As the world deals with its third year of the Covid pandemic, the somewhat shaky economic recovery has been made worse by Russia’s invasion of Ukraine. These two things, together with the rising cost of living, have resulted in a volatile stock market in the early part of 2022.
With this in mind, your clients might be wondering what action they need to take to limit any potential losses. In reality, the best course of action is typically to stay calm and wait for the stock market to bounce back.
That said, some investors may try to “time the market”, which means trying to sell their investments at the “top” of the market. Typically, these investors will then try to reinvest when prices in the markets are low.
If you’re an accountant or solicitor with clients who are DIY investors, they may use this strategy. Read on to discover why it’s fraught with dangers, and why taking a long-term view might be the better option.
Timing the market could reduce growth potential
While it can be lucrative if your clients get it right, timing the market is very difficult to do and is likely to end in disappointment. While your client may be an experienced investor and understand the cycles of the stock market, there is still no guarantee that the markets will move in a way that can be predicted.
Remember: even the most experienced and highly respected fund managers get it wrong sometimes.
This could mean that if your client tries to cut their losses by selling their shares at the beginning of a downturn, they could end up missing out on subsequent growth. To demonstrate this, consider the following graph.
It shows the performance of the MSCI World Index between 1 January 2021 and 31 December 2021. The index tracks a basket of companies from 23 developed countries.
Source: MSCI
As you can see, while there was significant growth during the year, there were several downturns. If your client had sold their shares during any of these drops, they could have missed out on the subsequent recovery and growth potential that followed.
Always remember that previous performance is no guarantee of future performance.
Money cannot enjoy potential growth if it’s not invested
While it may sound obvious, if your client has sold shares to limit losses, they could miss out on significant growth in the early days of a bounce back.
According to Schroders, if a client had invested £1,000 into the FTSE 250 at the beginning of 1986, it could have been worth £43,595 in January 2021. If they had missed out on the best 30 days during that period, their investment would have been £10,627 – a drop of £32,968.
If they missed just 10 of the best days, their money would have been worth £24,156, nearly £20,000 less. The illustration does not take the effects of fees, charges or inflation into account.
As you can see, while selling shares to limit losses may on the face of it seem sensible, in reality it could significantly reduce future growth potential.
The longer the term, the better
Research by Barclays reveals that taking a long-term approach to investing is generally better for a client’s wealth.
Their Equity Gilt Study tracks the nominal performance of £100 invested in cash, bonds or equities in 1899 and publishes updated performance annually. In its 2019 report, it revealed that the stock market outperformed cash in 69% of two-year periods.
If you extend that to 10-year periods, it outperformed cash 91% of the time.
Furthermore, if a client had invested £100 into cash in 1899 it would be worth just over £20,000 in 2019, yet if they had put it into stocks and shares, it would have been worth around £2.7 million.
Get in touch
While investing could expose a client’s money to greater potential growth, it’s never a smooth run. Putting money into the stock market means accepting there will always be short-term downturns.
If your client is a DIY investor and does not have a financial planner to speak to, they may be more tempted to sell investments to limit losses, and potentially lose out on future growth.
Speaking to us could help your client understand the importance of taking a long-term approach, and why they probably don’t want to sell investments during a downturn. Furthermore, we can confirm whether their investments offer the level of growth your client seeks. If they don’t, we can provide alternatives that could help your clients achieve their goals.
If you or your client would like to discuss this further, please contact us at hello@ardentuk.com or call 01904 655 330. As we are an award-winning specialist in financial planning, named as a VouchedFor Top Rated firm in 2022, you’ll have peace of mind that we’ll provide your client with an excellent service.
Please note
This article is for information only. 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 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.
