Don’t look, don’t touch: should I take money out during a stock market crash?
This week we’re going to look at whether we should touch our pensions and investments when there is a stock market crash (just like the one we’re recovering from now).
We always go on about how investing should be boring and that you should look at your pensions (at most) once a year. But, we know that it would take nerves of steel not to wonder how your investments have suffered from this current crisis.
It may cross your mind to take some money out of the stock market and hold it in cash for a while, where it is safe, snug and secure!
Loss with a capital L
This could be a mistake. Of course, you could be timing this correctly to reinvest at another time, but in advance, that’s very difficult, if not nigh on impossible to know.
Taking money out after a market downturn is called ‘capitalising loss’. What this basically means is that by taking your money out after its value has dropped, this is similar to waving the white flag and accepting that you’ve made a loss.
Investing is bumpy. The markets go up and down all the time and it is impossible to predict where the next boom or bust will come from. However, if we look back through history, the markets have always recovered. We can’t say that this will happen this time round, but it’s highly probable.
Therefore, by taking money out when there’s a dip in the markets, just like what we’ve seen with COVID, you could miss out on the recovery period down the line.
Let’s try an example. The Adviser Fund Index (AFI) Balanced Portfolio is a hypothetical benchmark that is made up of the recommended portfolios of a panel of leading UK financial advisers. It’s a pretty standard overview of what an average investment portfolio could look like.
Here’s what their balanced portfolio has performed like over the past year:
If you’d have panicked and taken money out of the market and held it in cash at the end of March/start of April, you would have missed out on the recovery. This means you would be over 15% down on what you had at the end of February.
As you can see, we’re almost at the same level that we were at this point last year. Markets may take a while but it’s probable that they will recover.
It’s a bumpy ride
Now, let’s look at what the same portfolio has performed like over the past 10 years instead:
If that were a road, it would be full of potholes.
This current economic and health crisis has been the worst in a while, but as you can see, there are loads of points over the past 10 years (a period which was pretty strong overall) where the market dipped and then recovered.
So, what’s the answer?
Investing is a long-term game.
Looking at the growth of investments in the short-term is a natural human trait. We’re impatient and we want results quick.
If we could just train ourselves to sit back, relax and let the markets do the work, this would prevent a lot of pain and frustration. There’s a clear positive correlation between how often you check your pension portfolio and how often you’ll be disappointed by the results.
With investing your capital is at risk at all times and you may get back less than what you put in. Your investments can go up as well as down at all times.
This blog does not constitute regulated advice.