Why a pessimistic outlook always leads to losses

With the 2008 financial crash still fresh in the minds of investors, and various macro headwinds still on the horizon, it is hardly surprising that many people prefer to hold cash over equities in the current environment.

However fund manager Thomas See, who heads up the highly regarded Maximiser range at Schroders, believes investors could be set for significant losses if they keep fleeing risk-assets. 

"Unlike some fund managers, I’m not going to stand here pretending volatility doesn’t exist, because it does and will always be there," he said. "However, history tells us that equity markets always revert back to the mean." 

"You’re getting a lot of people saying we’re in a different place to where we’ve been before, and that model will break down."

"However, I disagree – mean reversion has happened for the last 140 years, which includes two world wars and various crises." 

"As Warren Buffett once said: "Investors should be greedy when others are fearful, and fearful when others are greedy." 

See points to the annual return of the S&P 500 since 1870, which shows that when market sentiment is at its worse, usually cumulative returns are still buoyant.

"The mid-1970s were the most volatile years over the whole period, but the returns overall were above average," he explained. 

"In 2009 you had plenty of people worrying that markets would fall further, but the worst thing you could have done would have been to go into cash." 

The manager says the fact that cash has a real negative yield makes the need for long-term investment even more important.

"Cash is no longer risk-free anymore, which changes everything," he explained. "You simply can’t hide in cash." 

"Politically, inflation is the most intelligent way to solve the debt crisis, in that it is stealthy, silent and effective." 

"If there is a choice between a [traditional] default and a default through inflation, I think the authorities will err on the side of caution and go for inflation. For this reason, cash is not where you want to be at the moment." 

Schroders forecasts interest rates will stay low for the time being, which is again negative for cash investors. 

The firm believes rates in the US are likely to stay below 0.25 per cent beyond 2015, and that ECB rates could fall from 0.75 to 0.5 per cent in the next year. UK rates are likely to stay at 0.5 per cent.