When markets are choppy many investors are inclined to move their money into cash, in the form of high interest savings accounts, viewing these as a safer option. But as any adviser will tell you, while cash may appear stable in the short term, it is not without risk, particularly when it comes to long-term erosion of purchasing power due to inflation.
Whilst the past few years have presented exceptional challenges; pandemics, global conflict, energy crises, inflation and rising interest rates, history shows that financial markets have always recovered over time.
In the current environment, many clients I’ve begun to advise recently, have seen the value of their pension pot go down. This has been as a result of volatile markets and geopolitical uncertainty. Indeed, global events such as trade policy tensions, shifts in UK taxation, particularly around inheritance tax and pensions and broader economic instability have led to growing concerns.
And these are fair concerns! With easy access to real-time portfolio data through digital platforms, clients are more aware than ever of short-term fluctuations. Negative headlines trigger people to go and check their investments’ performance, and a temporary drop in value can generate understandable anxiety.
Market resilience: why long-Term Investors Outperform Cash
Whilst the past few years have presented exceptional challenges; pandemics, global conflict, energy crises, inflation and rising interest rates, history shows that financial markets have always recovered over time.
For investors with a long-term horizon, market downturns represent temporary paper losses, not permanent declines. If capital is not being withdrawn imminently, short-term volatility should be seen in the context of a longer investment timeframe, typically 5, 10 or even 15 years.
Indeed, a long-term approach will almost always pay off, especially as markets have repeatedly demonstrated resilience. Every major downturn in the last two decades has been followed by a period of recovery and growth. The key is to remain invested and avoid making reactive decisions based on short-term movements.
So, although cash feels safer, and past performance is no guarantee of the future, historically, investments do better.
A well-diversified portfolio, across equities, bonds, property and other asset classes, provides the opportunity to outpace inflation and benefit from the power of compound growth. Despite periodic volatility, such portfolios have consistently delivered higher returns than cash over extended periods.
The hidden risk of cash: how inflation erodes your wealth
Although the value of cash does not fluctuate and clients might find a good rate of interest, the truth is that is value over time is silently eroded as it fails to keep pace with inflation. The balance may appear unchanged, but the ability to buy goods and services diminishes year by year.
Source: Flying Colours 31/12/1994 to 31/12/2024, cash is represented by the Standard Life Cash. Equity by Prudential UK Equity and Bond by M&G UK Fixed Income
To preserve and grow wealth over the long term, investing remains the most effective approach.
A well-diversified portfolio, across equities, bonds, property and other asset classes, provides the opportunity to outpace inflation and benefit from the power of compound growth. Despite periodic volatility, such portfolios have consistently delivered higher returns than cash over extended periods.
Investing also works in the client’s favour when we look at compounding. This is the process where returns are reinvested and generate their own earnings over time. By staying invested, individuals benefit not only from market appreciation but also from reinvested income, such as dividends and interest, which further accelerates portfolio growth.
The power of compounding interest
Investing also works in the client’s favour when we look at compounding. This is the process where returns are reinvested and generate their own earnings over time. By staying invested, individuals benefit not only from market appreciation but also from reinvested income, such as dividends and interest, which further accelerates portfolio growth.
For example, an investment of £10,000 growing at an average of 6% annually, would double to over £20,000 in just 12 years. Left untouched for 20 years, it would exceed £32,000, demonstrating how compounding rewards patience and consistency.
Thus, by staying invested through market cycles, investors not only recover from downturns but often emerge stronger due to this cumulative growth. The key is to avoid interruptions in the investment journey, which can limit the benefits of reinvestment and compounding.
Time in the market: Why long-term investing outperforms timing
Another frequently raised concern is whether now is the right time to invest. Clients often worry about entering the market at a peak, or whether a downturn is imminent.
While timing the market with precision is virtually impossible, time in the market has proven to be far more valuable than attempting to predict short-term movements. For those investing over a 10-year timeframe or longer, the precise moment of entry matters far less than staying the course and allowing investments to grow.
It’s also important to recognise that investing is as much an emotional journey as a financial one. Decisions made in fear or haste, especially during downturns, can undermine years of disciplined planning.
The power of hindsight makes missed opportunities, like investing early in successful companies, easy to recognise. But the more important lesson is consistency, discipline, and a long-term perspective.
Aligning investment strategy with your financial goals
Ultimately investment strategy should always reflect the client’s personal circumstances, especially their time horizon and risk profile. For clients approaching retirement, typically within five years, it is advisable to de-risk gradually.
In some cases, this transition includes shifting from higher-volatility equities to more defensive holdings such as bonds or lower-risk equity funds. But the objective remains consistent: to protect capital while still aiming to generate returns above inflation.
A well-balanced approach, combining a sufficient cash reserve with a diversified, long-term investment strategy, can offer both peace of mind and the potential for meaningful growth. By staying focused on long-term objectives, reinvesting gains and harnessing the power of compounding, clients give themselves the best chance of achieving sustainable financial success.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
If this article has raised questions for you, feel free to get in touch!
Russell Bruce, Independent Financial Adviser at Flying Colours