The cost of living crisis and economic disruption around the globe have had a significant effect on stock markets.
As a result, the value of your investments may have fluctuated in recent months. It’s only human to be concerned in times of market volatility like this, and many people are opting to sell their investments to avoid further losses.
In fact, as reported by Reuters, investors took a total of £1.19 billion out of equity funds during August 2023.
Many of these investors likely see cash savings as a “safer” option because interest rates have risen in recent months. If you are concerned about potential investment losses, you may be considering moving your wealth into cash savings to take advantage of these favourable rates too.
However, many people who cashed out their investments in recent years believed it to be a mistake. A survey reported by CNBC, for example, found that nearly 40% of investors who pulled money out of the stock market in 2021 regretted it.
This is because stock markets often climb a “wall of worry” during periods of uncertainty, defying outside factors and achieving long-term growth. Consequently, you may still meet your long-term goals, despite short-term fluctuations.
Read on to learn about the wall of worry and the potential benefits of sticking to your long-term financial plan.
The wall of worry describes the stock market’s ability to stay resilient in times of crisis
The wall of worry is a concept that describes how the value of the stock market typically continues climbing, even when it’s disrupted by negative global events.
It demonstrates that the value of investments may still grow over time, regardless of the short-term market fluctuations caused by outside factors.
Over the years, there have been multiple wars, economic crises like the 2008 financial crisis or the dot-com bubble, and even a global pandemic.
Many investors panicked and sold their investments when these incidents caused market values to drop.
Yet, while these events affected share prices, they did not fall permanently. Instead, the markets climbed the wall of worry and continued moving upwards.
Consequently, it may be more beneficial to hold investments in the long term and stick to your original financial plan because historical data suggests that markets tend to surmount the wall of worry and you could see more growth in the future.
The 2008 financial crisis saw record drops in stock values, but the markets recovered
The 2008 financial crisis is one of the most significant market upsets in recent memory, and a prime example of the wall of worry in action.
On 31 December 2008, the Guardian reported that the year had been the worst on record for global stock markets – £9.7 trillion was wiped off share values and the FTSE 100 dropped by 31%. The world economy fell into a recession that had far-reaching effects around the globe.
Considering the severity of the crisis, you would be forgiven for thinking that investors experienced significant losses that they couldn’t recover from.
However, historical data shows that if you invested in the FTSE 100 between 1990 and 2010, you still would have seen growth, despite the 2008 financial crisis.
The following graph shows the long-term growth of the FTSE 100 between 1 January 1990 and 1 January 2010:
Source: London Stock Exchange
As you can see, by 2010, stock values had started to recover, and the value of the FTSE 100 had more than doubled since 1990.
Yet, if you panicked and sold investments in 2008, you may have locked in those losses and missed out on potential growth in the future once markets surmounted the wall of worry.
This trend is not unique to the 2008 financial crisis either. In fact, according to CNBC, the data shows that the worst days in market history are typically followed by the best.
This means that, whenever there is a significant drop in the value of your investments, they could bounce back and continue growing soon. However, if you sell investments on the way down to avoid the bad days, you may also miss out on the good days.
Cash savings interest rates are still lower than inflation
If you are concerned about market volatility, you may consider moving your wealth into a cash savings account instead. You don’t assume the same level of risk as you would with investments, and rising interest rates may make cash savings more attractive.
In August 2023, the Bank of England (BoE) raised its base rate for the 14th consecutive time to 5.25%.
The interest rates on cash savings accounts are rising alongside the base rate, meaning that you may see more growth than you would have in the recent past. Indeed, according to MoneySavingExpert, the best interest rate on a five-year fixed ISA was 5.26% on 11 September 2023.
That said, cash savings may not be as “safe” as they appear when you consider the impact that inflation has on your wealth.
The Office for National Statistics (ONS) reports that inflation was 6.7% in the 12 months to August, which is still higher than the best fixed ISA interest rate. Consequently, your cash savings could lose their spending power over time.
Conversely, the Motley Fool reports that the average annualised return from the FTSE 100 in the 10 years to November 2022 was 12.89%. This is despite the Covid-19 pandemic, the Ukraine war, and the current cost of living crisis.
While past performance doesn’t guarantee future performance, this historical data suggests that investing your wealth may help it grow faster than inflation.
As such, selling investments and holding your wealth as cash savings may not be a sensible choice, even during times of market volatility.
Instead, it may be more beneficial to trust your existing financial plan and give investments time to potentially climb the wall of worry.
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This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.