Investors tend to hold cash for too long

The 50% fall in the Australian share market since its 2007 peak has prompted many investors to flee to cash. As at 31 December 2008, more than 12% of all managed fund assets were held in cash funds according to Plan for Life.

In the US, 37% of all mutual fund assets invested as at 31 December 2008 were invested in money market funds - the highest level on record according to Strategic Insight, FMRCo Market Economics and Research (MARE).

Moving to cash once we are in a bear market reduces investors' exposure to shares when they are at historically low prices. For example, the graph below shows how in October 2002, when a new bull market had begun in the US, investors had an above average level of cash until February 2004 - meaning they over-allocated to cash during a 15 month period when shares rose more than 30%.

As a result, investors who had long-term capital tied up in cash likely missed out on the big gains experienced in the early stages of the share market rebound. Historically, many investors have increased cash positions during bear markets but have been slow to reallocate to shares in the early stages of a new bull market.

In summary, ineffective market timing can be costly. The sell-low and buy-high behaviour is a poor strategy that results in returns that are below the market return.

The above article has been sourced from FIL Investment Management (Australia) Limited.

Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.