Money Clinic: Market will bounce back, but nobody quite knows when

Holding onto cash in a volatile market can pay off but investors should beware of waiting too long and missing out on sizeable gains if markets strengthen unexpectedly.

With all the doom and gloom about global markets, property and the oil price, I have investment paralysis. Is now the time to hang on to cash and sit the storm out until the dust settles? BC, Abu Dhabi

Expert one:

Sam Instone, chief executive of AES International

The unprecedented volatility to start the year has brought out every type of expert opinion on the best way to ride out the storm. I have heard arguments ranging from “stay the course” to “this is just the start of the crash”.

Let’s be clear – no one knows what is going to happen over the next three to six months. We could be another 20 per cent lower, 20 per cent higher, or anywhere in between. Anything can happen, because over the short term markets are unpredictable. However, over the long term, markets become very predictable, and that’s why we practise a time-in-the-market approach rather than trying to time the market.

Stocks periodically go on sale because people panic and sell them at just about any price they can get in their rush to the exits, and we are experiencing one of those periods now. Whether this will be a 5 to 10 per cent year or a 20 per cent year, time will tell. But it’s worth noting that in the past, every one of those drawdowns eventually ended with an even greater upturn.

It’s easy to think that we can reinvest money when the markets calm down, but it’s nearly impossible to know when that moment has arrived. There’s also a risk of waiting too long to get in to the market and missing out on a big gain, which could mean you fall short of your financial goals.

Having said that, when markets fall, it’s normal to worry. It’s also normal for markets to go up and down. Sometimes the swings are big, but over the long run, markets bounce back. However, only a disciplined, systematic approach, with a diversified asset allocation and long-term mindset, wins in the markets. Warren Buffett has a great quote: “The stock market is a device for transferring wealth from the impatient to the patient.” I couldn’t have said it better.

Expert two:

Tom Anderson, stockbroker at Killik Offshore

We are seeing some big daily swings across equity, commodity, currency and debt, so I can understand that people are worried. However, many of us are reliant on markets to provide asset growth or additional income, so investors are stuck between the rock of their future investment requirements and the hard place of today’s markets.

The UK’s benchmark index, the FTSE 100, has lost almost 15 per cent of its value since last summer, although it has since bounced. The S&P 500, which is the main US index, was down 10 per cent before strengthening last week. In the same period of time, Apple has lost 25 per cent of its value, but Google (now called Alphabet) is up 40 per cent.

Therefore, the first step is to review your investments in line with your objective. Are they simply a list of preferred ideas that could be dangerously correlated, or do they form a diversified portfolio that should be able to stomach volatility? Cash can certainly form part of the non-equity element of a portfolio, but you need to be aware that over the long term, inflation will demolish its purchasing power. There is also a risk that if you sit out of the market you may miss a good day and have to buy back in at a more expensive moment.

However, this is something that is not unique to private investors. Pension funds, asset managers and sovereign wealth funds face the same dilemma. Their difficulty is exaggerated by the fact that they are massive and require huge liquidity to make changes. A private investor has the advantage of being more nimble, so it is relatively easy to sell assets and hold some cash.

Make sure you understand what you own, and if you want to trim some assets and hold as cash, then do so – it is your portfolio. If you are worried about markets or have a requirement for cash this year, then maybe selling something wouldn’t be a bad idea, but it can be frustrating if you hold cash and markets strengthen unexpectedly.

Next Money Clinic:

I want to invest in mutual funds but am wary of using the services of a financial adviser. What's the easiest way for a novice to get involved, and how do I interpret the information on a mutual fund fact sheet? KJ, Dubai

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