AS INVESTMENT professionals, we are trained to seek out predictability.
We analyse complex situations and assess the likelihood of an outcome before making a judgement as to how much capital we should then deploy.
In the multi-faceted world where global economies meet corporate balance sheets and profit and loss accounts, we are often faced with a whole range of potential outcomes.
Therefore, as investors we try to reduce the risks, which sometimes we view as falling short of the expected return, by giving prominence to the more predictable of asset classes: cash.
“Cash is king” is a phrase that is often used both inside and outside the investment industry.
It echoes the sentiment that predictability, and therefore security, is good. That is a notion that it is difficult to argue against in isolation.
However, assuming that cash is king only tells half of the story.
Indeed, while the value of today’s cash is clearly marked on every pound note and dollar bill, what it will buy tomorrow - its purchasing power - is not.
It is very likely that the £10 note you have in your pocket right now will buy you less next year than it will this year, and even less the year after that.
So, while cash can protect investors from market volatility in the short-term, it exposes them to inflation risk in the medium- to long-term.
Human nature, though, is such that the immediacy of losses experienced in equity markets are less palatable than the erosion of value by inflation over a sustained period.
That is the case even if the overall loss remains exactly the same.
Moving to the current markets, it is undeniable that we are living in uncertain times.
One could argue that this is nothing new, but with the current political backdrop - both domestically with Brexit and globally with events such as trade wars and tensions in the Middle East - today we are faced with a particularly unpredictable environment.
When the social, economic or political landscape is in flux, our natural instinct is to seek predictability and stability - as mentioned previously.
However, if we go back 30 years to 1988, it is clear that in the intervening years there have been 19 instances when the S&P500 index has fallen by more than 10 per cent.
Of those 19 instances, half of the drawdown on average occurred within 10 weeks of the bottom of the market.
That is the same period in which it took the market to recover back the ground it had lost.
The point I am trying to highlight is that to time a market exit is incredibly difficult, and to time a re-entry to the market remains nigh on impossible.
This shows that the old adage of it being better to have time in the market than attempt to time the market has perhaps never been more true.
In 2019, equity markets have performed well and we are in one of the longest bull markets in history.
At the same time, 10-year bond yields are at multi-year lows and deposits receive low to negative interest rates in the UK and across Europe.
Against this backdrop, it is easy to commend the virtues of equity investment over cash or bonds.
Nevertheless, investors should remember first of all that it is important to construct an investment portfolio with a medium- to long-term strategy that incorporates all assets classes and which matches their medium- to long-term goals.
Secondly, that strategy should be adopted as the default position. Diversification across asset classes is what weathers their risks, not an attempt to time the market.
Finally, and most importantly in the current climate, if investors are to truly achieve their long-term goals, it must surely be better to have the possibility of gain through equities than the certainty of loss by holding cash.
It looks like it could be time to dethrone the king.
Gordon Scott is regional team head at Julius Baer International.
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