"It's tough to make predictions, especially about the future" - Yogi Berra
Stock market volatility can be uncomfortable. Soothing words that ‘this too will pass’ are not necessarily reassuring when the value of a carefully-curated savings pot is declining. Nevertheless, in the face of unpredictable markets, it is worth holding on to some long-term wisdom on financial markets.
The first point to note is that stock markets go up more than they go down. While we recognise that past performance is no guide to the future, it is certainly true that investors have history on their side. Data from US group Guggenheim shows that when dividends are factored in, the S&P 500 has risen just over 70% of the time , year on year since 1926. That statistic has held through World Wars, financial crises, rampant inflation, the technology boom and bust and every flavour of political uncertainty.
Perhaps more impressive is that more than half the time (57%), the S&P 500 has risen by more than 10%. In other words, the stock market may go down this year, or even next year, but in the long-term, fortune tends to favour stock market investors.
Equally, stock market declines don’t tend to last very long. It may feel tough at the time, but 5% to 10% corrections in the S&P 500 are reasonably regular occurrences . Since 1946, there have been 84 declines – roughly one a year. The market usually bounces back in a matter of months. More severe declines happen far less frequently, and markets usually take longer to recover, but they have always recovered in the end. Since 1946, there have been just three declines of 40% or more and investors had to wait an average of 58 months to get their money back.
The most significant declines in the MSCI World Index in recent memory came in the wake of the technology bubble in 1999, when share prices became wildly inflated; the next sell-off was after the Lehman bankruptcy in 2008. The final major sell-off was in 2020 as it became clear that Covid-19 would create a worldwide pandemic.
Why not sell?
Selling out at times of crisis tends to be a disaster. There are two problems with this approach: the first is that investors are probably selling out at just the wrong moment – at the point of maximum pessimism is when prices are likely to be at their lowest - and the second is that they miss the chance to make their money back because they don’t reinvest in time.
The sell-off in response to the pandemic was a good example of how this could work in action. Markets sold off 30% in a matter of days, leaving investors little chance to get out before they fell. The bottom of the market was in March 2020, long before there was a vaccine or any kind of resolution to the crisis. By the end of July, markets had hit previous highs and by the time the vaccine was announced in November, were significantly higher . Waiting for the ‘safe’ time to invest is seldom a good strategy.
A final point to note is that the alternative to stock market investment may be even worse. When considering other options for a savings pot, inflation needs to be front of mind for investors. The Bank of England suggests that inflation could hit 8% in the year ahead . Cash is a tough choice at times of rising inflation. While savings rates have risen a little, 1-2% interest does little to compensate investors for an 8% rise in living costs.
The bond market looks even more precarious. Even though yields have risen a little, there is a danger that they may rise faster if inflationary pressures mount. The Federal Reserve is still forecasting six rate rises in the year ahead . With this in mind, investors need to think hard about the alternatives before they move capital out of the stock market.
Nevertheless, there are ways to mitigate the stress many investors feel around markets. Investing regularly rather than putting capital to work all in one go varies the entry price and helps mitigate market risk. At the same time, maintaining a balanced portfolio, with a spread of asset classes, geographic regions and sectors will ensure an investment portfolio can thrive in a variety of market conditions.
Perhaps most importantly, it is important to keep an eye on the long-term. Market volatility needs to be set in the context of a decades-long investment strategy. At Tilney we help you understand your risk parameters and to build a portfolio that preserves and grows your wealth over time. There will always be bumps on the road, but we aim to ensure that the journey is as steady as possible.
This article is solely for information purposes and is not intended to be, and should not be construed as, investment advice. It is based on our opinions which may change. Investments go down as well as up and you may get back less than you originally invested.
Tilney Investment Management Services Limited is authorised and regulated by the Financial Conduct Authority.
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