The year has started in much the same way as we closed 2021. However, volatility is definitely higher, particularly when I consider the tech heavy Nasdaq index in the US. I think there’s concern about the pace at which central banks are looking to reduce stimulus and increase interest rates. This would be negative for some businesses, but there are several reasons why I don’t think I should pull my money out of the stock market at the moment.
Timing is impossible
The first reason is market timing. In the first few years after I started investing, I tried to sell when I thought the market would fall further. I’d also try to time when I bought back in again, right down to the hour!
What I found was that even though I might call it right a couple of times, on average I was worse off. Consider the Nasdaq at the moment. It’s fallen around 4% over the past couple of days. Even though the index might continue to move lower in coming days, does it really warrant me selling? The risk is that we get a bounce-back and I’m left having to buy at a higher price than I got whent I sold.
Trying to actively buy and sell in the stock market also increases my stress levels. It can distract me from appreciating the long-term value of a company and make me focused just on the share price swings during a day.
Shoots of optimism
I’m not going to pretend that the world is a great place right now. However, I think that there are enough reasons to be optimistic about 2022 for the stock market. Early data shows that Omicron is less deadly that other variants. When the case numbers ease (be it in a matter of weeks or months), the economic situation should improve significantly.
It should also act as a springboard, with knock-on benefits for different parts of the economy. For example, more people will travel abroad. This will boost travel and tourism stocks. Higher spending will also be good for banking stocks. Retailers will see higher purchases from consumers. The economy as a whole should see a natural uplift.
As mentioned above, I don’t know exactly when this switch will happen. Therefore, I think I’m better off staying invested right now so that I can ride this potential wave of optimism later this year.
Preferring the stock market to alternatives
My final reason for wanting to stay invested at the moment is that I still feel I have better chances of yield here than in other places. I’m conscious that inflation is running hot in the UK at the moment. If I pull my funds and sit in cash, my money is being eroded, giving me a negative real return.
Interest rates are also at low levels (0.25%). So I’m not going to be able to make good returns from that option either.
Rather, from dividend options to growth stocks, I think the stock market is my best option. I do acknowledge that my capital is at risk here versus a cash account. But I think the potential reward is worth it.
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