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Investors: is now the time to take profits?

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Written by: Paloma Kubiak
06/02/2018
UK equities have fallen back to levels seen in early 2017 while in the US, the market has lost all gains made since the end of last year. The temptation is to sell out, but should you?

The past week has seen the FTSE 100 fall from 7,587.98 to 7,185.15, a level last seen in April 2017. In fact, in the first five minutes of the FTSE 100 opening today, it fell from 7,334.98 to 7,117.85 and investors are rightly nervous.

Across the pond, the S&P 500 closed at 2,648.95 on 5 February, wiping out the steady gains made since December last year.

As markets have dipped, investors here in the UK and in the US have taken flight to safe haven asset, gold. The Pure Gold Company reports a 74% increase in financial professionals buying physical gold over the past week amid the return to volatility in equity markets. As such, the gold price tipped upwards by 2% since Friday.

Meanwhile, competitor BullionVault has seen trading leap 133% over the past 24 hours as investors bought and sold a total of £2.8m.

Given the nervousness and concerns over a market correction, some investors may think now is the time to take their remaining profits and reduce exposure to equities.

However, JP Morgan says that with no imminent sign of a recession, the bull market could still run on for some time. Also, investors going to cash now may be denting the potential for long-term returns.

Nandini Ramakrishnan, global market strategist at JPM, says: “History teaches that investors who stick it out are rewarded with about 20% average returns during the last 12 months of past US equity rallies, versus on average 11% decline in US equities in the first six months of the cycle going off the rails.

“Put another way, even if we’re wrong about this, the cost of cashing out too early can be greater than doing it too late.  In the meantime, we’re still favouring equities as our top pick over credit and cash is our least favoured.”

Ramakrishnan adds that in the US, inflation fears are driven by higher wage growth (2.9%) but she says that inflation is still quite low, lower than the Fed Reserve target.

“We are not convinced the recent market move is a sign of a peak that has already occurred. It won’t continue selling off as the fundamentals, earnings and economy are so strong.

For investors favouring the UK markets, the message is the same: “More gains are possible and investors should sit tight. We need to contextualise what’s happened in the past week; volatility is healthy and normal – the past few months have been an unusual period of low volatility”, Ramakrishnan says.

Analysis of the FTSE All Share reveals how the UK performs around market peaks, and given the table below, there is evidence that investors who stay invested, are rewarded.

Just looking at the last market peak in June 2007, investors would have seen returns of 21.6% in the year before the market peak. However, three months after the peak, they would have lost 5.7%, showing that the run up is more than the run down.

Click table to expand content:

JPMmarketcorrection

Ramakrishnan says: “On average, investors who stay invested are rewarded significantly more than those who try and time getting out of the market before a downturn. The median return in the year before a market peak outweighs significantly the median losses 3-, 6-, 12- and 24-months after the peak. The data shows that the consequences of trying to time the market and missing out on the run-up to the peak, are much greater than accepting some drawdown and staying invested throughout.”

This is supported by data from Fidelity. Its analysis shows that someone who had invested £1,000 in the FTSE All Share index 30 years ago but missed the best 10 days in the market since then would have achieved an annualised return of 6.80% and ended with a total investment of £7,215.56.

However, for someone who had stayed invested in the market for the whole time would have an annualised return of 9.05% and investments worth £13,491.66, a £6,000+ difference.

Tom Stevenson, investment director for personal investing at Fidelity International, says: “With stock markets across the world experiencing a sharp sell-off over the past few days, many investors may be looking to press the panic button and sell up themselves.

“However, it should be remembered that volatility is the price you pay for the long-term outperformance of equities over other asset classes. Corrections often provide investors with an opportunity to add to their portfolios at attractive prices.

“That said, it’s very difficult to predict when to be in and out of the market, and just missing a handful of the best days in the market can be seriously costly. This problem is compounded by the fact that the best and worst days very often tend to be bunched together during periods of heightened volatility.”

Stevenson adds that it’s easy to get carried away with negative sentiment during bouts of volatility, but history shows that these turn out to be “nothing more than short-term blips”.

“It’s therefore far more prudent and beneficial to stay fully invested through market cycles over the long-term. As the old stock market adage goes; time in the market matters more than timing the market,” he says.

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