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Should you invest in equities if you have less than 10 years?

25 November 2022

Trustnet editor Jonathan Jones looks at the tough market conditions facing investors, particularly in such a fast-moving world.

By Jonathan Jones,

Editor, Trustnet

Invest for the long term. It sounds like an easy thing to do. You put your money into the market – either in one go or every month – then watch as over time it grows.

Yet it is never that simple, and with the current cost-of-living crisis putting a squeeze on finances, it makes it all the trickier to justify locking cash away for 10+ years.

This was the point made this week by abrdn UK Value Equity manager Wes McCoy, who said investing for a decade or more might be the right thought process, but in reality life catches up with you.

“Those statements are wonderful, but the problem is that it creates a certainty that the world can’t match. I’d like to say that there are investments that I can hold forever, but it’s so difficult to make that call in our environment,” he told Tom Aylott.

While he was talking about investing in stocks and the running of his own fund, I found this a useful thought exercise with my own portfolio.

The ‘invest for 10 years at least’ mantra is sound advice given by most financial advisers. It gives the sense of security that even when assets are down, you are going to give them time to recover.

As such, many will say that you should not even touch the stock market if you have a less than five-year time horizon.

Yet this seems also seems counterintuitive to me when thinking about the world in real terms. Indeed, after taking inflation into account, money in savings accounts, bonds or other assets is likely to make a real-world loss – by this I mean that the amount of stuff you can buy with that cash will have gone down the following year, even if the total cash pot has risen.

Equities have historically been the best place to make higher returns, but admittedly the year-on-year returns can be choppy.

It means there is a real problem for people that now face volatile markets at the same time as losing money in cash accounts. What do you do if you have bills to pay and mouths to feed, but can’t afford to keep losing to inflation?

There must be a balance to strike. Taking on some short-term market volatility, as long as you are aware that it might not always work out, seems almost inevitable to me.

I invest in this way myself, reviewing my portfolio twice a year. While I aim to be long term, not touching portfolios that I have conviction in even if performance has underwhelmed since I bought them, I am also aware that I am in an expensive period of my life with a baby, mortgage and car to pay for (among a host of other things). And it doesn’t get easier. I am sure in 10 years’ time I will have similar short-term financial obligations too.

This means that there is always one eye on when I might need the cash in the short term to cover anything unexpected. Should I completely sell out of all of my equities because of this? I don’t think so. You just have to be prepared for the inevitable volatility that comes with it.

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