The Covid-19 pandemic caused widespread panic that markets would be routed in a way not seen since the 2008 financial crash and ensuing recession.
However, as you’ll recall, after an initial shock, global stock markets rebounded spectacularly. The trend continued through early 2021. The rollout of the Covid-19 vaccine and subsequent reopening of economies accelerated the markets’ upward trajectory.
Now, amid a backdrop of longstanding supply chain disruption, rampant global inflation, subsequent aggressive central bank policy, and an abhorrent war in eastern Europe, times have certainly changed. These factors, combined with bloated valuations, mean the good times stopped rolling; the music’s been turned off and the lights switched on.
I’m sure you will all have had clients raising concerns, especially considering the fruitfulness of the preceding years. Loss aversion principle can supersede reason, and being bombarded with news stories centred around impending recessions, record-setting market crashes, and a crumbling stock market could cause even the least risk-averse of clients concern after all.
Although history is by no means an indication of how the future will play out, it has its uses when rationalising the current environment to clients, and so I wanted to provide you with some analysis to further back up this point.
I’ve analysed the FTSE All Share Index from inception in 01 January 1986 to 30 June 2022 (36.5 years) to show how markets move during a typical investment lifecycle [3].
Remaining invested
The first point I want to support is the importance of remaining invested. The visual below charts the percentage of times an investor would have made or lost money if they’d held the index across a number of different time periods.
The chances of making a loss diminish significantly the longer the holding period. In fact, across a 20-year time frame there have been no instances where an investor would have lost money. Compare this to the almost 50/50 chances when holding for a day or more likely holding for a year, where the chances of making a loss are one in four.
Figure 1: percentage of times an investor would have lost or made money, per holding period, 01/01/86 – 30/06/22 [3]
Ignoring short-term noise
The index certainly wasn’t immune to short-term losses, and they weren’t always insignificant either. As the chart below visualises the max drawdown regularly exceeded 10% and almost hitting 50% in 2003 and 2009.
Despite these intermittent losses, the chart also clearly shows the importance of staying invested rewarded investors handsomely. Remaining investing across the entire period returned 2,096%, or 8.83% annualised.
Figure 2: return and max drawdown, 01/01/86 – 30/06/22 [3]
Both these points ultimately tell the same story; for a long-term investment objective, remaining invested is the sensible approach to take. Trying to second guess the market rarely works out in the long-term, especially in times of market turbulence.
I hope this analysis provides you with an extra level of assurance for clients and helps you in your conversations with them.
Sources
[1] Morningstar, FTSE All World TR GBP, 22 March 2020 – 31 December 2020
[2] Morningstar, S&P 500 TR USD, 01 January 2022 – 30 June 2022
[3] Morningstar, FTSE All Share TR GBP