According to the Guardian, Britons are buying “small luxuries” to cheer themselves up as the cost of living skyrockets. It reports that sales of luxury eyeliners, mascara, chocolate and coffee have increased as people look to give themselves an affordable mood boost.
As the price of goods continues to soar, an article by Professional Adviser may not come as a huge surprise. It revealed that 44% of DIY investors have sold their shares to deal with the rising cost of living.
In addition to this, there will also be investors who didn’t need to sell their investment for financial reasons, but who chose to do so to limit potential losses. With the volatility of the stock market in 2022 and fears of a global recession in 2023, switching from investments to cash savings may indeed seem like a safer, and savvier, option.
If this is something you’re considering, care needs to be taken, as selling your investments and putting the money into cash savings could reduce your wealth in real terms. Read on to discover why. Before you do though, let’s consider the performance of equities so far this year.
2022 has been an uncertain year for the stock market
In the aftermath of the Covid pandemic and the war in Ukraine, the UK – like most other nations – has seen spiralling inflation, which in turn has resulted in interest rates going up. This, together with the political uncertainty in Britain in 2022, has resulted in stocks and shares becoming extremely volatile.
To demonstrate this, you may want to consider the following illustration, which shows the FTSE 100 between the beginning of November 2021 and start of November 2022. The index tracks the performance of the largest 100 companies on the London Stock Exchange.
Source: London Stock Exchange
As you can see, while the index finished roughly where it started, there were plenty of ups and downs along the way. Furthermore, March, September and October saw significant downturns, which could have spooked some investors and prompted them to sell their shares.
If this is something you’re considering, let’s look at why switching from investments to cash accounts could cost you dearly over time.
Rising interest rates may not be enough to inflation-proof your wealth
According to the Office for National Statistics (ONS) inflation reached 11.1% in October 2022. As inflation measures the rising cost of goods and services, it means that £1 in the future is likely to buy you less than it does today.
If you use an inflation calculator, you will see that you would need around £143 in September 2022 to have the same spending power as £100 in September 2012.
This means that your money would need to grow by 43% during the period to keep pace with inflation, which averaged 3.6% a year. This is significantly lower than the rate of inflation in October 2022.
While the Bank of England increased its interest rate to 3% in a bid to bring rising inflation under control, savings accounts still tend to offer rates that are below inflation. For example, on 21 November 2022, Moneyfacts revealed that the top easy access savings account offered just 2.5%, and the best five year fixed-rate was 4.6%.
This means that money in these accounts will not keep pace with inflation, and will drop in value in real terms. There is good news though, as leaving your money invested might help as historically the stock market has provided greater growth potential.
This is backed up by research carried out by Schroders, which found that between the start of 1952 and end of May 2022, UK equities returned 11.7% a year on average. Cash returned an average of 6% a year.
Focusing on the long-term is typically the better financial strategy
Short-term stock market downturns should always be expected when investing. While it can be uncomfortable when it happens, it’s normally best to remain calm and keep your money invested, as selling your shares could turn a paper loss into an actual loss.
Furthermore, if your money is no longer invested, it cannot recover when the market bounces back. To demonstrate this, you might want to refer to the above illustration of the FTSE 100.
As already mentioned, it experienced several significant downturns between November 2021 and November 2022. If you had sold your investments during any of these downturns, you would have missed out on the subsequent growth that followed when the index bounced back.
Always remember that past performance is no guarantee of future performance.
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If you have investments and would like to discuss the economic situation, what it might mean for your money and what options you might have, please contact us on hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high quality service.
Please note
This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The information is aimed at retail clients only.
