early out and too late back in to the markets are common themes.

“The problem isn’t so much selling out of the market, it’s having the confidence to get back in the market. Investors say they’ll do it, but rarely do what they say they’ll do when the reality of it is starting them in the face. I have two fund managers as clients, one in fixed interest, the other in equities. They both can find every reason not to get back into their respective market – they’ve been having this discussion since 2008!”

However, Hall adds that he has not seen or heard of people going completely into cash during the current market cycle.

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