Cash is not King

We are very conscious from the conversations that we have been having with clients that this is a very unsettling period and one which hasn’t been experienced for some time. Often clients are concerned about drops in investment values and are wondering what the alternatives might be to provide them with reassurance that they are not staring into the abyss. The most obvious alternative is to sit in cash whilst the markets find some resolution but, at a time when interest rates remain low, for most this is not suitable. For those continuing to view their investment as a long-term solution our message remains the same as always: hold fast and do nothing.

We thought this recent bulletin from 7IM was especially useful in explaining why we recommend this why it’s our job to ensure the wrong decisions are not taken at a time when it seems like the world is falling apart.

As always, if you would like to discuss your concerns with us at any point please do not hesitate to contact us.

Clients need only read the news to worry about their investments right now. It’s no leap at all to consider whether a move to cash is a good move. In the context of long term returns, there is a simple answer to that – it isn’t. Looking back at the worst market conditions in recent memory, we’ve turned to an old favourite to illustrate this…

A 7IM Balanced holding worth £100k on 19th May 2008, the day the FTSE began its descent that year, is now worth around £156k. However, with a year spent in cash from 1st March 2009, the market low, it would be worth only £126k today. That’s a whopping 56% vs 26% return. Those dates were the worst you could’ve picked but if you’d have been a bit luckier and timed your exit earlier to avoid more downside, i.e. cashing out on 1st October 2008 for one year, you’d experience a 43% return vs 56% had you stayed invested.

Almost every scenario we’ve run ends in a lower return when investments were substituted for cash around the financial crisis. Only if you’d timed it perfectly, into cash at the top and back in at the bottom, did it work. The brightest minds in our industry didn’t call that. Click here to see the two examples mentioned.

It’s time in the market, not timing the market that pays.

Tom Merchant
Business Development Associate
Seven Investment Management