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Time to sell out of the stock market?

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With stock markets hitting fresh highs, investors have started to become nervous about a crash. As valuations hit levels last seen at the height of the technology bubble, should investors think about selling up?

Investment is a long-term game and, unless you need your money in the short-term, it is often better to stay invested. Here’s why:

Cash pays nothing

…or almost nothing. Investors are getting a near-zero return on their savings and have no hope of beating inflation leaving their money in cash. To ensure the long-term purchasing power of your savings, you will need to look at investments rather than savings accounts.

You probably won’t buy and sell at the right time

Investors like to run with the herd. If markets have gone up, it shows that other investors have confidence and that is reassuring. However, it isn’t always a good thing to do when investing – it tends to mean buying at the top of the market, when lots of other people are buying and prices are highest, and selling at the bottom of the market, when everyone else is selling and prices are lowest.

Selling out at the first sign of a crash can destroy wealth. The strongest gains in the market can often come immediately after a significant fall. If investors sell out at the first sign of trouble, they miss out on the gains, and the chance to recover their money.

In its recent Guide to the Markets, JP Morgan Asset management pointed out: “Frequent pullbacks in the market can be unsettling, and can encourage market timing, but investors should not jump ship. Being fully invested is particularly important when there is market volatility, because the best and the worst days in the market tend to be clustered together. If you were lucky enough to miss the worst days, you also were likely to have missed the best days…. A fully invested portfolio would have returned nearly double one that missed the 10 best days in the market.”

Trading costs

Buying and selling investments costs money. You may need to pay broker commissions, or an upfront fee if you are using a platform. As such, if you are going to make any change to a portfolio, you need to make sure the potential gains outweigh the cost. Given the uncertainty of markets in the short-term, this is difficult to do.

Compounding returns

You need to be in it to win it. Compound interest is nothing short of magical in generating long-term wealth, but in order for it to work, investors have to leave their investments alone. This means they also benefit from dividends. Hargreaves Lansdown data shows that an investment of £10,000 invested in the FTSE 100 30 years ago would be worth £31,225 at the end of July this year if dividends had been taken as income, but £96,569 if they had been reinvested.

Of course, you should review your investments periodically and decide whether they are still appropriate for your needs, and match your views of the investment environment. However, always remember that stock markets are volatile, and share prices will bounce about. Patience is your friend in stock market investment.

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