We all know markets have been volatile in 2022, and your investments may well have fallen in value recently, but bearing in mind the often-heard advice for those with long-term investment horizons that it can be wise to stay invested during the tough times, investors are asking if they should put more money to work.
Look for ‘investments’ in your favourite search engine, and there’s plenty of articles and investor questions about market timing. We’ve all heard the maxim ‘buy low, sell high’, a maxim that suggests that downturns in markets, may look like a promising opportunity to invest more. Our investment principles, rooted in helping clients to maintain the investment plan that’s right for their own circumstances over the longer-term, preclude us from ever advising investors to try and time the market – after all, if you invest now, what’s to say markets won’t fall further in the short term?
However, while timing the markets is not something we would ever recommend , we do advocate time in the markets, which we believe will, over time, recover from the current downturn. For us, it’s never a bad time to invest, so long as you have reviewed your current financial situation to ensure you will retain enough cash on hand for emergencies and have chosen the appropriate risk profile and timescale that suits your goals.
While it’s understandable that recent market volatility may seem like an exceptional, and worrying, period for clients, from historical perspective it’s not abnormal to see markets going through choppy periods like this. Inflationary pressures, coupled with a war in Ukraine, and an economy still recovering from the Covid pandemic lockdowns, are certainly difficult things for markets to contend with.
Tempering the pessimism
With inflation readings hitting multi-decade highs in recent months, there are concerns about central banks being forced to raise interest rates aggressively, and the impact that this has had on both bonds and equities has led to turbulence for multi-asset portfolios.
This has been coupled with what we see as a mood of extreme pessimism. The events in Ukraine, and the cost-of-living crisis will have ramifications for some time and are impacting consumer confidence, while talk of a global recession threatens to make things worse.
However, while there is data showing a slowing of economic activity – including the Bank of England’s forecast for slowing GDP growth in the UK next year – we still see some reasons for cautious optimism. There remains a strong contrast between high levels of pessimism versus what businesses are actually reporting, including quarterly earnings which proved on the whole relatively robust for the first three months of the year. Overall, production and global economic output remains relatively robust – which is why we remain optimistic when it comes to longer-term recovery.
The magic of compounding
As the global economy and markets ebb and flow, so the strategy of staying the course on your investment goals may reveal its benefits. In fact, the longer you invest, the less likely you are to lose money. It’s a chart we’ve referenced to in a previous blog but it’s worth repeating here. Looking at data from developed equity markets between 1971 and the end of 2021, the chances of suffering a loss went down over time.
As shown below, no matter when you invested during this period, long-term investing dramatically increased your probability of avoiding losses. Although future market performance can never be guaranteed to play out the same way as it has in the past, as investors we can still gain a sense of longer-term perspective from this. Yes, big movements over one day, or even several months, might seem of big significance today but are more likely to appear as a blip when viewed over several years.
Historical probability of loss decreases by holding equity longer (1972 – 2021)
Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, 1 January 1972- December 2021
With this long-term view of the markets in mind, rather than waiting for what might seem the ‘perfect’ time to invest, investors might instead consider what is called ‘pound-cost averaging’, or drip-feeding money into their portfolios at regular, say, monthly intervals via a Direct Debit instead of putting in lump sums in one go. This way you can reduce the risk of buying-in just before markets drop and stay invested for the market recovery – the speed of which can be very difficult to predict
It’s always a good time to think about your financial future
If you are happy to take a long-term view on your investments, ideally at least three years plus, then there are plenty of different products and structures available that can help you reach your financial goals.
For example, for those that qualify, a Lifetime ISA (LISA) can be a great way to build towards a deposit and get on the property ladder. Launched by the government to encourage people aged between 18 and 39 to put money aside for their first home or retirement, you can contribute up to £4,000 per tax year and the government will give you a 25% bonus – that’s up to £1,000 every year.
For clients looking to build a pot for retirement, a personal pension can be an effective way of investing for your future with a 20% tax relief on any contributions you make added to your pot. Additionally, a stocks and shares ISA allows you to contribute up to £20,000 per year in a portfolio with any growth or returns earned being tax free.
Regardless of how you invest, choosing a wealth manager like Nutmeg can be of great help in being able to navigate your portfolio through different market environments. Our expert investment team have strong experience of managing money through both bull and bear markets and will tilt portfolios accordingly in ways which they feel will best deliver growth for your chosen risk level.
For those still unsure about investing and who may need help to map out their financial future and find out how to make the most of different investment products, consider contacting the Nutmegs Wealth Services team who will be able to point you in the right direction.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. Tax treatment depends on your individual circumstances and may be subject to change in the future.