Should I move some of my investment into cash?
The growth in the stock market over the last two years has been exceptional. The Global Stock Index returned 19.54% in 2023 and 26.51% in 2024. If you invested €100,000 in January 2023, you'd have €151,230 at the end of 2024. That is an annualised return of 22.98%. For context, when doing projections for clients, the highest rate we use is 6%, which would equate to having €112,360 after two years.
Clients are now asking should they take money off the table and moving some/ all of their money into cash? There are a few factors to consider.
Loss of compounding
Compounding is cumulative. That is, it builds on both the original investment and the gains made. Moving to cash breaks that momentum. You are crystallising gains and moving your money into an asset class that generates very little over the long term.
Market Timing
This is a classic market timing move, trying to anticipate the best time to get out and crytallise your gains. But what if the market continues grow? You will be leaving further profits behind?
When do you go back in? When there is a crash? How long are you willing to wait for there to be a crash?
A unit in the Vanguard Global Stock Index was 20.8771 on 20 March 2020 when Covid hit. It hasn't been anywhere near that price since. On 28 December 2021, a unit was 39.7428. It fell to 33.1726 on 16 June 2022. This fall was not a straight line, there were ups and downs before it got to that price. When would you have gotten back in? There was a sell off in August 2024, when the media went crazy and it seemed like we were heading for a major correction. Was this the time to get back into the market? It was all over in a week.
In April 2020, I wrote an article, Diary of a market timer, which tracked the prices in March and April 2020 during Covid. Two days after a 18% fall, there was a 15% gain.
Market timing is about trying to beat the market, getting out at the top and back in at the bottom and avoiding all the volatility in between by sitting in cash. It is extremely difficult to do and relies on luck more than skill.
Tax
Depending on the structure of your investment, you may trigger a tax liability if you sell units to move to cash. If you are invested with a life company, you can switch within funds with no tax repercussions. If you are on a fund platform however, you will trigger a 41% tax liability.
What is the purpose of selling?
What are you going to do with the money if you sell? A few years ago, I took some gains off the table and used it to offset against my mortgage. There was a use for the money. If you are considering selling some of your investment, what are you going to do with it? Leave it sitting in cash is just changing your investment strategy. You are still investing your money but have moved to a low return asset class.
Volatility is a feature of investing. There will be times when the value of your money will fall in value but the longer you leave your money invested, the more it will grow. Leaving it in cash, it not a good strategy.
Money is also only ever good if it has a purpose. If there is something you want to spend the money on, by all means take some profit off the table and spend it. But moving to cash only to move back into the same fund at some point in the future, carries its own risks and you may end up losing money in the end.
Steven Barrett
27 January 2025