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What you need to think about before dipping into your investments?

Journalist: Marc Shoffman, Freelance

ended 16. December 2022

I am writing a piece for MoneyWeek on the risks of dipping into your investments to cope with the cost of living crisis.

  • What are the alternatives, e.g. a 0% purchase card for big purchases?
  • What other help can people tap into instead of raiding their investments? 
  • What are the risks of cashing out? Is it worth holding onto invested money, especially in a bear market, and why?
  • Is there any situation where it may be worth taking out your money to cope with rising bills?

7 responses from the Newspage community

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Editor
Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
Everyone seems to be financially under pressure at the moment with inflation running riot. However, if you're lucky enough to have money invested, it's not the time to be accessing it. Stock markets are down around the world as they weigh up how bad this recession is going to be. In the first instance, you should try and cut back on what you're spending, because accessing money whilst markets are low means it's doubly difficult to make it back when they rebound. The good news is that markets are forward-looking so should recover well before the economy does. If you need income, see if any of your investments produce dividends and these could provide an income. You aren't pillaging the value of your stocks this way, although you are missing out on buying more at a rock-bottom price. This is pound cost averaging super-charged.
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Editor
Scott Gallacher
Director at Rowley Turton
Although investment values may fall further, they are likely to be relatively low. So, whilst it can be tempting to cash out during a downturn, this can be a costly mistake in the long run as values to recover over time.

Consequently, if you have other options and your investments remain appropriate, it is generally best to hold onto them. This is especially true during a bear market.

Remember, if you sell your investments at a loss, you will lose money that you may not recover. Also, even if you're in a profit, cashing out can trigger a capital gains tax liability, further reducing your available money. As always, if in doubt, speak to a financial adviser.
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Philip Dragoumis
Director and Owner at Thera Wealth Management
The general rule of thumb is not to tap into your long-term investments to cover day-to-day needs. You would end up potentially realising losses and missing out on gains over the long run. This is why it's good advice to hold an emergency fund equal to at least six months of expenditure and even more if you are particularly cautious. The fund should be set up before you make long-term investments.

It's always worth reviewing your monthly spending and seeing if there is anything you can cut or do without. There are plenty of apps that can categorize your spending and help you figure out if you are wasting money. It may also be wise to stop or pause monthly investment contributions and you should ask your employer for a cost of living increase to your salary.
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James Thompson
Director at Becketts FS Ltd
Two key factors should be employed by investors to deal with the need for cashflow during periods of poor market sentiment. Firstly, investors should ensure that a sufficient ‘emergency’ cash buffer is held in all market cycles, good and bad. Secondly, a well-diversified portfolio should ensure that there are areas of relative positivity at all times, from which a portfolio withdrawal can be taken if absolutely necessary.
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Alex Shairp
Director at Blackmount Private Wealth Limited
Whether you should use invested money to help with the cost of living is going to depend on your own circumstances. It's best to weigh up all your options and do what's most affordable in the long term. Always be aware that cashing in your investments when they're down in value is going to realise losses that otherwise only existed on paper. Cash savings aren't keeping up with inflation so it makes sense to use any you have first. Your emergency fund can always be topped up from investments later if needed. Taking on debt can be risky, especially if you're only kicking the can down the road.
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Legend
Robert Bolohan
Co-Founder at Lotuly
If you have the funds I would use them if I needed them, I would prefer to dip into my investments than get into debt and risk losing everything I own. Sure, it's a risky approach but that's what I've been personally doing. I always say: if you can't buy something upfront you don't need it. Fancy car - do you have the funds saved up? Buy it. You don't? Why get into debt then? Not worth based on my personal experience. You don't want to risk having bailiffs sent to your address because you owe rent money or you missed paying several hefty gas bills for your home. I'd aim at avoiding falling for traps like buy now pay later, you'll buy now but suffer later when you can't afford the interest rate. I'd rather not buy something if I don't have the funds.
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Fanny Snaith
Owner at Fanny Snaith - Certified Money Coach
Tricky to answer generally here as each situation is difficult. I would get professional advice before withdrawing investments. What opportunities are out there to earn more money? Talk to service providers, can they reduce the bill or provide a holiday period? If you have credit card debt, can it be switched to a 0% card? Bottom line is that if there is more money going out than coming in how long will it take for your investments to disappear completely? I would try a temporary fix first before touching my investments. The worrying thing is though that there are few tricks left to play for many. Worrying.