With the high volatility being seen in stock markets around the world due to the coronavirus, many investors are wondering when the market crash will be over. We’ve seen some encouraging signs of stabilisation over the past few weeks, but caution is definitely warranted.
Whenever we’ve had a market crash (think back to the early ‘noughties’ or 2008/09), stock market critics surface and say that you’d be better off holding cash instead. Is there merit in this case? For me, not really.
V-shaped recovery
You’ll likely have seen the above phrase used a lot recently. Instead of V, some are using an L or W. Each letter denotes the potential stock market movement after the coronavirus market crash. Each letter starts with the sharp fall (which we’ve seen). The question is, does it then flatline like an L, bounce back quickly like a V, or stay choppy like a W?
I can’t tell you what will happen, but history does show us that a V or a W are the most likely moves from here. What this means for investors like myself who are holding stocks that have taken a hit over the past few months is that I should stay invested. If I sell now and move into a Cash ISA, I will be cementing my losses from the crash. And if we do see a rally over the summer (or even later), I won’t be able to benefit at all
Cash ISA returns are too low
If I was being offered a 5% Cash ISA rate for this year, it would make the choice of staying invested a lot harder. But currently, one-year Cash ISA rates are ranging just above 1%. This skews the scales much more towards staying invested in stocks.Â
Say I’d bought a FTSE 100 tracker fund at the beginning of the year with £1,000. I’d be down around £250 so far. If I sold it now and invested it in a Cash ISA, it would take me around 29 years with compounding to get back to £1,000! By staying invested, I’d hope to hit break-even within the next two years, maybe faster.
This is a really stark difference, and unless you think the stock market has more serious losses ahead, it just doesn’t make sense to switch right now.
Coronavirus market crash takeaways
Daily moves of 1% or higher have been seen a lot recently on the stock market. To avoid trying to time the market and short-term trading, remember that investors think for the long term.Â
There are various good individual companies out there for which you can make a strong investment case. I wrote a piece here about Rolls-Royce and why the stock looks attractive to me right now. The market crash has provided good new investing opportunities, but at the same time don’t sell out of existing ones, unless you have a strong reason.Â
Moving into cash right now would mean you’d need decades to recoup your funds, and could see you miss out on a stock market rally.