With Brexit having been pushed back to October and the Prime Minister’s seat now sitting vacant, much of the headlines at present are filled with speculation and opinions as to what the decision will mean for the UK’s investment market with some buyers and sellers choosing to sit tight until the political storm has passed, stockpiling their cash until things have settled. When we think of risky asset classes, we tend to think of the futures market, stocks and commodities, however, despite the natural reaction to hoard ones’ cash, it may be the riskiest thing to do from an investment perspective.
Year-on-year, cash has been the worst performing asset class in history having under-performed all other major asset classes. The longer you hold a significant portion of cash, the higher the probability your portfolio will under-perform just about everything else by comparison.
One of the main reasons for this is the erosion of value by inflation. Whilst your cash may be guaranteed by a bank when it’s sitting in their account, it’s also guaranteed to lose It’s purchasing power with every passing year it’s held there. In comparison to last year, the Pound (Sterling) lost purchasing power by about 1.8% i.e. £1 in 2018 is equivalent in purchasing power to about £1.02 in 2019.
As well as hoarding the cash that’s coming in, another natural reaction during market turmoil is to liquidate existing investments with the intention of getting back into the market when things pick back up. Firstly, there has never been a documented, real-world study done by anyone ever showing that moving from the market to cash and back to the market repeatedly works. Secondly, this is usually due to people overestimating their own investment acumen, thinking their ‘beating the market’ by liquidating.
Another reason why this doesn’t work is the comparison of timing the market versus time-in the market. When applying this to property, the most recent example of this was the 2008 crash. Many investors were running for ‘safety’ and selling at a loss with the belief that the property market was dying. When in fact it was, in its purest form, correcting. Investors who didn’t make the mistake of over-leveraging themselves would have seen the value of their property portfolio alone increase over 23% on average as of 2019 provided they held throughout the crash as opposed to selling in the panic.
This brings me back to the argument of cash. Cash gives people comfort because it does not move around much. It is very easy to understand and is the most common form of transaction on the planet. However, whilst cash brings comfort, we have already determined the irreparable effect of things like inflation, loss of purchasing power and poor long-term investment returns. Keeping short-term reserves on hand is a good idea but what is a better idea is investing said cash into well-thought out, long-term investments and keeping a cool head.