Market bounce shows again it pays to stay the course

The past month has brought some welcome relief for investors with significant bounces in markets on the back of better news on inflation and economic growth.

The S&P 500 index, covering the all-important US stock market, has added 7.8% in the past month. Meanwhile, yields on 10-year US Treasuries, a key benchmark in the bond market, have fallen more than 11% – translating into a big bounce for bond prices.

The trigger has been lower than expected inflation combined with better news for growth, raising hopes that interest rates can begin to fall sooner without a deep recession.

While that’s great news for investors, not all of them will feel the benefit. Many have been tempted this year to move out of risk-assets like shares and bonds and into cash, where there is no chance of their investments losing money in cash terms. Higher interest rates mean the returns on cash accounts have recovered to levels not seen for years. The highest paying savings accounts now pay in excess of 5% a year.¹

Yet, as we have seen, investing in the stock market gives your money the potential to grow more strongly, albeit with the risk of loss along the way. Unlike cash, you never know when gains from investments will come – but you don’t want to miss them when they do.

That’s been shown again this month, but it’s true over longer periods too. We examined historical returns to illustrate how exiting the market for periods – whether to take shelter in cash or not – can disrupt your financial plans in the long term.

Moving to cash means timing the market

By moving money out of investments you are effectively making a bet about future returns. Instead of following a consistent plan that captures the long-term return that investments offer, you are instead trying to time your exit from them to boost your results.

Timing the market in this way is notoriously difficult to do successfully. Even the best-paid professional investors struggle to achieve it with any consistency. By attempting to time your investments you are adding risk into your investing.

The chart below shows returns from global stocks markets in three scenarios.