 | Charlotte GiffordSenior Money Reporter |
If you’re currently sitting on the sidelines waiting to invest, you’re not alone.
Last year, British investors pulled £6.7bn from equity funds as they cashed in on record high markets.
But what to do now? Many of us are staying in cash for the time being, with plans to hunt for bargains once stocks fall. The issue is, this fall isn’t happening.
The FTSE 100 hit record highs again last week having reached its previous all-time high in January. By waiting for the opportune moment to invest, many savers have already missed out on significant gains. Meanwhile, despite AI worries, the bubble has yet to burst and some experts maintain that comparisons between the AI-driven rally and the dotcom bubble in the 1990s is overblown.
For investors, this presents a conundrum. Do you wait to buy the dip – however long that takes – losing out on any potential gains in the meantime? Or do you invest now and risk heavy losses in a market crash?
British savers are often chastised for holding too much in cash. As a nation, we ploughed almost £70bn into cash Isas in 2023-24, according to the latest figures – more than double the £31bn we committed to stocks and shares Isas.
Yet research shows that stocks and shares outperform cash over the long-term. A one-off investment of £1,000 in 1999 would be worth over £6,000 today, according to stockbroker AJ Bell, whereas the same payment into a cash Isa would be worth just £2,000.
No one likes the idea of buying when prices are high and missing out on a good deal, but there is no way of identifying market dips in advance, or guessing correctly how much damage they could inflict.
Since 1870, the US stock market has seen 19 bear markets – defined as a period with a drop of 20pc or more over at least two months. While some crashes dragged on for years, others were strangely brief. The US stock market took only four months to recover from the Covid-19 crash, for example.
The investment management firm AQR recently tested 196 buy-the-dip strategies going back to 1965 and found that, in more than 60pc of scenarios, the investor would have been better off holding the S&P 500 passively. Returns were especially poor if the investor bought the dip at the start of a lengthy market downturn.
Of course, it’s possible to combine both strategies. You could hold the long-term while also retaining some cash to tactically buy stocks at the opportune moment – but you have to be quick about it. Last week, for example, there were buying opportunities after weak jobs data and new coding tools triggered a significant sell-off in the technology sector.
Generally, the best time to invest is when you have the money to do so. Advisers recommend holding between three and six months of expenses in an easy-access savings account in case of an income shock. Any more than this, and you might want to think about investing again, without worrying too much about your market timing.
Remember the market is likened to an elastic band, the further it is stretched the faster it will snap back.
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