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When there are significant shifts in the marketplace, and shocks to the system, investors naturally tend to be concerned. You may be tempted to ‘sit and wait’ before making any further investment decisions.
In recent memory we had the dot.com crash in 2000 and 2001, the housing crash followed by the financial crash in 2008-2009 and now the coronavirus pandemic of 2020.
Sitting and waiting appears to be a low-risk strategy. We respect this approach. However, it carries its own risks which are not always given the weight they deserve;
Economic crashes don’t impact every business severely. Some have additional opportunities precisely because of the issues being experienced. We see this in the current crises where many retailers and food outlets have had to reinvent themselves.
Because money might be harder to come by, investment providers may offer higher than average investment terms, or a bonus for additional investment from current investors. This presents a timing-sensitive opportunity to do unusually well!
Sitting out may mean you have substantial cash holdings. Probably in a bank deposit account or instant access building society account. Either way, if you are holding cash, you are not even going to get a return equal to inflation. In real terms, you are losing capital.
With shares, investors can make an unfortunate error of selling at the bottom, then sitting and waiting. Prices then rebound, and investors buy back at a higher price. A disaster for portfolio values resulting in substantial losses.
The highest risk of all is that the returns you may have to give up by sitting on the sidelines can be much higher than many investors appreciate. A worked example is opposite...
Suppose you plan to invest in a fixed income investment offering 10% return annually for the next 10 years. You don’t need to withdrawincome, so you are going to reinvest your annual profits.
Let’s say you have £100,000 available. At the end of 10 years, due to the power of compounding, you would be entitled to a total return of:
Now imagine you decide to wait and stay out of the investment for two years. Your investment term, assuming the same maturity date, becomes eight years. What would your return on £100,000 be now? The answer is:
This delay has cost you £45,000 in lost in- come! That’s a massive amount of lost profit purely because you decided not to invest.
Of course, this assumes that you can make decent returns year after year! I refer you back to principles two and three – choose fixed-in- come, and insist on worthwhile returns.
A risky approach to a market downturn would be reckless, and you would be wise to consider fixed income, short-term investments as a way to protect your wealth from the vagaries of the market.
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Avantis Wealth Ltd is not authorised or regulated by the Financial Conduct Authority (FCA). This is not a financial promotion or an invitation to invest. Avantis Wealth Ltd does not provide any financial or investment advice. We provide a referral to a regulated advisor who will offer appropriate advice, or to the company offering an investment who will determine your suitability for the investment prior to any offer being made. We strongly recommend that you seek appropriate professional advice before entering into any contract. The value of any investments can go down as well as up and you might not get back what you put in. You may have difficulty selling any investment at a reasonable price and in some circumstances, it might be difficult to sell at any price. Do not invest unless you have carefully thought about whether you can afford it and whether it is right for you and if necessary consult with a professional adviser in accordance with the Financial Services and Markets Act 2000. These products are not regulated by the FCA or covered by the Financial Services Compensation Scheme and you will not have access to the financial ombudsman service. Information is provided as a guide only, is subject to change without prior notice and doesn’t constitute an offer of investment. This investment is restricted to persons who are high net worth, sophisticated or professional investors or who take independent advice from an authorised independent financial advisor.