It feels as if the whole industry has suffered exits in the last year or so because of the current high interest rates available versus volatility in the markets. The same has also led to a rise of annuities being taken up versus flexi-drawdown. It seems but a few months ago that 4% was a sustainable drawdown figure whereas now a 60 year old in good health can receive upwards of 6% as an annuity. There are of course advantages and disadvantages of both with the need for advice greater than ever.
Clients have been turning to cash and/or certainty so new investments are proving difficult to persuade clients to enter into when the returns have proven high at no risk*. Platforms have seen disinvestment on a scale that has seen not just them, but also planners/advisers, MPS providers and fund houses find ways to persuade clients to remain invested. Trotting out “long term returns for all asset classes” isn’t winning many hearts and minds at present. This therefore makes for a good time to discuss the subject of cash and market timing.
Most if not all of us have seen the charts fund houses and other providers trudge out demonstrating missing out on the best “x number of days in the market” but rarely do we see a chart which shows the effect of missing the worst “x number of days in the market”.
What we can do however is look at some recent data and consider the possible scenarios playing out.
Jerome Powells’ comments last month have seen, albeit over a very short time frame of just under two weeks (31st October to 10th November 2023), the MSCI World Index TR up 4.3% v the Cash Money Market TR up just 0.17%. (source: FE Fundinfo 2023).
What can be seen even in this 10-day window, is that markets move quickly and certainly much faster than any advised client can react. (Markets also react much quicker than some DFMs can react in this space, but that will keep for another post).
This recent reaction of the markets might lead or point to a trend, and markets could continue to increase in value. Alternatively, interest rates could start to fall and markets track down again. What we do know is that we just don’t know! If none of the experts around the globe with their teams of macro strategists, swathes of data analysts and economists can agree on what direction all this data is pointing to, then it must be nigh on impossible for us mere mortals.
The point I am looking to make is for those who have fled to cash or are still thinking they should, it is also worth giving some consideration as to when, and if, they might want to get back in and what the triggers would be. From the swiftness of the market turns, it is highly unlikely that waiting for confirmation via a regular review that it is again better to dip back into the market is likely to work. By the time a client review is completed and instructions implemented, the market move will have made that decision redundant. Let’s face it, we certainly could not see every impacted client in a timely manner and how would we prioritise or justify that under Consumer Duty or TCF.
As a separate but connected point, if inflation has peaked and so have interest rates, then it would be reasonable to assume that the current cash rates may also be at their highs. In recent historical terms and purely relative to risk assets, it could be said that cash is now expensive. This could mean that we would then see cash rates fall, and the possibility of bonds and/or equities go up in value.
For those who have not turned to cash, could staying invested therefore make sense now? For those who had exited, the question is, when is the right time to go back in?
Several MPS providers have launched “Money Market” portfolios at the lowest investable risk profiles to assist planners retaining clients’ investments. I can see these being really useful as a temporary haven but how popular will they prove if the markets return to low rates and low inflation? This article started by illustrating it is virtually impossible to time the market, so we would then have the same issue as before, how do we move all clients back in a timely fashion when these new portfolios lose their ?
These new portfolios do provide some advantages however. Firstly, investing into a Money Market fund shows an active management decision on behalf of the planner and the client. As such there is no need to issue the cash warnings mandated by the FCA where large proportions of pension funds are placed in cash. Secondly, these portfolios will already be on the platforms of choice so much easier to complete a switch when advised.
There will be two conflicting emotions at play for clients. The fear of missing out and the feeling of regret (both on not acting or having acted too soon). These emotions lead into our next blog which will be on behavioural finance.
*though erosion of purchasing power due to inflation clearly also needs to be considered here
