The world can be a scary place, and the part the markets inhabit is no different.  

    Despite the fact that your message to clients will have been to ignore the noise and focus on the plan, it’s incredibly easy to get distracted by the constant flow of information from the media and their attention-grabbing headlines about market corrections and turmoil.  

    ‘Catastrophic stock market crash isn’t over – here’s how much worse it could get’ (thanks, Forbes!) is obviously going to grab your client’s attention, and although it’s unwise for them to completely tune out from what’s going on in the markets, it’s important for them to remember these headlines are commenting on the short-term.  

    So how do you reassure them and remind them that investing is a long-term pursuit? 

    I hope the below provides some messages you can use to help your clients remain calm during the storm. 

    What’s happening? 

    Firstly, a bit of background. The Covid-19 pandemic brought about unprecedented economic uncertainty. In a bid to stop the spread of the virus overpowering healthcare infrastructure, entire portions of economies were shut down in a matter of weeks, most notably the hospitality and leisure industries. 

    To combat the potential economic disaster, central banks and governments introduced massive levels of financial support designed to prop-up markets and the economy, including asset purchases of corporate bonds and exchange traded funds (ETFs). A good example of this is in Japan, where the Bank of Japan became the single largest holder of Japanese stocks in Dec 20 [1]! 

    As economies emerged from multiple lockdowns, not only did demand increase – as you would expect it to do – but a record number of people voluntarily resigned from their jobs, in a trend which has become known as the ‘great resignation’. This labour shortage exacerbated already pressured supply chains, damaged by geopolitical posturing and Covid-19 induced restrictions on movement. 

    As inflation numbers increased through 21, central banks and economic commentators were keen to reassure markets that it was only temporary, brought on by the rapid vaccine rollout and subsequent reopening on economies, but as time went on it became clear that this might not be the case. 

    As the data started to suggest that inflation wasn’t transitionary, central banks’ rhetoric has become more and more hawkish. 

    Proven across history 

    Markets depreciating can be disconcerting, but it’s important to remember that significant drawdowns over the short-term are completely normal and absolutely to be expected when investing. It’s important to understand there will be volatility in the market, and the best strategy is to keep calm and remain invested.  

    This messaging has been proven true across history. Figure one charts the annual S&P 500 return and max drawdown. Over the 94-year period, the average max drawdown is 16.5%, and despite this the market provided positive returns three quarters of the time. In recent memory, three of the ten worst drawdowns have taken place since the turn of the century (34% in 02, 49% in 08, and 34% 20). Despite this the index has returned approx. 360% during the period [2] showing that the best course of action is to ride the corrections out. 

    Figure 1

    Figure 1 source Ben Carlson CFA, awealthofcommonsense.com 25 Jan 21 [3] 

    Losses can be hard to stomach in the short-term, but there is a great deal to be lost by reacting to market volatility and, fundamentally, trying to time the market. Based on analysis over a 148-year period [4] investors who only hold on to the market for one month are likely to lose money 39% of the time versus investors who hold for a 20-year period where the chances are basically nil (this only occurred once in the data from Jul 1901 – Jun 1921).  

    Conclusion 

    Investing is a marathon, not a sprint. It’s about achieving financial goals over the long-term. History tells us that there will be periods of uncertainty, periods of loss – sometimes sustained and significant loss – but it also tells us that returns are achieved over the mid to long-term. 

    I hope this helps your clients to see that in the long run, the best thing to do is to ignore the noise, keep calm, and remain invested.  

    Sources  

    [2] Morningstar direct, 1 Jan 00 to 28 Jan 22 

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