Does it pay to be patient with your investments?

Spotlight: Does it pay to be patient with your investments?

High inflation presents a significant challenge for both savers and investors alike. High inflation reduces the “purchasing power of money” which means that the same amount of money will buy you fewer items over time. For example, according to the Office for National Statistics the average price of a white bread loaf has increased from 8p in 1968 to 140p in 2024. Historically, some savers have managed to reduce the effects of inflation by placing their money in high-interest savings accounts. If your savings rate is higher than inflation then the reward you get from saving more than offsets the reduced purchasing power of your money. From 1961 until the 2008 global financial crisis, savings rates frequently outpaced inflation, (see chart below where the yellow line is above the green line). However, over the past couple of years finding savings accounts with savings rates that exceeded inflation have been harder to come by without locking your savings up for a long time. Inflation can also adversely impact your investment returns. For instance, if your investment return is lower than inflation, then your portfolio's purchasing power diminishes over time because the investment returns do not keep pace with the inflation rate. Research by Alliance Trust and Money Magpie also found that investors who sold their investments when inflation hit 10% in 2022, collectively lost £2.2 billion.

While rising savings rates might tempt some to shift their wealth into savings, this isn’t the full picture. It is important to consider how savings rates compare to 1) inflation rates and 2) the potential performance of investments that are suited to your risk level. The Alliance Trust and Money Magpie research suggests that £100 invested in the stock market in 1982 would have generated 50% more return than the same amount kept in a savings account over approximately a 40 year period.

The research also revealed that investors who frequently meddle with their portfolios in response to changing inflation and savings rates typically end up worse off than those who remain patient. They compared the hypothetical returns of a 'Patient' investor and an 'Impatient' investor. Both investors began investing in April 1999, contributing an equal portion (1/12th) of their ISA allowance every month. Over 24 years, the 'Patient' Investor consistently invested in stocks, remaining unfazed by fluctuating inflation and savings rates. In contrast, the 'Impatient' Investor switched their portfolio to a Cash ISA whenever savings rates exceeded inflation and moved back to a Stocks & Shares ISA when savings rates fell below inflation. In conclusion, investors who frequently meddle with their portfolios typically end up with lower returns than those who remain patient. According to the research, at the end of the 24-year period, the 'Patient' Investor would have a total of £590,000 compared to £400,000 for the 'Impatient' Investor. Furthermore, this difference does not account for any fees associated with buying and selling shares, which means the real-world difference could be even greater.
 
For those investing for the long-term, the moral of the story is to remain patient with your investments despite changing inflation and savings rates.

The Noise​

• As the UK approaches its general election, economic policy has become a central issue. Prime Minister Rishi Sunak and Labour leader Keir Starmer sparred in their first TV debate, outlining their visions for the UK's economic future. Sunak highlighted his government's achievements, focusing on efforts to reduce inflation and promote economic stability. He emphasised the Conservative Party's commitment to fiscal responsibility and tax cuts aimed at stimulating growth and investment, arguing that maintaining current policies would ensure continued economic recovery and market confidence. In contrast, Starmer criticised the government's economic management, addressing issues like rising living costs and stagnant wages. He proposed increased public spending on infrastructure, healthcare, and education, funded by higher taxes on the wealthiest individuals and corporations. Starmer asserted that these measures would boost economic productivity and address long-standing social inequalities. Businesses and investors are closely monitoring the situation, aware that changes in government policy could influence market conditions.

• The European Central Bank (ECB) cut interest rates on Thursday as widely expected, with all but one governing board member supporting a 0.25 percentage point cut to the ECB's three rates, cutting its main interest rate from an all-time high of 4% to 3.75%. However, they warned that inflation was likely to remain above the bank’s 2% target “well into next year”, averaging 2.5% in 2024 and 2.2% in 2025. Despite this decisive action, the ECB provided minimal guidance on future monetary policy steps, leaving markets uncertain about its next moves. This rate cut aligns the ECB with other central banks like the Bank of Canada, which also opted for a rate cut to stimulate their economies. In contrast, the US Federal Reserve remains on hold, monitoring economic conditions before making any rate adjustments. This divergence highlights differing approaches among major central banks in response to global economic challenges.

• Voter attitudes towards EU climate policies are under scrutiny. Recent elections in Europe suggest increasing support for robust climate action. However, it remains unclear if voters will prioritise ambitious climate policies or focus on other concerns. The outcome could significantly influence the EU's approach to climate change mitigation.

The Numbers

The Nuance

The European Central Bank’s (ECB) decision to cut interest rates reflects a proactive approach to address economic challenges amidst persistently high inflation. While the majority of governing board members supported the rate cut, the cautious tone of their statement underscores concerns about inflationary pressures. Despite the rate cut, inflation is projected to exceed the ECB's 2% target for the foreseeable future.

The ECB's decision comes against a backdrop of rising inflationary pressures across Europe. The latest projections indicate that inflation could remain elevated for a longer period than previously expected, influenced by factors such as supply chain disruptions and energy price surges. This monetary easing aligns with broader global trends, as central banks worldwide grapple with balancing inflation control and economic recovery. 

However, the ECB's rate cut also highlights a divergence in policy stances among major central banks. The ECB made history by implementing a rate cut before its US counterpart, marking a significant milestone in monetary policy coordination.

Simultaneously, the geopolitical landscape continues to impact market dynamics. Heightened tensions in Ukraine and ongoing global trade uncertainties contribute to volatile market conditions. Investors remain cautious, navigating between the potential benefits of monetary stimulus and the risks posed by geopolitical instability.

Overall, the ECB's latest moves reflect a strategic effort to navigate a complex economic environment, balancing inflation concerns with the need to support growth.