The cost of living crisis is biting, but think before you sell your shares

From higher interest rates to soaring utility bills, the cost of living crisis is putting a sizeable dent in household budgets. Stock market investment may feel like an unnecessary luxury at a time when finances are tight and investors may view selling shares as a way to ease the financial pressure.

If the alternative is taking on expensive debt, for example, then hanging on for the long-term upside from a stock market portfolio may not be worth the risk. Equally, if the money has been designated for a particular purpose that you need capital for now – buying a house, retirement, school fees – then selling may be the right option in the short-term.

The first is that markets are low: the S&P 500 had fallen 25% for the year to mid-October and other markets around the world have been similarly weak. Only a handful of energy and infrastructure stocks have bucked the trend. By selling today, investors may well be crystallising their losses and leaving themselves with little chance of recouping their original investment. 

The argument runs that investors may be avoiding more losses. Certainly, the stock market appears precarious and there could be more pain ahead with an increasing acceptance that we are entering a global recession. However, markets are quick to discount bad news and often recover some way ahead of good news. During the pandemic, markets turned nine months before a vaccine was found. In the Global Financial Crisis, markets turned in March 2009, just a few months after Lehman’s bankruptcy and some way ahead of an economic recovery.

This means it is difficult to find the right moment to reinvest. Missing just a handful of good days in the market can put a real dent in returns. Research by investment group Schroders showed an investment of £1,000 in the FTSE 250 left to grow for the next 35 years would have been worth £43,595 by January 2021. If an investor missed out on the FTSE 250 index’s 30 best days in that period, the same investment would have been worth £10,627 - £32,968 less.

By selling out, investors stall the powerful effect of compound returns on their savings. Withdrawing, say, £1000, may not feel like it will make a big difference, but that same £1,000 growing at 5% could be worth £2,700 in 20 years’ time. Do that too often and there’s a risk of compromising your future financial goals to plug short-term financial gaps.

There is also the question of where to put any money released from shares. While some may need to use that money, thanks to the cost of living crisis, others may just keep it in cash. This might feel safe and may pay a little bit more in interest than it did, but interest rates are still significantly behind inflation – and cash savers are losing money in real terms.

Markets are low and that means, in relative terms, investors will be getting more shares for their money. This can give their investments some rocket fuel when markets finally recover as, while past performance is not a guide to future performance, historically they always have.

Regular investing is a good discipline in good times and bad. However, emotionally it can be difficult to commit money to the market only to watch it effectively ‘disappear’ amid market volatility and the impact of the cost of living crisis. A long-term view is essential at times like these.

Taking on debt or suffering real financial hardship should be a sign to sell out. If this is the case, give careful thought to what to sell. That means reassessing the investment case for an individual stock or fund and asking whether the investment case still holds.

It’s worth making sure that that a portfolio is still balanced, with a mix of geographic regions and sectors represented. In recent years, many investors have seen their portfolios become increasingly skewed to the technology sector and the US after a strong run of performance. It may help to have some defensive exposure - areas such as healthcare, energy or infrastructure – to weather volatile markets.

It should be possible to emerge from a volatile environment with a better balanced portfolio, with higher quality stocks, that is more resilient in different market environments, so have this in mind when selling individual holdings.

Investors may feel dispirited but stock market investing is a long-term game. In a 20- or 30-year investment horizon, the current weakness will almost certainly appear as a blip, just as the Global Financial Crisis or technology crash do today.

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