Are you considering cashing in investments to cover costs? Here’s what you should know

The cost of living crisis currently affecting the UK is certainly presenting a challenge for savers and investors.

Inflation surged at double digits throughout 2022, a trend that appears to have continued into the early stages of 2023 – according to the Office for National Statistics (ONS), inflation grew to 10.4% in the 12 months to February 2023.

Meanwhile, to combat rising prices, the Bank of England (BoE) increased the base rate eight times last year, and has already raised it twice in 2023. This has increased rates on savings accounts, mortgages, and loans, in the hope of lowering spending across the economy.

This is somewhat of a double-edged sword for UK residents. Figures from the Guardian show that the best rate on an easy access savings account in early 2022 was just 0.71%, but had risen to 2.9% by January 2023, meaning the interest you receive on your savings might have increased.

On the other hand, this has been less good news for mortgage holders. According to the Evening Standard, someone with a £200,000 mortgage who has been on their lender’s standard variable rate (SVR) for the last 12 months could be paying up to £450 more a month now compared to December 2021.

With many households seeing a squeeze on their finances, it’s unsurprising that individuals may be looking for where they can find spare cash, especially when trying to meet unexpected costs. 

Indeed, research indicates that investors are turning to their investment portfolios to find this money, as MoneyAge reports. According to a study by investment house Alliance Trust, 3 in 10 (31%) investors say they would sell investments if they needed cash to cover unexpected outgoings.

Even more worryingly, one in seven (14%) said they would do so even if it meant making a loss on that investment.

However, cashing in investments to cover short-term costs, especially at a loss, may not actually be the most sensible decision to make for your wealth. Here’s why.

 

The benefits of long-term investing are well-documented

The principal reason that cashing in investments in the face of short-term setbacks may be a disadvantageous move is that a long-term investing strategy is often seen as the wisest approach to the market.

Rather than looking to generate returns over shorter periods of perhaps one or two years, it’s instead typically encouraged to take an outlook of five years or more.

Historical stock market data supports the theory of this approach, as shown by Nutmeg research.

Looking at global stock market data in the 50-year period between January 1971 and July 2022, the investment platform assessed the percentage chances of making a gain on any randomly chosen global stock, depending on how long you held it before selling.

The table below shows their findings:

Source: Nutmeg

While historical market data doesn’t necessarily indicate what will happen in future, these figures show the potential power of a long-term strategy.

Meanwhile, selling your investments to meet those unexpected costs could hinder the progress of your portfolio, especially if it’s built to provide returns over the long term. 

 

Selling at a lower price “crystallises” losses

Another downside to selling at a loss to cover short-term expenditures is that it removes the possibility of your investment recovering.

When your investments rise or fall in value, this change is entirely hypothetical until you “crystallise” it – that is, sell the investment at the new price to make it tangible.

So, if you sell an investment for less than you paid for it to cover short-term costs, you turn a loss on paper into a real one. Meanwhile, had you held on to it, there’s a chance that it could have recovered from this dip, and perhaps even risen beyond it.

Consider these figures from CNBC showing the “best” days for returns of the S&P 500 Total Return Index in the US.

The three days that provided the highest returns in a single day for this index are:

• 13 October 2008, with returns of 11.6%
• 28 October 2008, with returns of 10.8%
• 24 March 2020, with returns of 9.4%.

Crucially, each of these days is after one of the market’s biggest falls. The top two rises came amid the 2008 financial crisis, while the third was just days after announcements of lockdowns around the world to slow the spread of Covid-19.

These figures go to show that the market’s worst days are often followed by their best. Had you sold the day before each of these rises for a loss, you would have crystallised those losses and missed out on the opportunity for your investment to recover.

Again, past performance is not a reliable indicator of future performance, and markets could certainly behave differently moving forwards.

Even so, this historical data does show that selling when your investment has dipped in value may only serve to crystallise losses that might otherwise have recovered.

 

Working with a financial adviser can help you manage your money in the cost of living crisis

Ultimately, cashing in stocks after a year of market volatility might mean losses are inevitable. As the Nutmeg data shows, the historical chances of positive returns were far lower, while your probability of a loss was greatly increased.

As a result, you might be searching for alternative ways to hold and organise your money so that you aren’t forced to dip into your investments when you need to meet unexpected costs.

In this case, you may wish to consider speaking to your financial adviser, who can help you manage this difficult situation.

Your adviser will review your financial plan and then assist you in finding the most suitable methods to meet your existing obligations and any other unexpected costs. Crucially, they’ll do this with your life goals in mind, building your portfolio around what you want to achieve for the future, and your personal tolerance for risk.

This ensures that any decisions you make with your wealth now will keep your ambitions front and centre. That way, you’ll have the peace of mind that your choices aren’t jeopardising your long-term plans.

 

Get in touch

If you’d like help managing your investments amid the cost of living crisis, please do get in touch with us at Chancellor Financial Management.

Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.