Investing at the start of 1999, unfortunately just before the 2000 Dotcom crash, would have led to negative returns up until the end 2002 with a maximum loss of around 11%. By contrast, cash in the bank would have grown steadily, as interest rates were comfortably above the level of inflation. Financial markets then recovered during the noughties until these gains were reversed in the 2008 financial crisis.
However, since the financial crisis there has only been only one winner. While the value of our theoretical portfolio has risen substantially, the real value of cash has been eroded continuously due to negative real interest rates.
Overall, between 1999 and 2017, the 50/50 portfolio would have provided a real return of 73% while the value of cash in the bank would have would have fallen by 0.4%.
Regular investing can cushion short-term market declines
There are some lessons to be taken from this. Everyone should have cash saved for emergencies or a rainy day no matter what. However, once that emergency fund is put aside, then investing for the long term should be a consideration for anyone. While investing comes with increased risk, and there’s no guarantee you will get back what you put in, investments have historically outperformed over longer time periods.
If you want to start investing, but aren’t able or willing to put in a large amount to start, you can add small amounts on a regular basis and benefit from what is called pound cost averaging. See more on pound cost averaging.
Investing on a regular basis yields huge benefits, by smoothing the ups and downs of the market and avoids you from having to second guess the best time to buy in. Investing throughout both the 2000 Dotcom crash and 2008 Financial Crisis would have allowed you to buy more shares at a lower cost, leading to higher returns over time.