Two Key Factors To Consider Before Taking Your Money Out Of The Stock Market
By David Pritchard
As stock markets face turbulence, investors tend to get nervous, and the UK market has been a particularly stormy sea over the past year. With rising inflation concerns and a potential recession, it’s certainly had a tough time.
As a result, most investments have fallen over the last 18 months. This development, coupled with the cash deposit rates many banks currently offer, raises a new question for investors.
Should you sell some of your investments and move them over into deposits?
In this blog, we’ll explore whether your money is better off in the market or in the bank. There are two key factors to consider before making this investment decision.
1. Selling your investments could mean crystallising the loss
The value of any investment may go up or down, depending on the state of play within the market. However, if your investments have lost value and you sell them, you “lock in” those losses, and they become real and permanent. Once you sell, you can’t recover your losses even if the investment would have gone back up in value later on.
Many investments, over a medium to long term, usually outpace inflation and will eventually recoup any temporary losses. This means that if you’re patient and hold onto your investments, there’s a good chance that they will recover their value over the next one to two years.
2. Deposit rates have traditionally always underperformed inflation
While keeping your money in a bank is stable and not volatile (it won’t suddenly drop in value like a stock might), you’re still effectively losing money due to inflation. Deposit rates have traditionally always underperformed inflation.
At the moment, inflation is just under seven per cent while deposit rates are at five per cent. This means you’re essentially losing two per cent of your money’s purchasing power each year. At the end of the day, you won’t be able to make any positive returns because your money’s value isn’t growing faster than the rate of inflation.
The market will recover
The equity market, property market and fixed interest market are likely to recover in value over time. They currently look cheap (particularly in the equity market), so if you have extra money lying around, now might be a good time to invest.
Inflation will likely drop to five per cent by the end of this year, and go even lower to about two to three per cent by 2024. Interest rates are expected to follow the same trend, and regardless of where they end up, these rates will likely still be lower than the rate of inflation.
That means that even future ‘high’ interest rates won’t necessarily be a good deal when you consider the loss in buying power due to inflation.
The bottom line
In general, it’s not about trying to pick the perfect moment to buy or sell (timing the market), but rather about how long you can keep your money invested (time in the market). Medium to long-term investments will always outperform deposit rates and inflation in normal terms.
The longer you keep your money in various investments, the more opportunity there is for those investments to grow.
Our overall recommendation is: whatever cash you do keep in the bank, try to get the best deal you can in terms of interest rates. This will help your rainy day fund increase over time.
For the rest of your money – the part that’s invested in things like stocks, property or bonds – don’t rush to sell them off simply because their value has dropped. Hold onto them until they (eventually) recover.
If you’d like to find out more about how to protect the value of your investments, stay tuned to our podcast, A Dab Of Investment.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
Past performance is not a guide to future performance.