Cash and the non-existent market timing bell

Cash and the non-existent market timing bell

Image by Leopictures from Pixabay

Cash is the Dr Jekyll and Mr Hyde asset class of the investing world.  It’s good that Dr Jekyll’s moments tend to come at times of market turmoil, such as in 2022 when bonds and equity markets both fell.  However its evil Mr Hyde persona is its terrible track record of maintaining or growing purchasing power over time for investors.  During the Global Financial Crisis, from November 2007 to September 2009, it provided a real (after price inflation) return of 2% compared to world (developed and emerging) equities, which fell 37%.  However, from November 2007 to November 2023, cash lost 27% of its purchasing power, whilst the purchasing power of ‘higher risk’ equities more than doubled, resulting in 134% real growth, even when measured from the height of the market in November 2007 before the fall[1].

It can feel tempting to want to hold cash that pays a seemingly decent rate of interest but the problem is that no one rings a bell either telling you when to get out of risky markets and into cash or when to get back into them.

‘The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible.  After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently.  I don’t even know anybody who knows anybody who has done it successfully and consistently.  Yet market timing appears to be increasingly embraced by mutual fund investors and the professional managers of fund portfolios alike.’

John Bogle, Founder, Vanguard Group and the grandfather of index investing

In 2022, when bonds and equities both fell, driven to a large extent by the rapid rise in inflation to double digits and the subsequent increase in both bank base rates (controlled by central banks) and bond yields (driven by the market’s need to be compensated for risks taken), some investors were tempted to retreat to cash.  After all, deposit holders could receive, say, 5% or so on their cash, so why bother with bonds or even investing in general?

Answering the bond question, it should be remembered that, on average, as with placing a bank deposit, the longer you lend your money for (which is what you are doing when you give the bank your money or buy a bond) the higher the interest rate (or yield in the case of bonds) you receive.  So, for a long-term investor, this ‘term’ premium should provide a small higher expected long-term return.  In addition, often but not always (2022 being a case in point), at times of equity market crisis money tends to flood out of risky assets and into high quality bonds, driving up their prices.  In this case, investors revive both capital gains and yield.  This provides a defensive fillip not available to those holding cash, who just receive the interest on their deposits.

Perhaps something also worth noting is that it is very difficult to second guess where bond yields will be in the future.  There is quite a bit of talk in the media that interest rates, being the bank base rate, may come down this or in the next year.  That is within each central bank’s control and bank deposit rates are generally set relative to this rate.  Bond yields, on the other hand, are driven by the market’s aggregate view of the risks it perceives, which will already incorporate its own collective view on where the bank base rate will be in the future.  It is not the case that bond yields will fall just because the bank base rate is reduced, as that is already anticipated to some extent and reflected in bond prices today.  No market timing bell there.  Trying to second guess the market is a challenging sport with few winners.  In the US, for example, over 90% of government bond funds failed to beat their market benchmarks over a 10-year period[2].

In terms of not investing at all, the returns from cash make the case pretty strongly as to why long-term investors should avoid holding cash in lieu of investing.  If we look at the period since the start of 2023, an investor holding cash, which may have felt comfortable at that point, would have left valuable returns on the table.

Cash returned around 5.3% from the start of 2023 to the end of January 2024, whereas short dated global bonds (hedged to sterling) returned 5.7%, UK equity returned 6.3% and world equity (developed and emerging markets) returned 16.1%[3].

Source: Bloomsbury Wealth

Anyone hear the market timing bell?  No?  Then stay invested and only retain cash equal to the amount you feel comfortable holding as an emergency reserve and for any known capital expenditures over the next few years.

This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance.

[1] Indices: ICE BofA SONIA Overnight Bid, MSCI ACWI.  Adjusted by: UK CPI.  Data in GBP terms.

[2] SPIVA U.S. Scorecard Year-End 2022 – available at

[3] Cash – Royal London Short Term Money Mkt Y Acc, SDGB – Bloomberg GblAggxUSMBS 1-5Y FA TR HGBP, SD Corporate Bonds – Markit iBoxx GBP Corp 1-5 TR, UK equity – MSCI United Kingdom NR USD, World equity – MSCI ACWI NR USD.