Over the last decade or so we have seen some monumental volatility in stock markets around the world. Interest rates and inflation are relatively low which has seen more people switch to stock market investments than ever before. Holding your money in savings accounts is no longer an option but why should you maintain exposure to rising stock markets?
Long-term investment
For many people stock market exposure will be just one asset class into which they have invested their long-term funds. They may have a percentage of their funds in bonds and near cash investments as a means of introducing a steady backbone. However, in the current market, cash investments (such as savings accounts) are actually losing their value in real terms when you take into account inflation. Bonds will also become a little more volatile as interest rates rise because there is a direct inverse relationship between interest rates and bond prices. As interest rates rise, bond prices will fall, and vice versa. So, for many people stock market investment is their only real growth prospect in the longer term.
Market timing
If we all knew how markets were going to react in the short to medium term we would all trade the stock market on a regular basis, selling at the top and buying back in at the bottom of the cycle? The fact is that the more successful stock market investors take a long-term approach and do not tend to reduce their stock market exposure to any great extent. The fact is that if you sold all of your stocks today, with the intention of buying back in the short to medium term, it would be almost impossible to get your timing right. You may drip feed cash into the market, but you could miss out on a significant rally, and maintaining a strong cash element would (in the current market conditions) see a real term reduction in value.
Nobody can predict a crash
While experts will pat themselves on the back and flash a big smile to the mass media when they “predict a stock market crash” nobody can predict a stock market crash. If you look below the surface, in the months and years prior to any real stock market crashes in years gone by there will have been experts who had been expressing their concerns. Many will have forecast a crash but they will have forecast a crash tens in that hundreds of times before the event actually happened. Let’s face it, a crash is not really a crash if you can see it coming?
The current rally is underpinned
If you look at the current US stock market rally it is to a certain extent underpinned by low interest rates and relatively low inflation. Many of the valuation tools used in years gone by do not indicate the market is about to crash because while there was a gap between current and expected price earnings ratios, indications of improved trading across the board have realigned this particular issue. Markets may well have “got ahead of themselves” but the reality today is that (famous last words!) we do not necessarily stand on the verge of a stock market crash. Therefore, why would you want to sell up, sit back and possibly see the markets rising even further?