Investors may miss out on stock market gains if they hold onto cash while waiting for a stock market correction, according to Liontrust Asset Management’s John Husselbee (pictured). 
Although savers may have been boosted by the Bank of England’s recent rate hike, holding cash still represents an “unattractive option” for investors as inflation remains at elevated levels, said the Liontrust head of multi-asset.
The rising of rates is seen as the first steps towards the removal of stimulus and tapering of quantitative easing policies that have contributed to the post-financial crisis bull run.
This has prompted some investors to fear that, once stimulus is removed, markets could undergo a correction with valuations dropping to more sustainable levels.
Husselbee said: “We believe many investors are currently sitting on the sidelines with their money in cash, possibly worried about an impending correction given that we have been enjoying the second-longest bull market in history.
“While evidence shows that, over the long term, equities outperform bonds and cash, it is natural for people to worry they may be investing in the stock market just as shares might be about to fall in value.”
Yet, he warned that holding uninvested cash can ultimately prove just as risky for investors.
Indeed, with data from the Office for National Statistics showing that the consumer price index (CPI) rate of inflation had hit 3 per cent last month and interest rates still at pre-referendum levels, investors could be penalised for hanging onto cash.
Inflation vs interest rates since 2008
Source: Liontrust
Husselbee said: “While we believe people need to take some risk with their capital if they are looking to achieve financial goals, evidence shows trying to time the market is rarely successful.
“All investors want to buy assets when they are lowly valued and sell them when they are expensive, but putting this into practice is difficult.
Husselbee added: “There is a saying, which we agree with, that timing the market is a fool’s game whereas time in the market – which means keeping money invested in equities – is your greatest natural advantage.”
The cost of delaying can also add up for investors.
The multi-asset head said investors should ignore the “ebbs and flows of stock markets” and instead invest for the long term.
He said its analysis of the FTSE 100 showed the blue-chip index had delivered an annualised return of 5.68 per cent over the past 20 years, during which time a lump sum of £100,000 would have grown to £301,895, as the below chart shows.
Source: Liontrust
“A one-year delay in investing would have reduced this gain by more than £16,000 and waiting three years – perhaps fearing a correction – before investing would have cut more than £46,000 off the returns,” said Husselbee.
He added: “Compounding returns over long time periods, therefore, has a clear impact on wealth creation.”
Yet, the recent closing of FTSE 100 at an all-time high has posed a further conundrum for investors.
While equities globally have continued to climb higher, the uncertainty surrounding the UK’s future relationship with the EU – its largest trading partner – has added a further dimension to the strength of the blue-chip index.
Indeed, weaker sterling – which fell further against the US dollar following the Bank’s rate hike – has made some of the internationally-focused constituents of the FTSE 100 appear more attractive.
Ultimately, Husselbee noted that nobody would be able to forecast how long markets will continue to rise.
“We do not have a crystal ball and therefore cannot tell you for how much longer the current equity bull market will run or how large the next correction will be,” he said. “What we can tell you is that no one else has the answers to these questions either.
Husselbee said rather than trying to anticipate a correction, experience highlighted the importance of investing for the long term.