Why moving to cash in a panic rarely pays off.

TL;DR

While market volatility may be hard to ride through, all the data tells us that moving to cash in a panic is likely to do more harm than good to your investments. 

The power of diversification. Why moving to cash in a panic rarely pays off.

It’s understandable that heightened share market volatility can be unsettling. Yet, making emotional investment decisions in response to day-to-day movements on markets may have negative long-term consequences.

For example, as the illustration below shows, investors who overreacted to market events by moving to cash have generally underperformed over time against diversified portfolios with a 60% investment weighting in equities (shares and property securities) and 40% in fixed income (bonds). Long periods out of the market can make matters worse.

Return distribution of moving to 100% cash
  

Notes: Equities in the 60% equity/40% fixed income portfolio are represented by the Russell 3000 Index, and fixed income is represented by the Bloomberg U.S. Aggregate Bond Index. Cash is represented by the FTSE 3-Month Treasury Bill Index. Monthly data are from January 1980 through December 2022. Equity losses of more than 10% over three months trigger the move from a 60/40 portfolio to all cash in the illustration. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Vanguard total return calculations, as of 31 December, 2022.

The keys to smoother investment returns

It’s well known that spreading your money across different assets helps to offset market volatility and deliver smoother returns over the long term.

The reason is simple. Different assets perform differently from year to year. The best-performer one year can be the worst the next. Diversifying your investments means you’re not exposed to just one asset type.

While you can’t control what the markets do every day, there are things you can manage, such as what you invest in, how much you invest and pay in costs, and how long you stay invested.

How can I use diversified funds in my portfolio?

Depending on your investment plan and the level of control you desire, you can use a diversified fund as the core of your portfolio and then add other smaller investments to round out your strategy. Whichever strategy you choose, it’s important to focus on the fundamentals of having a well-diversified portfolio so your money is invested in a range of different assets.

This article was written by Tony Kaye, Senior Personal Financier Writer

Important information and general advice warning

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor. We have not taken your objectives, financial situation or needs into account when preparing this article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any financial product we make available before making any investment decision. Before you make any financial decision regarding Vanguard products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD before making any investment decisions. You can access our IDPS Guide, PDSs, Prospectus and TMDs at vanguard.com.au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.

© 2023 Vanguard Investments Australia Ltd. All rights reserved.

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