Important information: the value of investments can go down as well as up so you may get back less than you invest.

The past month has brought some welcome relief for investors with significant bounces in markets on the back of better news on inflation and economic growth.

The S&P 500 index, covering the all-important US stock market, has added 7.8% in the past month. Meanwhile, yields on 10-year US Treasuries, a key benchmark in the bond market, have fallen more than 11% - translating into a big bounce for bond prices.

The trigger has been lower than expected inflation combined with better news for growth, raising hopes that interest rates can begin to fall sooner without a deep recession.

While that’s great news for investors, not all of them will feel the benefit. Many have been tempted this year to move out of risk-assets like shares and bonds and into cash, where there is no chance of their investments losing money in cash terms. Higher interest rates mean the returns on cash accounts have recovered to levels not seen for years. The highest paying savings accounts now pay in excess of 5% a year.1

Yet, as we have seen, investing in the stock market gives your money the potential to grow more strongly, albeit with the risk of loss along the way. Unlike cash, you never know when gains from investments will come - but you don’t want to miss them when they do.

That’s been shown again this month, but it’s true over longer periods too. We examined historical returns to illustrate how exiting the market for periods - whether to take shelter in cash or not - can disrupt your financial plans in the long term.

Moving to cash means timing the market

By moving money out of investments you are effectively making a bet about future returns. Instead of following a consistent plan that captures the long-term return that investments offer, you are instead trying to time your exit from them to boost your results.

Timing the market in this way is notoriously difficult to do successfully. Even the best-paid professional investors struggle to achieve it with any consistency. By attempting to time your investments you are adding risk into your investing.

The chart below shows returns from global stocks markets in three scenarios.

Source: Refinitiv, MSCI World from 5.1.01 to 15.9.23.  

Past performance is not a reliable indicator of future returns

The middle line shows the total return from £100 invested in a global stock market index since 1999. The upper line shows the same return if the ten biggest one-day falls during the period had been avoided - constituting remarkably successfully market timing. Finally, the bottom line shows what would’ve happened had you avoided the 10 biggest one-day gains - in other words, had you got your timing badly wrong.

It’s no surprise to see that missing the worst days leads to a spectacularly better result and missing the best a much worse result. But of more interest is the range of difference between those two scenarios. Timing could work in your favour - although no one has been able to consistently perform the trick - and you could end up with a return closer to that top line. Or it might work against you and lead to something closer to the bottom line.

Anyone attempting to time the entry and exit from markets dramatically increases the range of possible returns or losses they might get. If your financial plans are based on achieving the long-term returns that risk-assets offer, then you may be better served opting for the middle path and resisting the urge to swap in and out of markets, whether that’s by moving your money to cash or not.

Got a burning question you want to ask? Why not drop us a line. Click here to ask an expert your question.

(%) As at 31 Oct 

2018-2019 

2019-2020 

2020-2021 

2021-2022 

2022-2023 

MSCI World 

13.4 

4.9 

41.1 

-18.1 

11.1 

Past performance is not a reliable indicator of future returns 

Source: Refinitiv from 31.10.18 to 31.10.23 Basis: Bid to bid with income reinvested in USD terms. Excludes initial charge.

Source: 

1 MoneySavingExpert, 22 November 2023 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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