Market ups and downs are par for the course when it comes to investing, as any seasoned investor will tell you.
That’s not to say during turbulent times, even experienced investors feel the urge to move their money into ‘safe’ assets.
Assets like cash.
The problem is, whilst it might bring short-term peace of mind, it’s rarely a smart move for your long-term financial gain.
Here’s why it’s so important to stay the course during periods of high market volatility.
The Problem With Trying to Time the Market
There is no doubt you’ve heard tale upon tale of people trying to ‘time the market’.
When markets drop and the word on the street is gloom and doom, selling off your investments and waiting for calm can seem like a good idea. But in practice, timing the market is incredibly tough.
Vanguard research shows that the best and worst trading days often occur close together and typically during the most volatile periods.
For example, 10 of the 20 best trading days (according to the MSCI World Price Index from 1980 to 2024) happened in years with negative overall returns. At the same time, 11 of the 20 worst days happened in years with positive returns.
This overlap highlights just how hard it is to guess the right time to exit, and re-enter the market.
Trying to wait out market lows means you risk missing out on strong rebounds, which can damage your long-term returns.
Why Staying Invested Pays Off
Since 1972, global stock markets have seen 13 bear markets, signified by prices falling by 20% or more.
While that might sound alarming, it’s worth noting that bear markets tend to be short-lived compared to bull markets, when prices rise.
Between 1980 and 2024, the average global bull market lasted about four times longer than the average bear market.
During that period:
- Bull markets delivered an average total return of +96% over 1,018 days.
- Bear markets averaged a -30% return over 282 days.
In other words, while downturns do happen, they’re typically followed by longer and stronger upturns. That’s a strong argument for sticking to a well-diversified, long-term investment plan.
The Hidden Costs of Moving to Cash
Switching your portfolio to cash during a downturn might feel like a safe bet, but it comes with its own risks.
Firstly, you’ll need to figure out the right time to re-enter the market, which, as we’ve seen, is incredibly hard to do.
Secondly, when markets are volatile and you want to cash out, you are selling on a down market. Only to gain confidence and reinvest when the markets go up. You will be hard-pressed to find an experienced investor wanting to sell at the bottom of the market and buy at the top.
Thirdly, there are tax implications: selling appreciated assets to raise cash could trigger capital gains taxes.
Vanguard analysed how U.S. investors fared when shifting from a balanced portfolio (60% U.S. stocks, 40% bonds) into cash after a major market event.
- After 3 months in cash, investors had a 74% chance of underperforming the market, with an average underperformance of -4.1%.
- After 6 months, the underperformance probability was 71%, with an average underperformance of -7.4%.
- After 12 months, the likelihood of underperforming climbed to 87%, with an average underperformance of -13.3%.
In short, investors who moved to cash during periods of stress typically lost out compared to those who stayed invested.
The Bottom Line
Volatility is a normal part of investing, but reacting emotionally by pulling out of the market can hinder your financial goals.
History shows that markets rebound, and those who remain invested in a well-diversified portfolio tend to come out ahead.
Focus on your long-term plan, not short-term market noise.
Reach out to the team if you are seeking advice to build a customised, diversified portfolio to suit your needs in the current, volatile market we are experiencing. Let our experience be your guide.
