With all the volatility that 2022 and the preceding pandemic years brought it’s understandable that you may have fallen out of love with investing in the stockmarket.
Cash accounts have started to look far more appealing with better offerings as interest rates have gone up. Cash accounts offer a stable haven for your money, and they do have their place for short term investing, but here’s three reasons why you shouldn’t give up entirely on the stockmarket just yet, particularly if you have a long-term investment goal:
- You could land a bargain: Few can stomach the sudden major dips of markets when news of recessions or other dismal data appears. It’s tempting to cut your losses, sell out and run into the ‘safe embrace’ of cash. But what many tend to forget is that, if you look back in history, stockmarkets have had plenty of bull and bear runs. Just like relationships there are many ups and downs. But if you stay committed, chances are that you’ll get a good bargain. This is often achieved through riding out the downs and taking advantage of the upswing. Research shows there’s often a major upswing after a bear market or a correction. A bear market, by definition, is a fall of 20% or more while falls between 10%-20% are considered merely a correction. Research shows that between 1950 and 2022 the S&P 500 has tended to perform better shortly after a correction or a bear market event. However, if you try to time the market (few can do this) chances are you’ll mistime it and miss out on some or all the growth that comes after a correction or bear market episode.
- Things are not as bad as they appear: This week the FTSE 100 reached a record high and UK data shows that we’ve narrowly missed a recession. Gross Domestic Product (GDP) in the last quarter of 2022 was broadly flat, following a contraction in the third quarter. Recessions are defined as two consecutive quarters of shrinking GDP. The UK has missed a recession by the slimmest of margins, but it’s still good news for investors because things aren’t as bad as originally feared. In general markets currently are quite forward looking. There was a big sell off in 2022 but predictions of a recession in 2023 have already been priced in. This is one of the many reasons why markets have performed well in recent months. But even if there is some volatility over the next year, it’s never a good idea to have a short-term view when you are forging an ‘investment relationship’ with stocks and shares. Just like any relationship, you need to invest your time (and money) to see the benefit.
- The stockmarket can typically offer you more variety than cash: Cash may be safe and predictable, but it will never beat the overall returns you could get by investing in the stockmarket over the long term (for example, 10 years or more). If you invest in the stockmarket, particularly if your portfolio is spread out globally you could benefit from investing in a range of different markets and assets, whereas traditional cash accounts offered by banks are one dimensional. Remember that cash is ‘safe’ because you’re not taking on any risk. You get a better return on investment in the long term when investing in the stockmarket as ‘payment’ for taking on that risk.
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As with all investing, your capital is at risk. T&Cs and ISA rules apply.
It’s never a good idea to expose your money to just one asset class. The key to ensuring you have some protection when things go wrong is to invest your money in a variety of assets that can give you a return over the short, medium and long term.
Over the short term, cash of course has its place and should form part of your portfolio. The pandemic has shown us the value of having a rainy-day savings pot to fall back on in times of trouble. If history is anything to go by this is not the last threat of a recession that we’re likely to face. It’s not the last time we’ll see interest rates rising but it’s also not the last time that we’ll see a stockmarket rally.
Love it or hate it, investing in the stockmarket has its challenges. If you don’t let emotions get in the way, you may well get the returns that you seek and hit the financial goals you’ve set out.
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