The strong performance of major equity markets since the start of the pandemic has left many investors wondering whether it is a good time to raise cash.

On the face of it, this is an excellent question.

Major market indices reached all-time highs in 2021 and, whilst company profits have generally kept up, that pace is likely to ease in 2022, especially if interest rate rises gather momentum.

The market is, however, an extremely broad church.

Whilst it is true that some equities have performed remarkably well, equally true is the fact that many have not.

For the year to mid-December 2021, when the S&P500 hit a 52-week high, no less than two-thirds of the same index was recording a 52-week low.

The ’market’, in other words, has experienced mixed fortunes even if the domination of a handful of technology giants has skewed the outcome.

Reducing exposure to certain richly-valued technology stocks would, at face value, seem sensible. We say ’reduce’ because none of us know for sure how long share prices can keep rising.

Rationalising short-term equity price movements in an increasingly irrational world will inevitably end in disappointment. Or, to paraphrase John Maynard Keynes, insolvency.

Part of the problem is that the alternatives are, by and large, unappealing.

Nomadic herdsmen in the lesser populated regions of Outer Mongolia will probably be aware that we have an inflation problem right now, not least because the value of their cattle will have soared in the local market. What might they do?

Whilst holding cash reserves to meet short-term liquidity requirements is common sense, it does not replace a strategic plan for deploying capital over the longer term.

This is especially the case in times of inflation, which can simply rip the spending power of cash to shreds. Your bank balance might be dropping by ’only’ 3% or so in real terms each year, but if 60% of that inflation figure was caused by rising energy prices (as was the case in 2021) and this, in turn, amounts to 20% of your monthly household expenditure, then you suddenly have a serious problem.

The Mongolian herdsman doesn’t mind this.

The inflated value of his cattle translates into higher cash prices at market which softens the blow of rising household expenditure. But if he were to sell all of his cattle for cash and inflation persisted, then a lack of real assets would eventually be his undoing.

Although inflation has reduced the real return of equities in recent months, it has caused havoc in cash and bond markets. 2021 was a year in which even second-hand cars rose in value. But investors in UK government bonds, a so-called ’safe haven’ lost nearly 10% in inflation adjusted terms.

We expect interest rates to rise modestly in 2022 as central banks react to the prospect of ongoing inflation.

Whilst year-on-year base effects mean that inflation is already close to peaking in the near-term, the headline figure will probably settle at around 3%, which is a little higher than currently anticipated. Cash and government bond holders can expect, therefore, another year of negative real returns, as can many other investments with the word ’fixed’ attached to them.

Owning real assets therefore, as opposed to cash or government ’IOUs’, is the key to long term prosperity. According to the latest research published by Barclays, the annualised return on UK equities over the last 50 years in real terms was more than 5 times the return on cash. In the US, the gap is wider still.

Selecting high quality equities has, therefore, serious inflation-busting appeal, provided they are of the right kind and in the right sectors. Other types of asset exist, of course, but they rarely possess the ability to distribute income (in the form of dividends) whilst providing an equivalent depth of liquidity and transparency.

Ironically, this liquidity is not always helpful. The list of stories about what could go wrong with the world at any given moment is both relentless and borderline depressing. The temptation to sell the ’family silver’ from an investment portfolio on the whim of a tweeted bad news story is ever-present and, invariably, value-destructive.

The Outer Mongolian cattle herder has the advantage of not, presumably, being bombarded with such generally unverified nonsense. But in our so-called developed world, for the rest of us, such ’news’ is far harder to resist. For our well-being and for our financial health, resist we must.