When to call it quits on an investment

If you were invested in an index fund last year, there’s a good chance that your investment made money. In the past year, the MSCI World returned 12.8%, the FTSE returned 25.8% and, despite it’s early wobble, the S&P 500 returned 8.4% (all in pounds sterling and based on data from FE Fundinfo).  

But this success might leave some investors with a conundrum: should they stay in the market and hope for another positive year, or get out while the going is good?  

The decision isn’t as simple as thinking the market will go up or down. And frankly, that’s not something even the experts are very good at anticipating. From 2005 to 2012, CXI Advisory group got forecasts from a group of market experts about how the market would react in the coming years. On average, they were correct just 48% of the time. Applying this logic, an investor would be better off flipping a coin to decide if they should stay invested rather than trying to analyse the market.  

For many people, the timeline for investing is based as much on their personal life as the market. And we have much more control over this aspect of things. For example, if you were investing to purchase a home, and you’ve saved up the amount you intended, pulling your money out of the market makes sense, because it’s time to spend it. If you’re investing for a long-term goal, like funding your retirement, it may make sense to leave the money in the market, in the hopes that it will grow.  

But a lot of people sit with their money somewhere in between. They don’t need the money right now, but they might want to access some of it in the not-so-distant future. In this case, keeping money in the market might feel greedy, or like you’re pushing your luck. However, there can be risk involved with taking your money out of the market as well as keeping it in.  

The risks of investing versus not investing

The risk that is most commonly associated with investing is called ‘capital risk’. This is the chance that the stock market falls while your money is invested, resulting in a loss of value. It’s easy to see the immediate effects of capital risk, because investors can see the investment value drop in their account.  

But there are some sneakier, just as significant, risks that come along with not putting your money in the market. If you’re saving for a goal, one aspect to consider is shortfall risk. This happens when you simply haven’t saved enough money to achieve your goal based on the timeline you set. If you don't seem on track to achieve your goals, you can keep investing for longer or try to increase your contributions.  

A more time and cost-effective way to achieve this may be investing instead of simply saving in a bank account. While this does mean you are taking on the risk of losing money if the market goes down, it also means that you can supercharge your savings, especially if your goal isn’t imminent. Maintaining a comfortable level of investment risk is still important with this method, not only to protect against losses but to keep peace of mind. But investing can lead to much faster growth.

Across the past 10 years, the MSCI World has returned an average 13.9% each year in terms of pounds. From 2016 to 2026, there’s been two years where the return has been negative. If this money was instead put in a savings account, the average annual return for money invested in cash would be 1.5%, according to the Bank of England. If we factor in the impact of inflation, which has averaged 3.3% during that same time period, cash in the bank would still have grown in terms of pounds and pence but its buying power would have been reduced.

Once an investor has had success in the market, they may be tempted to pull their money out and save instead. This might be necessary if you need to spend that money. But for investors that just want to lock in their gains and move the money from being invested to cash, it’s vital to understand what this means in the long run.  

Below are four scenarios with £1,000. In one example the money is invested in an average cash account. In the next, it’s invested in a fund following the MSCI World for one year, then pulled out and put in cash. The following one shows this same scenario with five years in the market before moving into cash, and the last keeps the money invested the entire time.

For this time period, investments in a fund tracking the MSCI World beat cash savings quite handily. And while spending at least some time in the market gave a helpful boost, consistency in the market allowed for the most growth. 

For those that just spent a year invested before exiting the market, they would have just about pushed their savings over the threshold of beating out the £1,395 £1,000 would grow to with inflation. Average savings accounts would have accumulated just £1,164. But by investing throughout this period in a fund tracking the MSCI World, an investor could have accumulated £3,842 before fees.  

Taking rewards through income

For investors who would like to start reaping some of the rewards from their investments, they may choose to take the income from dividends rather than reinvesting that money into the market.  

For investors that choose to take their income, especially if it is to bank the cash in savings, it’s important to realise how it can impact future returns.  

Let’s see what would have happened to £1,000 in a fund tracking the FTSE 100 over the past 10 years, depending on if the dividend payments were reinvested or not. Over those 10 years, if dividends were reinvested, the £1,000 would become £2,593 before platform fees. 

If the dividends weren’t reinvested, the ending value of the investment would be £1,754 before fees. Plus, the investor would have received payouts of £485 in dividends. In total, taking the dividends results in a sum of £2,239, meaning the investor would have £354 less at the end of the decade by not reinvesting.