Volatility is part of the investment market, but when the value of stocks and shares are fluctuating, you may be tempted to hold your capital in cash, rather than investing. When you look at the long term, it could be a decision that harms your prosperity.
The natural ups and downs of investing can be daunting. And you’re not alone if you’re worried about how volatility will affect your wealth. Research from Aegon found:
- 55% of investors are worried about the state of the global economy or the threat of another financial crash
- Investors are opting to hold more wealth in cash in the next tax year; this is the case for around 20% whilst a further 24% are undecided
- 67% said they were unlikely to invest in stocks and shares in the next year; 15% hold more than half of their investments in cash
Feeling nervous about investments is more likely to affect women. Research indicates that overall, men have a higher appetite for risk than women. Just under a quarter of men are likely to invest any extra money they have in riskier investments, such as stocks and shares. This compares to just 14% of women.
Whether you’re taking your first steps into the world of investing or have a substantial portfolio, volatility can still make you nervous. However, opting for cash could affect your financial security more than investing in stocks and shares.
The pitfalls of investing in cash
To understand why you shouldn’t let investment volatility put you off, it’s important to know the disadvantages of cash.
Holding your capital in cash is often viewed as a safe and secure way to maintain your wealth. And to some extent this is true. Your money isn’t going to devalue due to changing values on the stock market. In addition, up to £85,000 is protected per person per authorised bank or building society under the Financial Services Compensation Scheme (FSCS). This can give you a sense of security.
But there’s one key drawback here; inflation.
As the cost of living continues to rise each year, the capital held in cash actually becomes worth less in real terms. Over time the value of your savings can become significantly less. In the past, higher rates of interest may have helped you keep pace with or, in some cases, exceed inflation. However, interest rates have been low since the 2008 financial crisis, making this far more difficult.
Of course, there are reasons why holding cash suits your financial plan, for instance, if it’s acting as an emergency fund or it’s needed relatively soon.
Five reasons to invest amid volatility
With the real term value of cash assets decreasing over the long term, investing can provide a solution. If you’re still worried about volatility, here are five things to consider:
1. Potential to beat inflation: Whilst inflation erodes the value of your savings when they’re held in cash, investing in stocks and shares gives you an opportunity to beat it. This gives you a chance to grow your wealth over the long term, particularly if you leave your returns invested to take advantage of compound growth.
2. Historical recovery: First, historical performance shouldn’t be the only thing you base investment decisions on, it’s not a reliable indicator. However, looking back at the past performance of investments over the long term can give you an idea of how markets act. Investments experience volatility, but historically have recovered when you take a long-term view. If you’re worried about short-term dips, this can help give you confidence in your investments and wider financial plan.
3. Take advantage of lows: When investment values fall, it can be a concern. But remember, losses are only set in stone when you sell. Instead, view market volatility as an opportunity to purchase during a low and reap the rewards in the future. There are a couple of things to keep in mind here. The first is that you shouldn’t focus on timing the market, it’s impossible to do so consistently due to the many influential factors. Secondly, make sure growing your investment portfolio is appropriate for you and your financial plan.
4. Your long-term financial plan: When you start investing it should be with a minimum five-year timeframe in mind. This helps you ride out the dips and, hopefully, see an overall return on your initial purchase. As a result, short-term volatility should have little impact on your decisions and how you’ll use the money in the future.
5. Various risk profiles: There are numerous different options when it comes to picking stocks and shares, which can be tailored to your attitude to risk. Choosing a lower risk profile means you’ll experience less volatility overall.
While investing in stocks and shares can provide a way to maintain and build your wealth, it’s not always the right path. Remember to consider your overall financial and lifestyle goals before you decide.
Please note: The value of your investment can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance.