Finding the right time to invest depends on your long term plans

This article was written by Samantha Gibson and originally published by CGWM. 

I think I’ll wait until the market drops. This was a statement from a new client recently — a very common observation from most new, and in some cases existing investors. 'Timing the market' is to try and buy stocks when their value is low and sell when the value is high. Sounds like the ideal strategy for investing.

However, as we have seen, sometimes the most successful fund managers in history don't always get it right and even they have been unable to predict the market. Also, there’s merits to holding some cash too.

Let’s look at why waiting for the right investment opportunity and trying to time the market can ultimately hinder your returns. Instead, the ‘right time’ to invest depends on you and your circumstances.

Where cash can be king – the role of cash in your financial plans

You've worked hard for your money, so the last thing you want is to see it lose value. Perhaps the safest thing to do is to keep it as cash, you think. This way you know exactly what you'll get back. Also, rates have been more attractive recently for those holding cash. 

However, cash isn't completely risk-free, as explained below. From the point of view of a wealth planner, it’s always recommended you hold some cash as an emergency or ‘rainy day’ fund, and you should keep money that you have plans for easily accessible.

On these occasions cash is the often the best solution. Where it gets unwise is when you leave too much of your money in cash for too long.

But cash rates are high?

In 2020, we saw the Bank of England (BoE) base rate fall to an historic low of 0.10%. Leaving your money in cash was likely to pay you the same in interest — if you were lucky. Fast forward to 2024 and rates reached a 15-year-high of 5.25% with some savings accounts reflecting this in their headline rates. 

On 1 August, the BoE made the decision to cut interest rates from 5.25% to 5.0%, marking a turning point in the interest rate cycle. While savers may need to shop around to lock in 5%, it’s still a relatively good time to have that emergency cash fund. But let’s consider the downsides of holding on to too much cash for too long.

Cash rates tend to be short term, allowing for banks to adapt depending on the BoE’s rate announcements, so you'll likely need to move this money around at least annually to keep up with market-leading rates. This can be time consuming and admin heavy.

When rates start to come down you could end up buying into the market at a higher price than if you had invested sooner. While you remain in cash you are potentially missing out on market performance during this time. Cash does simply not benefit from the same compounding effect as long-term investments thanks to dividend payments, for example.

Cash in the bank (unless in an ISA or similar tax-efficient cash account e.g. premium bonds) will also be subject to tax.

Cash rates have historically not kept pace with inflation. In October 2022, we saw inflation reach an all-time high of 11.1%. Headline rates, although appearing attractive on paper, could not offer protection against these levels and the true value of the cash continued to fall.

Long-term growth is at the heart of investing

Investing is about the long-term rewards, as well as the various tax advantages that investments can offer.

Trying to move in and out of the market, especially with the recent reduction to Capital Gains Tax (CGT) from an annual allowance of £12,300 to £3,000 makes buying and selling shares on a regular basis more complex and can cause unforeseen tax bills.

How the market moves today, tomorrow, or next year matters less when your plan is to invest long term. Your whole circumstances must be considered. A comprehensive financial plan must be made to ensure you are in the correct place in your life to invest your money in markets.

At Canaccord Wealth we’re unique in the way we approach advice in that each client is offered a tailored service depending on your specific needs. Investing isn’t right for everyone and there’s no ‘one size fits all’ approach with investing, but our goal is to take the time to get to know you before building a financial strategy around your short, medium and long-term goals.

When it does come to investing, what matters the most is you stay invested and keep your investments diversified across various sectors and geographical areas to benefit from the highs and lows across all markets.

But there are clear benefits to investing long term versus holding all cash. For example, if you had invested in the Canaccord Genuity Risk Profile 4 strategy at its inception on 31 July 2004, your investment would have returned 184.5% up to June 2024.  This return has significantly outpaced inflation and, even more dramatically, the performance of cash (42.4%), despite the multiple market downturns during this period (the Great Recession, the European debt crisis and COVID-19). This shows the potential for substantial wealth creation if you stay invested for the long haul.

At Adam & Company, our independent Wealth Planners can work with you to identify your unique goals and consider how you can achieve them within the context of your personal financial circumstances. If you would like to discuss the advantages of long-term investing, please get in touch.

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• Tax planning for high earners
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.