A look at the FTSE All-Share Index over the last 25 years highlights two key points about stock market investing:
Short-term volatility is to be expected
The general trend of markets is upward
Despite visible dips coinciding with (among other events) the Iraq War, the 2008 financial crisis, and a global pandemic, the value of a long-term investment is clear.
Source: London Stock Exchange (LSE)
The Covid pandemic caused huge economic uncertainty, but even since then, the markets have had to react to Russia’s invasion of Ukraine and the disastrous mini-Budget of September 2022.
The UK remains in the grip of a cost of living crisis. High (and slow-to-fall) inflation, a steadily rising base rate, and constant fears of a recession mean predicting what the markets might look like in 2024 isn’t easy.
But, if we’re to take any single lesson from 2023, it’s that you’re likely to be better off sticking to your investments than ditching them in favour of cash.
Keep reading to find out why.
High inflation will stick around in 2024 while the most severe effects of interest rate hikes could still be to come.
The latest figures from the Office for National Statistics (ONS) confirm that the Consumer Prices Index (CPI) held firm at 6.7% for the 12 months to September 2023.
Minutes from the most recent meeting of the Bank of England’s (BoE) Monetary Policy Committee (MPC), meanwhile, confirm that inflation isn’t expected to reach the Bank’s own 2% target until Q2 2025. Above-target inflation is here to stay.
During 2023 so far, the UK economy has grown just 0.3% in Q1 and 0.2% in Q2. Real GDP growth for the year, though, could be negative.
In fact, according to the Peterson Institute for International Economics (PIIE), the economy is projected to decline by 0.3% in 2023 and 0.2% in 2024. This is despite (subdued) growth in the US and Eurozone.
The Guardian, meanwhile, confirms that the lag between interest rate rises and their effect on the economy means that we may not feel the full brunt of these increases for another year.
The BoE’s base rate has been rising steadily since December 2021. Back then it sat at just 0.1% compared to September 2023’s figure of 5.25%.
These rates are slowly being passed on by high street banks and they might even tempt you to ditch your investments in favour of cash, but this could be hasty.
Here are 3 key factors to consider:
1: High inflation means cash savings could still be losing value in real terms
Moneyfacts (as of 25 November 2023), confirms that the best easy access cash savings rate is currently 5.3%.
While this is an improvement on the best rates available in recent years, it’s important to remember that rates have been poor since the 2008 financial crisis.
More important than the increase itself is how this compares to inflation.
And with inflation still at 6.7% and forecast to fall slowly over the next 18 months, your cash savings could continue to effectively lose their value in real terms.
Maintain a cash emergency fund in an easy access account but consider only holding what you need.
2: Your investment is diversified to spread risk and aligned with your risk profile
The economic outlook might look turbulent for 2024 but the stock market isn’t the economy.
Your long-term investments are long term specifically to ride out periods of short-term volatility. If your plans haven’t changed it’s unlikely your investment strategy will need to.
It’s also important to remember that your investment is diversified across asset classes, geographical regions, and sectors. This means that a fall in one area will hopefully be mitigated by a rise elsewhere.
It also means that a 5% drop in a given index won’t automatically mean a 5% drop in the value of your portfolio.
3. Trying to time the markets is liable to fail (and you could miss out on the best days)
A knee-jerk reaction during a market dip can have huge long-term repercussions for your investment.
Lowering the value of your fund means a lower potential for investment returns and compound growth. Worse still, you’ll have a smaller investment when the tide turns and you could miss out on the market recovery.
Remember that it’s time in the market, not timing the market that counts. So stay patient, ignore the background noise, and stay focused on your long-term goal.
Get in touch? We can help.
If you have any questions about the economy in 2024, your long-term investment plans or your pension, get in touch now.
Email info@credencis.co.uk or call 01158 967 538.
Please note
The value of your investment 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. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.