Don’t jump!

As I write, global stock markets are playing a one-sided game of snakes and ladders. And it’s not a good look. If the old adage that women save, men invest is still holding up, there could be a fair number of women rolling around in the I-told-you-so aisles right now. They might go as far as to taunt hapless investors with the odd jibe about their guaranteed 6% return over the next 12 months*. But would they be right?

What do you want?

As ever, there is no simple answer. So much depends on what you want your money for and when you want it. Let’s say you have some cash that you know you’re going to need in the next few years for a specific purchase – such as repaying a loan (snore) or taking that essential trip to Bali (yay). If you know you can tie it up in a savings deposit account for one or two years and get a guaranteed rate of return, then that’s a good bet. There is certainty and very low risk.

It looks greener on the cash-side

But what if you had a sum of money that you invested a couple of years ago in a well-spread portfolio of investments – investments that are being managed by professionals in a way that suits you – and that you still don’t need for anything specific? You could be forgiven for looking at the numbers on your statement right now and feeling somewhat let down. Not only that, but the cash-side of the fence looks a heck of a lot greener and you might be tempted to jump.

Keep sight of the long-term plan

I’ve got a couple of things to say about that. One is that this would be a bit like choosing a degree in Computer Science that you felt would set you up for an AI-dominant future but swapping courses half-way through because the Drama undergraduates are doing a module this term that looks like fun. In other words, ditching the long-term plan for a bit of short-term shenanigans. You have to know that the attractive cash rates are on the table right now for the same reasons that the investment markets are wobbling (more of that in a bit) – so, when things change, it might be tricky to hop back into the markets at the same price that you left them. In other words, the Computer Science course might have got oversubscribed while you were giving your best Desdemona on the Drama stage and, as a consequence, the tuition fees have gone up!

Cash is cash, assets are things

The other thing is that cash is just money – what you see is what you get – whereas investments are things (or, if you want to get all investment-y about it, assets). If you sell your investments now – possibly at a lower price than you paid for them – you are making those losses REAL. Think of your investments as tiny Monopoly houses (who doesn’t love those little widgets?). If you take money out of your investments, you will have fewer of those wee dwellings left in your pile. When things turn around (and, historically, markets have always recovered – we just don’t know when), there won’t be as many of them to benefit from a rise in value.

Timing the market is no small ask

Ideally, we would all know exactly when to buy our investments at the lowest values (ie when the share prices are in the doldrums and no-one else wants to invest) and sell them at the highest values. But doing this is no small ask of anyone. Stock market values can change very rapidly – often within the time between making a decision to buy or sell and actually making it happen. If you are trying to hop in and out of cash and investments successfully, you can end up losing out on sharp gains in values that happen in a matter of hours.

Why don’t we meet at 10:33?

It is very difficult to keep our emotions out of this kind of thinking. When we are faced with something like a 12-month timeframe where we know we can earn 6% on our money, we want to compare other options in a similar window of time. If our investments don’t perform as well in those exact dates, we see this unfavourably – even if we have no intention of selling those investments yet. I’m reminded of the observation that arranging to meet someone at 10:33 is no more or less precise than arranging for 10:30 – it’s just that we like to use order and systems to help us process our thinking and kid ourselves we are making informed decisions.

What do you want (again)?

In fact, the only information you need for these kinds of decisions comes back to what you want the money for and when you need it. And that brings me back to the point I nearly made earlier before I got side-tracked by Drama degrees and Monopoly houses. What is making the investment markets so miserable right now? And how does that relate to how much you can earn in a cash deposit account? And how does that, in turn, inform your decisions about what to do with your money?

The bones of the matter

There’s a bit of knee-bone-thigh-bone connectivity going on here, which can be simplified like this (and I’ve put a bit of meat on those bones after):
• Why are investment markets down? Because interest rates are high.
• Why are interest rates high? Because of inflation.
• What does inflation do to our cash? It devalues it, so we need to invest it in things that can grow when prices are going up.
Given all of that, does it make sense to sell investments when inflation is high just because you can get a better rate in cash than you used to be able to? Probably not.

Share prices go down when growth gets more costly

You might ask why, then, doesn’t everyone want to pile into investments right now? In other words, why are the prices of shares going down instead of up? This is because it’s the markets’ job to place values on all of those Monopoly houses based on information that is in front of them today. Investors are looking for companies that can do well in the future – ie grow their profits and share those profits with the shareholders – but, in order to grow, companies need to borrow money. And when interest rates are high, borrowing money costs more (mortgage holders can relate) and so those companies could have less profit to share. Consequently, their share price goes down.

Sit tight and ride it out

Once borrowing costs – aka interest rates – look like they are going to come down, however, the markets will favour these companies again and share prices will go up. There are some investors who believe themselves to possess superpowers of nimble-ness and clairvoyance and will try to “time” all these ups and downs by buying and selling on speculation about where the markets might be headed. For most of us, however, the sensible thing is to sit tight and ride it out.

6% is good – but it’s all relative

But what about those juicy cash savings rates out there? Shouldn’t we be trying to take advantage of these? Well, yes, if you are keeping savings in cash because you need it soon, but if this is money for your future that you won’t be needing for five years or so, then here’s the thing. It’s true that 6% looks good compared with the zero-point-zero-nothing we became used to until recently – but that was when inflation was at a similarly low ebb in its fortunes and our money was holding its value. At its peak last year, inflation was running at over 11%**. So, if you want your cash to keep pace with that, you need a savings rate to match it. The truth is, the rate of interest on your savings is unlikely to ever fully compensate for how much more you are paying for things when inflation is high. This is especially the case if you leave your money in cash for a long time. And it is why, when someone has a longer timeframe for their money, investments are considered more appropriate: ‘things’ – or ‘assets’ – have the potential to grow at or above inflation. Cash doesn’t.

So, there you have it. Now you’re equipped for a degree in Economics – if you hurry you might make the start of the autumn term. Just don’t get side-tracked along the way.

*Until this week, NS&I were offering 6.2% in their guaranteed growth bond if you tied your money up for 1 year.
** Office for national statistics data 12 months to October 2022 Consumer price inflation, UK – Office for National Statistics

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article
• Past performance is used as a guide only. It is no guarantee of future returns.
• Your investment can go down and you may not get back the full amount invested.
• This blog is for general information only and does not constitute advice.